CommonWealth Surges After Activists Challenge Stock Sale
CommonWealth REIT surged the most in more than two decades after activist investor Keith Meister and Related Cos. challenged the company’s plan to sell shares and said they’re prepared to make a $2.1 billion bid.
Related and Meister, a onetime Carl Icahn protege who started activist fund Corvex Management LP, said they see the opportunity to “meaningfully increase” their $25-a-share offer after completing due diligence, according to a letter sent to CommonWealth today and obtained by Bloomberg News. They are also prepared to file a lawsuit to stop the share issue, the letter shows. The shares jumped 54 percent, the most since at least Dec. 18, 1986, according to data compiled by Bloomberg.
Related and Corvex own 9.8 percent of CommonWealth’s existing shares and are demanding that CommonWealth abandon a planned stock offering, according to a regulatory filing earlier today. CommonWealth said yesterday it would issue 27 million shares of new stock and use the $450 million in proceeds to retire some of its debt, sending the shares down.
While activist funds like Corvex usually work alone, Meister and Related may be pooling their shares to make it more difficult for CommonWealth to resist their demands. Last year, activist fund Relational Investors LLC joined up with the California State Teachers’ Retirement System to force steelmaker Timken Corp. to split the company. The activist firms sent a letter to Timken’s board last week reiterating their position, citing their combined 7.3 percent ownership.
Meister and Related CEO Jeff Blau, who signed the letter in today’s filing, project that CommonWealth’s real estate assets are worth about $40 a share, and assert that poor management has driven down the stock. With better management, the two investors expect CommonWealth shares could reach more than $50. Corvex has already started lining up the funds to buy CommonWealth’s shares, according to a person familiar with the matter.
Joanna Rose, a spokeswoman for Meister and Related, confirmed the contents of the letter. Tim Bonang, a spokesman for CommonWealth, said the company will review its options and decide whether to meet with Meister and Blau. He declined to comment on the $25-a-share proposal.
Meister and Blau not only want to thwart the issuance of new stock, they are also striving to overhaul the board and would even be willing to buy the company’s assets at a premium to its current market price, the filing shows.
REITs, whose primary income streams are from real estate, are required by the Internal Revenue Service to distribute at least 90 percent of their taxable earnings to shareholders in the form of dividends. In exchange they pay little or no income tax. Issuing 27 million additional shares will dilute CommonWealth’s outstanding shares by more than 30 percent, according to data compiled by Bloomberg, lowering the dividends paid to shareholders.
CommonWealth REIT (CWH) owned $7.3 billion of office and industrial properties as of Dec. 31, with about 54 million square feet (5 million square meters) located in 31 states, Washington, D.C., and Australia, according to its website.
If the company doesn’t cancel the share offering, Corvex and Related may start a proxy fight and try to replace members of the board. If necessary, Corvex and Related would seek to replace the entire board, including CommonWealth President Adam Portnoy and his father, Chairman Barry Portnoy, according to the filing. Investors can call a vote and replace the trustees with a two-thirds vote, the filing shows.
The two Portnoys run Reit Management & Research LLC, or RMR, which manages properties for CommonWealth. RMR collected $77.3 million in management fees last year and more than $336 million in fees over the past five years, according to CommonWealth’s proxy statement.
In the filing, Meister and Blau say that CommonWealth has depressed its share price by paying excessive management fees to RMR. Those fees represent more than 20 percent of the the firm’s current market capitalization, they said in the filing.
CommonWealth’s Bonang said the company’s general and administrative costs, which include management fees, amount to 5.2 percent of revenue. That compares with a 6 percent average in the Standard & Poor’s U.S. REIT Office Index.
Part of Meister and Blau’s immediate proposal is to change the management compensation to pay them for creating better shareholder returns and replace the company’s charter and bylaws to improve corporate governance.
They also want CommonWealth to stop selling assets to related parties and to use cash to buy back shares. Meister and Blau said the managers’ fees reward them for making acquisitions “regardless of financial returns or strategic rationale,” which they want to change.
Together, Adam and Barry Portnoy own less than 1 percent of CommonWealth, according to data compiled by Bloomberg.
Meister has been active in pressuring companies to make moves that increase value for stockholders. In August, he disclosed a stake in food producer Ralcorp Holdings Inc. and three months later the company agreed to sell itself to rival ConAgra Foods Inc. (CAG)
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