March 12 (Bloomberg) -- CommonWealth REIT, the property owner criticized by its largest shareholders for its corporate governance, will use proceeds from the sale of its Government Properties Income Trust stake to pay debt, a spokesman said.
CommonWealth sold 9.95 million shares of its former unit for $25.20 each in an underwritten offering, Government Properties, a landlord to government tenants, said yesterday in a statement. CommonWealth, which had proceeds totaling $240 million, considered holding the stake to be outside of its main focus, Tim Bonang, vice president of investor relations for both companies, said in a telephone interview today.
“It’s an asset that’s not core to the business in the same way that suburban office isn’t core to the business plan,” Bonang said. CommonWealth, a real estate investment trust based in Newton, Massachusetts, primarily owns office buildings in or near major metropolitan markets.
CommonWealth last week sold 34.5 million of its own shares to pay debt in an offering that was challenged by Corvex Management LP and Related Cos. because of its dilution to shareholders. Keith Meister’s Corvex and Related, led by Chief Executive Officer Jeff Blau, project that CommonWealth’s real estate assets are worth about $40 a share, according to a Feb. 26 letter to the board. The “misalignment of incentives” between the REIT and its external management has driven down the value of the stock, the New York-based investors said.
Bonang declined to comment on the claims of the investors, citing litigation. While Corvex and Related have said they may seek to replace CommonWealth’s five-member board, that hasn’t occurred yet and “we’ll take a wait and see approach,” he said.
Joanna Rose, a spokeswoman for the investors, didn’t return a call seeking comment on the share sale.
CommonWealth listed $4.3 billion in total debt at the end of the fourth quarter, according to a regulatory filing. It has $265 million in debt due in 2014, $758 million in 2015 and $1.3 billion in 2016, according to the report.
The company is trying to maintain its investment-grade credit rating, and its equity offering to reduce debt was tied to that effort, Rich Moore, an analyst at RBC Capital Markets in Solon, Ohio, wrote in a March 4 report.
CommonWealth in the past five years has focused on buying downtown office properties in secondary markets in the U.S. and selling suburban office properties, President Adam Portnoy said on a Feb. 25 conference call with analysts. The company also owns industrial properties and real estate in Australia.
CommonWealth has identified 275 properties out of 440 for disposition over the next few years, and as of last month it sold 18 of them, according to Moore’s report.
CommonWealth fell 1.8 percent to $21.75 today. Government Properties, also based in Newton, dropped 6 percent to $24.92.
Government Properties was formed by CommonWealth as a subsidiary in 2009 and sold shares to the public that same year, according to a regulatory filing yesterday. Reit Management & Research LLC, based in Newton, manages both companies. RMR receives fees from the companies it runs and its owners, Barry Portnoy and his son Adam, serve on the boards of both companies.
The CommonWealth share sale is positive for Government Properties because some analysts said the CommonWealth ownership was an overhang on the stock, according to Bonang. Over the “long term” it will be viewed as a positive, he said.
“The sale eliminates that overhang,” Bonang said.
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