EXCLUSIVE-Whitestone REIT may face board challenge by hedge fund Emmett Investment, sources say

By Svea Herbst-Bayliss

NEW YORK, Aug 21 (Reuters) - Hedge fund Emmett Investment Management is gearing up for a possible board room fight at Whitestone REIT WSR.N and may nominate directors to the shopping center operator's six-person board, two people familiar with the matter told Reuters.

Emmett, a New York-based investment firm run by Alexander Rohr, has been a long-term investor in Houston-headquartered Whitestone and has expressed frustrations about how the company allocates capital and criticized its governance.

The firm owned 2.2% of the company at the end of the second quarter, making it the sixth largest investor.

For Whitestone, which is worth roughly $633 million, a fight with Emmett would be its second proxy battle in two years. Shortly after beating back last year's board challenge, management rejected a $15 a share takeover bid by MCB Real Estate.

Since then, Whitestone's share price has dropped by more than 14% to around $12.40 as of Wednesday's close.

Emmett has said privately that the company's future looks dim without meaningful changes, according to the people, who asked not to be identified because the fund's plans are private.

Whitestone did not immediately respond to a request for comment. A representative for Emmett declined to comment.

Emmett is laying the groundwork for what would be its first proxy contest, where it would try to replace the majority of the six directors currently serving on the board, the sources said.

New York-based Emmett, which oversees some $150 million in assets, is mounting its campaign at a time when open-air shopping mall assets are in high demand, according to industry analysts.

Whitestone acquires, owns, operates, and develops open-air, retail centers located in Phoenix, Austin, Dallas-Fort Worth, Houston and San Antonio and currently owns 57 properties with 5.1 million square feet of gross leasable area, the company has reported.

Few new strip malls are being built and they often rent to popular tenants like restaurants and nail salons.