Isle company battles Japanese REIT founder

Prospect asks that the company step aside to give investors more say

TOKYO » Prospect Asset Management Inc., a Honolulu-based fund with $2 billion invested in Japan, wants the company that founded real estate investment trust FC Residential Investment Co. to step aside as investors seek a bigger say in businesses where they own shares.

Fund Creation has failed investors by refusing to change FC Residential's management, Prospect's Chairman Curtis Freeze said in an interview July 11. Fund Creation, whose shares plunged 40 percent last week after it slashed its profit forecast, has said it won't give up the REIT, in which Prospect is the biggest shareholder.

"FC Residential could be the first REIT in Japan ever to be forced through a reorganization," said Daisuke Seki, chief executive of Tokyo-based IB Research and Consulting Inc.

Prospect and Morgan Stanley are among overseas companies piling into property after land prices rose in 2006 for the first time in 16 years. Prospect has endangered the trust's tax breaks by raising its stake in the REIT this year. That led news magazine AERA to liken Freeze to gunboats that forced Japan to allow U.S. trade in the 1850s.

Fund Creation, which wants FC Residential's top three shareholders to reduce their stakes to preserve the REIT's tax break, may sell new stock to a third party, Chief Executive Officer Katsuhiro Tashima said July 12. Tashima plans to find a partner to jointly manage FC Residential, which Fund Creation set up in October, 2005.

"It's far fetched to say that FC Residential needs a new fund manager just because we revised down our forecast," Tashima said. "The operation of FC Residential and our company should be considered separately."

Japanese REITs are exempt from corporate tax provided they distribute more than 90 percent of profit to shareholders, have 75 percent of all their assets in real estate and their three biggest shareholders own no more than 50 percent of the trust.

FC Residential's three biggest shareholders now own a combined 51.89 percent and that needs to drop below 50 percent by October to retain the tax break.

Freeze was described as a "black ship" on April 9 by AERA, a weekly magazine published by the Asahi newspaper, a reference to the flotilla commanded by U.S. Commodore Matthew Perry that forced Japan to open to trade in 1853.

Prospect has raised its stake in FC Residential to 37.37 percent, from 32.5 percent in January, endangering the trust's tax breaks by breaching the 50 percent threshold for a REIT's three biggest shareholders. The fund has done so as FC Residential generated a total return of 34 percent in the past year, including share gains and dividends, lagging behind the 43 percent average for the Tokyo Stock Exchange's REIT Index.

"We want a new management company and a new sponsor." Freeze said.