Austin-based brief vendor Blue Orca has taken intention at $17 billion actual property funding belief Solar Communities, or SUI, accusing its chief government of participating in undisclosed transactions with an unbiased board member’s household. That board member oversees the CEO’s multi-million pay bundle as chair of the compensation committee, in response to the brief report.
Notably, Blue Orca, an activist funding fund with $122 million in belongings underneath administration, admits it’s biased towards SUI. For one, by holding a brief place within the inventory it stands to make important features if the share worth declines. In a disclaimer, it states: “We are short sellers. We are biased…We have a short interest in SUI securities and therefore stand to realize significant gains in the event that the price of such securities declines.” To not point out, it hedges its accusations towards the corporate in a disclaimer that reads that it, “makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. All expressions of opinion are subject to change without notice.”
In its report, the brief vendor alleged Solar Communities CEO Gary Shiffman took an undisclosed $4 million mortgage from the household of Brian Hermelin, who for nearly a decade has chaired the board’s compensation committee and served on the audit committee. Shiffman allegedly used the mortgage to purchase one of the crucial costly houses on the market in Michigan, Blue Orca stated. The brief vendor screenshotted property information in its report that present a relative of Hermelin owned the house, and that the property offered to Shiffman for $2 million lower than the final publicly disclosed record worth. Blue Orca additionally claimed Hermelin, who has served on the Solar Communities board since 2014, is a stepcousin to Shiffman.
“Put simply, undisclosed to investors, the family of a Board member overseeing the CEO’s compensation and Company controls has been lending the CEO money to finance the purchase of luxury real estate,” the report said. Solar Communities paid Shiffman compensation valued at almost $11 million final yr, a drop from the prior yr when his pay was valued at almost $15 million.
And in response to Blue Orca’s admittedly biased report, it wasn’t a sole prevalence. In a deposition, they wrote, Shiffman admitted to borrowing $700,000 from one other board member who’s a companion on the regulation agency that serves as Solar Communities’ normal counsel. From the restricted deposition excerpt within the report it seems that the mortgage truly went to a 3rd occasion at Shiffman’s request. Board member Arthur Weiss, a director since 1996, is companion and member of the manager committee at regulation agency Taft Stettinius & Hollister LLP. Solar Communities disclosed it paid authorized charges and bills to the agency of roughly $27.9 million over three years, which included $7.9 million, $9.7 million, and $10.3 million in 2023, 2022, and 2021, respectively.
Solar Communities, which owns, operates, and develops manufactured housing communities, didn’t reply to Fortune’s requests for remark. Shiffman, Hermelin, and Weiss didn’t reply to Fortune’s requests for remark. Fortune couldn’t independently confirm all of the claims made in Blue Orca’s report.
Blue Orca stated the report ought to be thought-about in its entirety, and referred to Solar Communities as “an egregious mess of conflicts of interest and dubious executive behavior which we believe manipulates critical financial disclosures to inflate adjusted funds from operation and organic growth.”
Up to now, the inventory is down lower than 1% prior to now 5 days, however up round 18% prior to now yr. Just like nearly all actual property firms, Solar Communities’ inventory peaked in 2021 at $210 {dollars} a share in the course of the pandemic housing growth, and it’s fallen dramatically since, dipping even additional within the days following the discharge of Blue Orca’s brief report. Once more, one thing that advantages the brief vendor.
But, Blue Orca alleged Solar Communities trades at a premium as a result of it underreports recurring capital expenditures (funds used to accumulate, improve, or keep an organization’s fastened belongings), which primarily inflates its share worth. Its capital spending, the brief vendor claimed, “defies industry norms and common sense,” in that different REITs report recurring capital expenditures 4 to eight instances increased, as a share of complete. Its share worth may very well be inflated by as a lot as 48%, by Blue Orca’s estimate.
“We think that management’s persistent and aggressive minimization of recurring capex has given analysts [and] investors a misleading view of the Company’s financial results, resulting in chronic and significant overvaluation of the stock,” the report stated.
Moreover, Blue Orca’s report pointed to what it known as a “history of alleged accounting shenanigans and reporting failures.” In 2006, the Securities and Trade Fee filed an injunctive motion towards Shiffman, the corporate’s chief monetary officer, and its former controller. Regulators alleged the corporate didn’t report losses throughout seven quarters and that these choices have been directed by the corporate’s CFO on the time. The SEC finally dismissed its claims towards Shiffman and the controller and with out admitting or denying the allegations, the firm settled, which included the previous CFO serving a two-year suspension from working towards as an accountant earlier than the SEC and agreeing to a positive.
That historical past, in response to the brief vendor, raises additional questions on whether or not poor company governance continues to be current on the firm. Both approach, Blue Orca suggests buyers do their very own analysis and due diligence earlier than making any funding choices in respect to Solar Communities.
One monetary blogger, who lately wrote in regards to the brief report, known as the alleged $4 million undisclosed mortgage “bad optics,” however not an enormous concern. As for the accusation of underreporting recurring capital expenditures, the weblog dismissed recurring capex as a share of complete capex as a “junk metric,” utilized by Blue Orca.
However, Solar Communities has robustly disclosed a number of associated occasion transactions to buyers. Along with its authorized charges, the corporate stated it employed a agency owned by Hermelin that installs and maintains emergency cellphone programs at its properties. The corporate paid a complete of $700,000 for 2023, 2022, and 2021.
It additionally advised buyers that Shiffman and his household not directly personal a 28.1% stake in American Middle, the entity Solar Communities leases from for its principal government workplaces. Hermelin, Weiss and Ronald Klein every personal lower than 1% of American Middle. (Klein joined the board in 2015, and stepped down in 2024.) The corporate pays $20.95 per sq. foot and leases roughly 60,261 sq. toes of everlasting area in its settlement. Based mostly on these figures, the worth of the lease is roughly $1.3 million.
The corporate additionally makes use of a jet owned by Shiffman and paid him a complete of $1.9 million for the previous three years mixed.
Blue Orca concluded that it sees Solar Communities as an “egregious governance failure tainted by scandal, whose business is growing far slower and generates far less … than investors are led to believe.”
Blue Orca didn’t reply to Fortune’s request for remark.
