UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant ¨
Filed by a Party other than the Registrant x
Check the appropriate box:
| ¨ | Preliminary Proxy Statement |
| ¨ | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
| ¨ | Definitive Proxy Statement |
| x | Definitive Additional Materials |
| ¨ | Soliciting Material Pursuant to §240.14a-12 |
COMMONWEALTH REIT
(Name of the Registrant as Specified In Its Charter)
CORVEX MANAGEMENT LP
KEITH MEISTER
RELATED FUND MANAGEMENT, LLC
RELATED REAL ESTATE RECOVERY FUND GP-A, LLC
RELATED REAL ESTATE RECOVERY FUND GP, L.P.
RELATED REAL ESTATE RECOVERY FUND, L.P.
RRERF ACQUISITION, LLC
JEFF T. BLAU
RICHARD O’TOOLE
DAVID R. JOHNSON
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
| x | No fee required. |
| ¨ | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
| (1) | Title of each class of securities to which transaction applies: |
| (2) | Aggregate number of securities to which transaction applies: |
| (3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): |
| (4) | Proposed maximum aggregate value of transaction: |
| (5) | Total fee paid: |
| ¨ | Fee paid previously with preliminary materials. |
| ¨ | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. |
| (1) | Amount Previously Paid: |
| (2) | Form, Schedule or Registration Statement No.: |
| (3) | Filing Party: |
| (4) | Date Filed: |
This filing contains (1) a press release issued by Corvex Management LP (“Corvex”) and Related Fund Management, LLC (“Related”) on April 18, 2013, (2) a presentation disseminated by Corvex and Related on April 18, 2013, and (3) screenshots from a website hosted by Corvex and Related.
**************************************************************
CORVEX AND RELATED SEND LETTER TO COMMONWEALTH REIT SHAREHOLDERS
CALLING FOR AN END TO VALUE DESTRUCTION
Urgent Need to Remove Entire CommonWealth Board Now and Stop Accelerating Campaign to
Disenfranchise Shareholders
Vote the WHITE Consent Card Today
NEW YORK, April 18, 2013 – Corvex Management LP (“Corvex”) and Related Fund Management, LLC (“Related”), whose separately managed investment funds collectively own approximately 9.2% of the outstanding common shares of CommonWealth REIT (NYSE:CWH), today sent a letter to CWH shareholders, urging them to vote the WHITE consent card and remove the entire Board of CommonWealth before it can take any additional action to destroy shareholder value.
Corvex and Related have also published an investor presentation detailing their plan for driving value and restoring shareholder wealth at CommonWealth and outlining the latest actions of CWH’s Board that they firmly believe have destroyed shareholder value. The presentation is available at www.shareholdersforcommonwealth.com.
Shareholders are urged to sign, date and return the WHITE consent card today. You may also be able to vote online by following the instructions on the voting materials you will be receiving. They also encourage all shareholders to call today D.F. King & Co., Inc., their proxy solicitor, at 1-800-714-3313 so they can ensure you receive their materials and they can assist you in voting your shares.
The text of the letter to CWH shareholders is as follows:
IMMEDIATE CHANGE IS NEEDED TO STOP THE CONTINUED VALUE DESTRUCTION
AT COMMONWEALTH
OUR CONSENT SOLICITATION WILL SERVE AS A REFERENDUM ON THE CURRENT
BOARD AND MANAGEMENT TEAM AND IS THE ONLY WAY TO EFFECT REAL CHANGE
SIGN, DATE AND RETURN THE WHITE CONSENT CARD TODAY!
Dear Fellow Shareholders:
We are two of the largest shareholders of CommonWealth REIT with a combined ownership of 9.2%, and are seeking written consents from shareholders to immediately remove all members of CommonWealth’s board of trustees. CommonWealth is managed by Reit Management & Research LLC (RMR), which is owned by Barry Portnoy and his son Adam. The Portnoys, along with their hand-picked trustees, have in our view managed CommonWealth in a way which has enriched themselves rather than representing the interests of shareholders. If we do not act NOW to remove the entire board, management will continue its unrestrained and accelerating campaign of value destruction, and shareholders will be forced to endure many more years of mismanagement.
We made a substantial investment in CommonWealth earlier this year after conducting an exhaustive property-by-property study of CommonWealth and its assets under the lead of Related Fund Management, an affiliate of Related Companies – one of the most respected privately-owned real estate firms in the world with over $15 billion of real estate assets and a 40 year history.
