* Investors demand CommonWealth cease equity offering
* Investors may seek removal of board if demands not met
* Stock jumps 54 percent
By A. Ananthalakshmi and Ritika Rai
Feb 26 CommonWealth REIT shares surged
more than 50 percent after activist investor Keith Meister and
real estate major Related Cos said they were willing to buy the
owner of office buildings for $2.1 billion or more.
Corvex Management, run by Carl Icahn associate Meister, and
Related Fund Management, the investment arm of Related Cos,
together reported a near 10 percent stake in CommonWealth
earlier on Tuesday and called for the company to cancel its
proposed share and debt offering.
"We believe that the company's real estate assets are
significantly undervalued due to the misalignment of incentives
between the company and its externally advised management
structure, and track record of underperformance," the investors
wrote in a letter to the CommonWealth board.
The shareholders said the stock has the potential to cross
$50 per share over two years if CommonWealth made changes to its
management structure and operating performance and followed a
more shareholder-friendly capital allocation policy.
The stock closed up 54 percent at $24.41 on Tuesday, valuing
the company at about $2 billion.
In a second letter to the board later in the day, Corvex and
Related said they were willing to offer $25 per share for
acquiring CommonWealth. Based on the 83.8 million shares
outstanding as of Feb. 21, the offer values the company at $2.1
The offer can be increased "meaningfully" after completion
of due diligence, the shareholders said, adding that they were
willing to meet with the management immediately.
CommonWealth has not issued a statement responding to the
shareholders' demands. It was not immediately available for
The firms, which said they were prepared to seek a removal
of CommonWealth's board if they did not receive an adequate
response, reported a combined 9.75 percent stake in CommonWealth
Corvex in recent months called for changes at ADT Corp
, which appointed Meister to its board, and Ralcorp
Holdings, which was sold to ConAgra for $5 billion.
Reported Cos was founded by billionaire developer Stephen
Ross and is best known for developing the Time Warner Center. It
is also the largest owner of luxury residential rental
properties in New York.
The shareholders' main point of contention is CommonWealth's
externally managed structure whereby its management is
compensated based on the assets under management, and not the
performance of the company.
This structure allows the company acquire assets regardless
of their quality and the company has an incentive to issue as
much stock as possible to fund the acquisitions, according to a
Citi note on Monday.
A share offering would not affect the management as they own
very little stock in the company - less than 1 percent.
"CommonWealth's track record of operational underperformance
relative to the office REIT peer group stems from the company's
externally advised and managed structure, which results in
uneconomic decisions and puts shareholders and management on an
uneven playing field," Citi analyst Michael Bilerman said.
CommonWealth's external adviser is REIT Management &
Research LLC (RMR), which also manages investments for
Hospitality Properties Trust, Senior Housing Properties
Trust and other publicly traded REITs.
According to the investors' presentation slides filed with
regulators, CommonWealth paid $209 million in management fees to
RMR over the last three years, during which time the company's
market value declined by $647 million.
Corvex and Related called the 27 million share offering and
debt repurchase that CommonWealth announced on Monday "value
They said they would sue to stop or rescind the offering if
the company does not cancel the plans by the end of the day.