Back in my Wall Street research days, we called it “Going to the dark side.”

Every year, a few of our fellow research analysts would announce that he is quitting and going to work for a company he was once tasked to follow. The move can make sense. Analysts often know a great deal about the competitive environment in the industries they follow, and they develop strong opinions about which companies in an industry have the right management vision and which ones don’t.

#-ad_banner-#Jonathan Litt took a slightly different route. He parlayed a decade’s worth of buy-side and sell-side real estate research experience into his own investment firm, which, you guessed it, focuses on real estate. In 2008, Litt launched the hedge fund LandandBuildings, which currently has a respectable, but not massive, $100 million in assets under management.

Though there are hedge funds with considerably more capital deployed in real estate, few have cultivated the spotlight as well as Litt. Back in his Wall Street days, he was known for his blunt style of writing and often harsh opinions about the companies he followed. And these days, he’s using that style to rattle the cages at various real estate investment trusts (REITs).

A David Hunting Goliaths
At first glance, Litt’s activist approach to REITs may seem quixotic. In 2012, he targeted Las Vegas Sands Corp. (NYSE: LVS), which is backed by billionaire Sheldon Adelson. In an unlikely outcome, Adelson eventually acceded to Litt’s wishes, which netted the fund manager a nearly 100% gain by the time Las Vegas Sands took steps to unlock shareholder value.

That outcome clearly emboldened the REIT activist to keep going after big prey. In July 2013, he offered to buy BRE Properties for $60 a share (or around $4.6 billion). BRE’s management quickly realized that Litt didn’t have a fraction of the money to pull off such a deal. Litt’s fund “has neither the capital capacity nor demonstrated transaction experience to execute an acquisition of BRE,” said the company in response. At the time, BRE was generally seen to be an industry underperformer.

Perhaps Litt’s main goal was to get BRE to consider a sale — to any buyer — at a presumably higher price. Near the end of 2013, BRE agreed to merge with Essex Property Trust, Inc. (NYSE: ESS), in a deal valued at $4.5 billion, right near Litt’s original suggested price. The key takeaway: If you bought shares of BRE after Litt approached the company, then you would have racked up a respectable 15% six-month gain.

Litt continues to target seemingly undervalued REITs. In June 2014, he sent a letter to the board of directors at Associated Estates Realty Corp. (NYSE: AEC) suggesting that management had done a poor job of maximizing shareholder value. In that letter, he noted that AEC’s “stock had traded at least 20 percent below its aggregate net asset value since 2000.” He went on to suggest, “The company needs a shakeup of its board, whose average tenure is more than 14 years.”

AEC’s board mostly ignored Litt’s entreaties. So he ratcheted up the rhetoric in November, sending another letter urging aggressive changes. His jawboning appears to have worked, as AEC has become one of the best-performing REITs of the past six months.

Litt is currently targeting Mack-Cali Realty Corp. (NYSE: CLI) — from the inside. In March, the REIT relented to the fund manager by giving him a seat on the board in exchange for a promise not to pursue a proxy fight. That tactic has not borne fruit, as this REIT’s shares have actually fallen to a recent $19 from $22 when he joined the board. You can presume that Litt is pushing for a sale of the REIT, now that he has a direct line to fellow board members.

Litt is also jaw-boning Pennsylvania REIT (NYSE: PEI) to either go private or sell itself. The operator of malls has been the subject of buyout speculation ever since Washington Prime Group, Inc. (NYSE: WPG) announced plans in September to acquire rival Glimcher Realty Trust for more than $4 billion. Whether it’s those buyout rumors, or Litt’s public shaming tactics, shares of Pennsylvania REIT have risen roughly 25% since mid-October. (Shares currently trade for $24, though Litt pegs fair value at $30.)

Risks To Consider: REITs, as an asset class, are very sensitive to interest rates. First, because rising rates would draw investor funds away from divided-paying equities and toward the improving yields of fixed-income securities. Second, because REIT’s cost of capital would rise, diminishing the economic returns of their projects.

Action To Take –> Through his activist campaigns, Litt claims that he generates an average 40% return, though such claims are hard to verify. For investors, the key questions are these: What kind of REIT is a potential target for Litt? And how can you profit from his approach?

The targets are fairly obvious.  They are any REITs that have badly underperformed the peer group (on an apples-to-apples basis such as mall REITs versus other mall REITs, or apartment REITs versus other apartment REITs). Or he identifies REITs that trade at a discount to recent industry transaction prices, as was the case with the Washington Group/Glimcher deal’s implications for Pennsylvania REITs.

The best way to mimic the Litt approach is to watch REIT industry transactions and then compare the value of the deal to rival, publicly-traded REITs. As the cost of capital remains quite low, you can be sure that the REIT mergers and acquisitions frenzy is bound to continue for the foreseeable future. In coming weeks, I will focus on several REITs that are clearly undervalued in the context of peer group valuations and/or relative performance. These are the kinds of REITs that will be on Litt’s radar in 2015.

The private, 12%-plus yielding investments once reserved for the wealthy are being unlocked for the rest of us. And I’m not talking about REITs… we’ve found another investment that, like a REIT, is required by law to pay 90% of profits to shareholders — and it’s not what you might be thinking. To learn more about the incredible power of these wealth-generating income investments, I invite you to watch this research video.