CommonWealth REIT to Change Manager Payment Structure

CommonWealth REIT (CWH), whose biggest shareholder is seeking to oust the board, plans to change the way its management company is paid, add directors and eliminate a takeover defense to address investor concerns.

Beginning next year, 10 percent of the company’s base business management fees paid to Reit Management & Research LLC will be paid in shares of CommonWealth, instead of in cash, the Newton, Massachusetts-based office landlord said in a statement today. Annual incentive payments to RMR will be based on total returns by CommonWealth shares in excess of certain benchmarks, instead of being tied to funds from operations.

Corvex Management LP and Related Cos., which own about 9.6 percent of CommonWealth after buying shares this year, began a campaign in April to remove the company’s board trustees, claiming conflicts of interest and mismanagement. The real estate investment trust’s move to improve governance follows conversations with investors who said they wanted RMR’s financial incentives to be more aligned with shareholders, the trustees said in the statement.

“We think it’s the right thing to do,” Adam Portnoy, CommonWealth’s president, said in a telephone interview. “My hope is that we have a happier shareholder base.”

External Management

Portnoy and his father, Barry, a company founder, sit on CommonWealth’s five-member board and are owners of RMR. Corvex and Related have claimed that the external management structure diminishes shareholder returns and that the Portnoys’ ownership leads to self-dealing.

Disputes between the REIT and the Corvex group are in arbitration. Last month, the arbitration panel struck down a provision making it more difficult for stockholders to remove the company’s board of trustees. The arbitrators scheduled a hearing for further consideration of the issues to begin Oct. 7.

Corvex and Related said today that the governance changes “lack substance,” contain caveats and wouldn’t be considered until after the arbitration panel rules.

“Today’s announcement is nothing more than hollow rhetoric and a desperate attempt to keep Barry Portnoy and his son Adam in control of CommonWealth,” Corvex Founder Keith Meister and Related Chief Executive Officer Jeff T. Blau said in an e-mailed statement.

Share Gain

CommonWealth shares closed unchanged at $22.54. They have gained 42 percent since Feb. 25, the day before Corvex and Related made their activism public.

CommonWealth said today that it plans to get rid of a poison pill after the conclusion of its arbitration with Corvex. The board also plans to recommend to shareholders that the company’s corporate rules be amended to allow for the annual election of all trustees, instead of the current staggered board where they serve three-year terms.

The company also plans to boost the size of the board to increase the ratio of independent trustees to at least 75 percent from 60 percent.

“What we tried to do was address basically everybody’s concerns,” Adam Portnoy said. “We really tried to hit upon all the major themes we heard.”

RMR’s base management fees are calculated at the annual rate of 0.5 percent of the gross historical cost of CommonWealth’s assets. Next year they will be based on the lower of gross historical cost of CommonWealth’s real estate assets or the company’s market value.

Monetary Damages

Corvex and Related had asked for monetary damages from CommonWealth’s trustees for alleged breaches of fiduciary duty. The investors asked that those claims be dismissed, which they were by the arbitration panel, according to the statement.

Corvex and Related consented to the dismissal to expedite the arbitration process, the investors said in their statement.

Other REITs managed by RMR also plan to change their compensation arrangements and their boards will recommend the annual election of trustees, according to statements from those companies today. Select Income REIT (SIR), Government Properties Income Trust (GOV), Hospitality Properties Trust (HPT), and Senior Housing Properties Trust (SNH) are all managed by RMR.

The changes “better align interests with common shareholders,” while conflicts of interest still exist given the external management structure, David Loeb and Michael Bellisario, analysts at Milwaukee-based Robert W. Baird & Co. who cover Hospitality Properties, wrote in a report today.

“We believe these shareholder-friendly changes in the RMR management agreements are due to pressures created by activist efforts by Corvex/Related at CommonWealth,” Loeb and Bellisario wrote.

CommonWealth, which also owns properties in Australia, focusing on selling U.S. suburban office properties to focus on downtown buildings.

“Nobody told us we were on the wrong track,” Portnoy said of shareholder comments from meetings on the company’s business strategy.

To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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