CommonWealth Focusing on Property Strategy Amid Clash

CommonWealth REIT, whose second-largest shareholders want to oust the board, is better off keeping its management structure as investors are poised to benefit from its plan of focusing on downtown U.S. office buildings, President Adam Portnoy said.

The real estate investment trust published an investor presentation on its website today detailing its strategy in response to criticism from Corvex Management LP and Related Cos., who say the company has underperformed because of the costs of its external manager, Reit Management & Research LLC, or RMR. The investors, after proposing a $2.9 billion buyout that was rejected, are soliciting votes to remove the board.

Bringing CommonWealth management in-house would be more expensive, boosting general and administrative costs and hurting shareholders, according to Portnoy, an owner of RMR with his father, Barry. The stock will rise as the Newton, Massachusetts-based REIT sells suburban properties in favor of downtown offices, which have better growth potential, Portnoy said.

“We still have a lot of work to do, but I think we’re on the right path,” Portnoy said in a telephone interview. “The biggest benefit that shareholders are getting is the lower G&A costs that are being experienced by CommonWealth.”

Stock Decline

CommonWealth shares fell 24 percent in the five years through last week, compared with an 11 percent gain in the Bloomberg REIT Index. The stock closed April 19 at $22.17, up 40 percent since Feb. 25, the day before Corvex and Related made their activist efforts public. The investors say the shares could rise to $35 if the trustees were removed and reach $44 by the end of 2014, according to an April 18 presentation.

CommonWealth has bought $3.7 billion of properties in central business districts and sold $1.5 billion of suburban office real estate since the start of 2008, according to the investor presentation. Rents and demand for downtown space are rising, while suburban areas have lagged behind, the REIT said.

“We happen to be operating in a very tough sector,” Portnoy said. “That has more to do with what’s been going on with the performance of the company than anything else.”

CommonWealth had 94 properties for sale at the end of 2012. It sold 18 of them as of today, according to the presentation.

“The sales market has gotten a lot more robust even for turnaround or value-add properties in the U.S.,” Portnoy said. “It’s taken a long time for this turnaround to come about.”

Management Fees

CommonWealth said in the presentation that its general and administrative expenses are lower than that of its peers. RMR gets fees from business and property management, and not from acquisitions, dispositions, leasing or financing, the REIT said.

RMR, which has 820 employees dedicated to real estate and manages four other REITs, “is able to leverage its economies of scale to lower costs and add value to each of its managed companies,” CommonWealth said in the presentation.

“The Portnoys are asking shareholders to continue to believe in their inherently conflicted structure and their so-called strategic plan” that has led to share underperformance, Joanna Rose, a spokeswoman for Corvex and Related, said in an e-mail. “Corvex and Related remain singularly focused on allowing all shareholders to exercise their rights, effect change and restore shareholder value -- rights the Portnoys and CWH board have spent the last eight weeks desperately trying to suppress.”

Seeking Removal

Corvex, founded by Keith Meister, and Related, whose chief executive officer is Jeff Blau, sent a letter to investors last week lobbying them to remove the board after the landlord spurned the companies’ buyout offer. The REIT’s trustees and management “are solely beholden” to the Portnoys, they said.

CommonWealth’s trustees sent their own letter to investors in response, saying the activists aren’t entitled to seek the consents under its bylaws. The company said in its presentation today that removing the board and RMR would have negative effects including hurting lease negotiations, disrupting projects and adding uncertainty surrounding the transition.

Corvex and Related, based in New York, hold 9.2 percent of CommonWealth’s stock, making them the largest shareholders behind Vanguard Group Inc., which owns 9.5 percent, according to data compiled by Bloomberg.

CommonWealth rose 2.4 percent to $22.71 at the close of New York trading.

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