CommonWealth REIT (CWH) said billionaire Sam Zell, who has been nominated by dissident investors to join its board, has a conflict of interest that puts him at odds with the company’s shareholders.
Zell is a lead investor in Par Petroleum Corp. (PARR), one of the largest tenants of Select Income REIT, a company 44 percent owned by CommonWealth, the Newton, Massachusetts-based U.S. office landlord said in a statement today. If elected to the board, Zell, part of a slate picked by Corvex Management LP and Related Cos., may use his position to further other business interests ahead of CommonWealth’s, the company said.
Some of the rent paid by a tenant recently acquired by Par Petroleum is scheduled to be reset to fair market value on April 1, according to CommonWealth’s statement.
“We are concerned that Zell is joining the Related/Corvex hostile takeover effort so he may influence these lease negotiations to the benefit of his company and the detriment of SIR shareholders, including CWH,” CommonWealth President Adam Portnoy said in the statement, referring to the companies’ ticker symbols.
Corvex and Related, which own 9.6 percent of CommonWealth combined, are seeking to overthrow the board, arguing that the ownership of an external management firm by Adam Portnoy and his father Barry, a CommonWealth founder, has led to conflicts of interest and underperformance at the real estate investment trust. Both Portnoys are directors of CommonWealth, which pays fees to the management company.
Adam Portnoy said the company didn’t know about Zell’s involvement in a Hawaii property owned by Select Income REIT (SIR) until Jeff Blau, chief executive officer of New York-based Related, mentioned it in a March 10 interview on Bloomberg Television. In the interview, Blau said he thought Zell “wound up in a dispute with the Portnoys in a transaction or some land holdings they have in Hawaii.”
Chai Trust Co., a division of Zell’s Equity Group Investments, is Par Petroleum’s biggest shareholder, with a 32.5 percent stake, according to data compiled by Bloomberg.
Zell and David Helfand, co-president of Equity Group Investments, have agreed to serve as CommonWealth’s chairman and chief executive officer, respectively, if the dissidents’ effort to replace the board succeeds. An entity affiliated with Zell and Helfand will have an option to acquire as many as 4 million CommonWealth shares, Corvex and Related said last month.
CommonWealth shareholders have a March 20 deadline to vote on the proposal to oust the board.
“There is simply no conflict of interest,” Joanna Rose, a spokeswoman for Corvex and Related, said in an e-mailed statement. “We find it distasteful that the Portnoys would try to lecture anyone on conflicts of interest in light of the hundreds of millions of dollars they have extracted from CommonWealth in just the last six years alone, while shareholders continued to suffer from their terrible performance.”
In a story today on the website of the Financial Times, Zell dismissed CommonWealth’s concerns.
“I’ve spent the last 20 years championing strong corporate governance within REITs,” said Zell, chairman of Chicago-based apartment landlord Equity Residential. (EQR) “Governance is what has taken real estate out of the dark ages and on to Wall Street as a respected investment class. This industry is perhaps the most salient legacy of my career. I have an obligation to protect its integrity.”
CommonWealth fell 1 percent today to $26.87. The shares have gained 22 percent in the past 12 months.
The REIT has denied Corvex and Related’s claims of conflicts of interest and has said it is focusing on buying office buildings in U.S. downtowns and selling suburban properties to boost shareholder value.
CommonWealth in September announced changes to its corporate governance after conversations with investors who said they wanted the financial incentives of the external management company, REIT Management & Research LLC, to be more aligned with shareholders. The changes were made in December, according to CommonWealth.
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