UBS O’Connor Hedge Fund Sells U.S. REITs in Second Quarter

UBS O’Connor LLC, the $5.6 billion hedge-fund unit within Switzerland’s biggest bank, sold most of its stakes in U.S. real estate investment trusts during the second quarter after the companies delivered some of the highest stock-market returns in the past year.

O’Connor cut its holdings by more than $900 million, selling almost every type of REIT, including those backed by apartments, offices, mortgage bonds, campgrounds, cell-phone towers and hotels, according to a filing last week with the U.S. Securities and Exchange Commission. The biggest reductions were in Mid-America Apartment Communities Inc., AvalonBay Communities Inc. (AVB) and Equity Lifestyle Properties Inc. (ELS)

The selling took place from the firm’s $4.8 billion global multi-strategy fund as the firm switched into other industries, according to a person with knowledge of the matter, who asked not to be identified because the information is private. O’Connor increased investments in information technology and consumer staples, including Coca-Cola Enterprises Inc. and Mondelez International Inc. (MDLZ), the filing shows.

Ted Smith, a spokesman for O’Connor at Dukas Public Relations, declined to comment on the filing or the reasons for the sales.

Managers with more than $100 million in U.S. equities are required to file a Form 13F with the SEC. The O’Connor filing showed the market value of its U.S. equities at $4.6 billion as of June 30, a $513 million reduction from the prior quarter. It still holds REIT shares valued at about $292 million, according to data compiled by Bloomberg.

REIT Returns

REITs returned 15 percent in the first half of the year, according to the Bloomberg REIT Index, beating the 6.1 percent gain in the Standard & Poor’s 500 Index of large U.S. companies. The returns were bolstered by growing demand for commercial real estate, including apartment buildings. Since June 30, REITs have advanced 2.8 percent, compared with a 1.3 percent increase in the S&P 500. (SPX)

The Bloomberg REIT Index rose 0.4 percent at the close of trading in New York. The measure, which comprises 141 publicly traded property owners, earlier gained 0.5 percent to the highest level since May 2013.

Investors have been drawn to REITs as the Federal Reserve holds interest rates near zero for the sixth year. In exchange for paying no corporate income tax, the companies are required by the Internal Revenue Service to pay out at least 90 percent of taxable earnings to shareholders.

They offer a yield of 3.5 percent, according to the Bloomberg REIT Index, which comprises 141 publicly traded property owners. That compares with yields of about 2.4 percent on 10-year Treasury notes.

Rising Rates

Rising interest rates will probably reduce the appeal of the yield that REITs offer. Expectations have heightened that the Fed will be forced to raise interest rates sooner than expected as the U.S. economy improves. Central bank officials said it may be appropriate to reduce economic stimulus sooner than anticipated, according to minutes of their July meeting.

O’Connor exited investments in firms including American Homes 4 Rent (AMH), Ryman Hospitality Properties (RHP) Inc. and Sovran Self Storage Inc. (SSS) It held stakes as of June 30 in REITs including mortgage firm Redwood Trust Inc. (RWT) and American Realty Capital Properties Inc. The hedge fund increased its shares of Weyerhaeuser Co. (WY), a forest-products company.

The firm was founded as O’Connor & Associates in 1977 by mathematician Michael Greenbaum, with funding from brothers Edmund and William O’Connor, according to the 1999 book “The Predictors” by Thomas A. Bass, who wrote that the firm “made money hand over fist” and “developed a cult of secrecy.”

Swiss Bank Corp., a UBS AG (UBSN) predecessor, bought O’Connor in 1992. UBS O’Connor’s traders developed the bank’s equities proprietary-trading desk before opening hedge funds to clients in 2000.

To contact the reporters on this story: Margaret Collins in New York at mcollins45@bloomberg.net; Devin Banerjee in New York at dbanerjee2@bloomberg.net

To contact the editors responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net Pierre Paulden

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