Corvex Management, LP (“Corvex”) and Related Fund Management, LLC (“Related”) announced today that investment funds managed by them collectively own approximately 9.8% of the outstanding common shares of CommonWealth REIT (“CWH” or the “Company”). Corvex and Related believe that CWH’s portfolio of real estate assets trade at a substantial discount to fair value due to a misalignment of incentives between the Company and its external advisor, REIT Management & Research LLC and track record of underperformance.
Corvex and Related have released an open letter to the Company’s Board of Trustees demanding that the Company immediately cease a value destroying equity offering and debt repurchase, and enter into discussions with Corvex and Related regarding maximizing long-term value for all CWH shareholders. They have also publicly filed a Schedule 13D, including a detailed presentation outlining a clear path to value creation for CWH. Based on a comprehensive property-by-property valuation analysis, Corvex and Related believe that CWH’s NAV was approximately $40 per share as of February 25, 2013, which is generally consistent with CWH’s book value of approximately $37 per share, as opposed to the closing price of $15.85 on February 25, 2013.
Corvex and Related believe that if the Company implemented, among other changes, an internal management structure, basic operating performance enhancements and a more shareholder-friendly capital allocation policy, CWH could achieve a target price of more than $50 per share over a two year period. If the Board fails to adequately respond, Corvex and Related are prepared to seek the removal of the Board so that it may be replaced with five truly independent trustees.
Corvex and Related would also be prepared to acquire all the outstanding shares at a significant premium to the current market value. Accordingly, they demand that the Company not proceed with this dilutive share issuance.
The letter follows: Board of Trustees CommonWealth REIT Two Newton Place 255 Washington Street Newton, MA 02458-1634 February 26, 2013 Dear Members of the Board of Trustees: Corvex Management, LP (“Corvex”) and Related Fund Management, LLC (“Related”) separately manage investment funds that collectively own approximately 9.8% of the outstanding common shares of CommonWealth REIT (“CWH” or the “Company”). We have deep industry experience and have spent considerable time with our advisors analyzing CWH’s assets and corporate structure. We are publicly filing today a detailed presentation outlining a clear path for maximizing value for all of CWH’s shareholders.
We believe that the Company’s real estate assets are significantly undervalued due to the misalignment of incentives between the Company and its externally advised management structure, and track record of underperformance. Based on a detailed property-by-property valuation analysis, we believe that CWH’s net asset value as of February 25, 2013 was $40 per share, as compared with the current per share price of $15.85. We believe that if the Company implemented, among other changes, an internal management structure, basic operating performance enhancements and a more shareholder-friendly capital allocation policy, CWH could achieve a target price of more than $50 per share over a two year period. We believe that CWH’s shares trade at such a large discount mainly because the Company’s externally advised management structure skews incentives, reduces CWH’s cash flow through excessive fees and impairs the Company’s valuation. We note that, according to public filings, over the last five years the Company has paid out over $336 million in management fees to REIT Management & Research LLC (“RMR”) – representing over 20% of CWH’s market capitalization as of the close of business on February 25, 2013. In addition, these fees are based primarily on historical costs, and reward management for acquisitions regardless of financial returns or strategic rationale.
We also note that CWH’s management and Board own very little stock in CWH (less than 1% of the Company) and their misaligned incentives have led to a strategy that has sought to maximize management fees for RMR at the expense of CWH’s shareholders. Furthermore, the Company’s poor corporate governance exacerbates the inherent conflicts of interest between management and shareholders. Among other things, the Company has: a classified board; a “poison pill” triggered by the acquisition of only 10% of CWH’s outstanding shares, with a “slow hand” provision; and questionable trustee independence. This has insulated management and further misaligned the interests of management and its shareholders. ISS has also taken notice, recommending against CWH’s incumbent board trustees last year.
The misalignment of interests and poor governance are all made readily apparent by the announcement on February 25, 2013 that CWH has commenced an underwritten public offering of up to 31,050,000 common shares (including the anticipated over-allotment option), the proceeds of which will be used to repurchase up to $450 million of certain of the Company’s outstanding investment grade unsecured senior notes, to repay other debt and for “general business purposes”. The proposal to raise equity when the stock trades at such a large discount to its intrinsic value is absurd, and more than anything speaks to the incredible disconnect between the goals of CWH shareholders and the Board and RMR.
We also note that our $40 per share estimate of NAV is generally consistent with CWH’s book value of approximately $37 per share, and are astounded that the Board of Trustees would consider issuing equity at a time when the shares are trading at $15.85 which is 43% of their own estimate of minimum fair value. Based on our above analysis, the proposed offering would represent a massive dilution to existing shareholders that would be highly destructive of shareholder value. In addition, we question why the Board would repurchase investment grade debt on highly attractive terms at a large make-whole premium with no near term maturities or liquidity issues. It appears that the external manager’s goal is to grow the Company’s equity base, increase its acquisition capacity and ultimately increase management fees – all at the expense of creating value for CWH shareholders.
Instead of this approach, the Board should be selling assets into the market and repurchasing shares. We demand that the Board of Trustees immediately cease this ill-advised offering and debt repurchase and engage in frank and open discussions with us regarding CWH’s business and strategy. If the Board of Trustees proceeds with a course of action that is clearly destructive to CWH’s shareholders, we intend to hold you and CWH’s management responsible for this and other potential breaches of your fiduciary duties.
We are filing today a detailed presentation outlining a clear path for value creation at CWH and believe the following immediate steps must be taken to close the massive discount between the public market value and NAV:
If necessary, we are prepared to seek the removal of the entire Board of Trustees though an action by written consent so that the Board may be replaced with Trustees that will be responsive and representative of the interests of all of CWH’s shareholders and not just its management. Furthermore, Corvex and Related would also be prepared to acquire all the outstanding shares at a significant premium to the current market value. Accordingly, we demand that the Company not proceed with this dilutive share issuance.
Corvex Management LP
712 Fifth Avenue,
New York, New York 10019
Jeff T. Blau
Related Fund Management, LLC
60 Columbus Circle
New York, New York 10023
About Corvex Management, LP Corvex Management, LP is an investment firm headquartered in New York, New York that engages in value‐based investing across the capital structure in situations with identifiable catalysts. Corvex was founded in March 2011 and follows an opportunistic approach to investing with a specific focus on equity investments, special situations and distressed securities largely in North America.
About Related Fund Management, LLC Related Fund Management, LLC is an affiliate of Related Companies, one of the most prominent privately-owned real estate firms in the United States. Formed 40 years ago, Related is a fully-integrated, highly diversified industry leader with experience in virtually every aspect of development, acquisitions, management, finance, marketing and sales. Related’s existing portfolio of real estate assets, valued at over $15 billion, is made up of best-in-class mixed-use, residential, retail, office and affordable properties. For more information about Related Companies please visit www.related.com. Copies of the detailed presentation are included in the 13 D filing and available on EDGAR. Copies can also be obtained by contacting Rupal Doshi of Corvex at (212) 474-6750 or [email protected] or Joanna Rose of Related at (212) 801-3902 or [email protected]