Keith Meister, managing partner of Corvex Management and a former executive of Icahn Enterprises LP (NASDAQ:IEP), acknowledged that his firm was in for an activist war with CommonWealth REIT (NYSE:CWH) the first day it acquired shares of the real estate investment trust company, which owns offices and industrial buildings across the United States of approximately 55 million square feet.
According to Meister, “We knew we were in for a fight before we bought the first share” said Meister during the Active –Passive Investor Summit held in Manhattan on Monday as he discussed the investments of Corvex Management in real estate.
ValueWalk's Raul Panganiban interviews William Burckart, The Investment Integration Project’s President and COO, and discuss his recent book that he co-authored, “21st Century Investing: Redirecting Financial Strategies to Drive System Change”. Q1 2021 hedge fund letters, conferences and more The following is a computer generated transcript and may contain some errors.
Meister’s hedge fund initially acquired a 9 percent stake in CommonWealth REIT (NYSE:CWH) in partnership with Related Companies, a real estate developer. Another hedge fund, Perry Capital also purchased shares in the real estate investment trust.
According to Meister, the combined stock holdings of Corvex Management, Related, and Perry Capital in CommonWealth REIT (NYSE:CWH) is around 21 percent. Meister said 20 other hedge funds that own 1 percent to 4 percent stakes in the real estate investment trust company joined Corvex effort. The entire group against CommonWealth REIT owns more than 50 percent of the company.
Corvex Management and Related submitted a conditional offer to takeover CommonWealth REIT (NYSE:CWH) for $24.50 per share, which was rejected by its board of directors saying that the proposal will be harmful to the interest of the company and its shareholders.
The two entities demanded to replace the entire board of directors of CommonWealth REIT (NYSE:CWH) claiming that the shares of the real investment trust company is undervalued because of the poor management of RMR, its external management run by father and son, Barry and Adam Portnoy.
Meister believes that the shares of CommonWealth REIT (NYSE:CWH) will be worth as much as $45 per share once RMR is removed from its management structure. In a court filing with the Massachusetts, the two shareholders claimed that the CommonWealth-RMR contract harmed the shareholders of the real estate investment trust company because of its “perverse incentives.”
In addition, Corvex Management and Related alleged that CommonWealth REIT (NYSE:CWH) has poor governance rules, and the members of the board are not truly independent. The shareholders complained that management structure has conflict of interest, and it encourages increasing the number of its assets instead of focusing on improving rents, and the vacancy levels of its existing properties.
Adam Portnoy rejected the claim that there is a conflict of interest between CommonWealth REIT and RMR. Prtnoy said, “I’m on both boards and I can say there’s no conflict of interest.”
Corvex Management and Related also claimed that RMR received around $400 million fees from CommonWealth REIT since 2007, while stock price of the company dropped by 60 percent. The company refuted the amount and stated that the two shareholders overstated the fees. In addition, the company said its operations cost is lower than its average competitor. Furthermore, the company explained that the decline of its share price was due to heavy concentration of its assets in suburban markets.
Moreover, CommonWealth REIT (NYSE:CWH) emphasized that it is undertaking measures to continue to create value for its shareholders by implementing its strategic plan. According to the company, since 2008 it increased its portfolio concentration on CBB properties to 59 percent. The company said it acquired around $3.7 billion primary Class A CBD assets and sold $1.5 billion of suburban properties with significant gains.
The company also said that it is 94 of its properties with low occupancy and negative cash flow (18 properties already sold), unlocked value through “carve-out” IPO’s for Government Properties Income Trust (NYSE:GOV) and Select Income REIT (NYSE:SIR). It received $60 million proceeds from the two IPO’s, and gained another $66.3 million from selling its remaining stake in GOV for $240.1 million.
On Monday, Meister emphasized that CommonWealth REIT will achieve its proper stock price under a new management. According to him, he has a candidate to serve as CEO and ready to lead the company. He also said that lenders are standing by and ready to refinance CommonWealth REITH’s balance sheet if necessary.