Activist Investor Elliott Pressures Japan’s Sumitomo Realty to Boost Shareholder Value

Activist investor Elliott Management has issued a set of demands to Sumitomo Realty & Development, vowing to oppose members of the Tokyo-listed builder’s senior management at a shareholder meeting if corporate governance and value-enhancing initiatives aren’t addressed.

In a letter dated 8 June, Elliott outlined four key areas of concern — poor shareholder returns, excessive cross-shareholdings, declining capital efficiency and subpar governance — and urged Sumitomo Realty to implement “tangible reforms” like increasing its shareholder payout and setting a credible return target.

Bloomberg first reported in March that Elliott had amassed a stake in the builder, one of Japan’s largest. The Manhattan-based firm said this week that its 3 percent ownership interest reflected its belief in Sumitomo Realty’s strengths, including a dominant position in Tokyo office real estate, an attractive business mix and a high-quality portfolio of assets.

“However, despite these advantages, Sumitomo Realty trades at just half of the post-tax market value of its real estate, making it the most undervalued real estate developer in Japan,” Elliott said in the letter. “Sumitomo Realty also trades at a depressed multiple of earnings, despite its stable, high-quality core office leasing business.”

Chairman’s Sagging Approval

Presenting its case ahead of the 27 June annual general meeting, Elliott identified three key areas of concern, headed by Sumitomo Realty’s dividend payout in the last fiscal year of 17 percent of net income — significantly lower than that of the builder’s peers, with one unnamed rival expecting to exceed 80 percent, according to the US firm’s analysis. Management’s proposed increase is judged too slow, potentially taking a decade to reach a 35 percent target.

Elliott also noted the developer’s cross-shareholdings equivalent to 26 percent of net assets, exceeding those of peers and advisory firm limits, and the lack of a strategy regarding return on equity, resulting in a six-year decline and further projected decreases.

As evidence of shareholder dissatisfaction, Elliott pointed to low approval for Sumitomo Realty’s board based on annual meeting votes, with chairman Kenichi Onodera’s approval rating falling from 95 percent to a record-low 77 percent by 2023 — the lowest among peers.

Elliott called for Sumitomo Realty to hike its shareholder payout to 50 percent, cut cross-shareholdings to less than 10 percent of net assets and set an ROE target of 10 percent or more. The firm urged the developer to strengthen governance by adding independent directors and establishing a nomination and remuneration committee.

A Sumitomo Realty representative told Bloomberg that the developer would continue to have constructive discussions with Elliott on improving returns and corporate governance.

Reformers on a Roll

Elliott’s Sumitomo campaign is part of a wave of investor activism in Japan directed by US hedge funds, with the firm led by founder and president Paul Singer having purchased a 5.03 percent stake in Tokyo Gas last year.

After Elliott urged the city gas provider to boost shareholder value by selling some parts of its extensive real estate portfolio, Tokyo Gas in January earmarked assets to be sold to fund growth investments.

California-based Dalton Investments has been pressuring scandal-plagued broadcaster Fuji Media Holdings to spin off its real estate business, unwind cross-shareholdings and push through governance reform, the Japan Times reported.