Based on Related’s extensive due diligence and expert analysis, and with the assistance of highly qualified external consultants, we recognized that CommonWealth’s real estate assets trade at a substantial discount to fair value due to a misalignment of incentives between RMR and shareholders, and what in our view is plain mismanagement by the Portnoys and the trustees. Specifically, the flawed RMR structure reduces the Company’s cash flow, impairs CommonWealth’s valuation multiple (40%+ discount to peers historically), destroys investor confidence, and has resulted in a track record of underperformance. In fact, CommonWealth is one of the few remaining externally managed equity REITs in the public markets. Green Street Advisors, a leading real estate and REIT research firm, refers to this structure as a “dinosaur” that “stands out like a sore thumb.”1 We firmly believe this external manager structure must be removed and replaced with an internal management team that is truly focused on creating value for ALL shareholders.
Since announcing our ownership stake in late February, we have sought to effect change, and have consistently remained open to multiple options to create value for all shareholders. However, it is clear to us that the current board of trustees and management are solely beholden to the Portnoys, do not recognize or ignore the inherent conflicts of interest that the external manager structure creates, and will not act in a way that seeks to enhance value for all shareholders.
In fact, in response to our efforts, CommonWealth has shown that it will stop at nothing to silence us and other shareholders. Within the past seven weeks alone CommonWealth’s management and board have: completed a massively dilutive equity offering at a 48% discount to book value; amended the governing documents of CommonWealth twice in an attempt to eliminate long-standing shareholder rights; announced the possibility of selling CommonWealth’s controlling stake in Select Income REIT at a discount; secretly lobbied the Maryland legislature in an attempt to introduce amendments that would have eliminated shareholder democracy; and, most recently, purported to completely eliminate shareholder rights to remove trustees without cause – an effort that in our and our lawyers’ view is invalid under Maryland law. If any shareholders had doubts as to where the trustees’ allegiances lie, these actions have made clear it is to the Portnoys and not shareholders.
Given the accelerating pace of CommonWealth’s value-destroying activities, we are left with no alternative but to seek to immediately remove this board. The only way for shareholders to effect meaningful change is through our consent solicitation. Any other strategy would take years to make a difference as a result of the various entrenching devices built into CommonWealth’s governing documents.
MISMANAGEMENT OF COMMONWEALTH BY THE CURRENT BOARD AND
MANAGEMENT TEAM HAS RESULTED IN SEVERE UNDERPERFORMANCE
It is our firm view that the Portnoys’ collective actions have led to CommonWealth significantly underperforming its peers on almost all key metrics, including:
| • | Worst shareholder returns – CommonWealth’s stock price has performed 28%, 31%, and 30% worse than peers over the last 1 year, 3 years, and 5 years, respectively.2 Over the same 1 year, 3 |
| 1 | “The Portnoy REITs – What It Means to be ‘Uninvestable’”, Green Street Advisors, March 1, 2013. Permission was neither sought nor obtained to include quoted language. |
| 2 |
CommonWealth’s peers include Piedmont Office Realty Trust Inc. (PDM), Highwoods Properties Inc. (HIW), Mack-Cali Realty Corp. (CLI), Brandywine Realty Trust (BDN) and Parkway Properties Inc. (PKY). Returns calculated through January 15, 2013, the day prior to when Corvex and Related began purchasing stock. |
| year, and 5 year time periods, CommonWealth’s total return performance, which is calculated based on stock price performance and dividends, is 26%, 26%, and 22% below peers, respectively. |
| • | Massive discount to peers – CommonWealth’s share price was trading at a nearly 40% discount to its peers on an unlevered capitalization rate basis immediately prior to the public announcement of our ownership stake on February 26, 2013. CommonWealth has also traded at a 40%+ discount to peers on a price/FFO basis over the last 1 year and 3 years, respectively. |
| • | Mismanagement of operations – CommonWealth has consistently delivered negative growth in both FFO/share (-5% 2010-2012 CAGR) and CAD/share (-23% 2010-2012 CAGR) and is among the bottom performers of peers on both metrics. |
THE PORTNOYS AND THEIR TRUSTEES HAVE ENGAGED IN AN ACCELERATING
CAMPAIGN TO DISENFRANCHISE SHAREHOLDERS
AND DESTROY VALUE
Since we first called for change seven weeks ago, the Portnoys, aided by their trustees, have executed a self-serving campaign aimed at advancing their own financial interests, at the expense of shareholder rights and value. This campaign has included:
| • | Completing a Highly Dilutive Equity Offering: This past March, the board completed a dilutive equity offering at a time when CommonWealth’s shares were trading at a 48% discount to book value as of December 31, 2012, in order to repay debt trading at prices ranging from 102% to 111% of par. The offering increased CommonWealth’s share count by 41% and diluted its NAV by over $6 per share. |
| • | Disenfranchising Amendments to Governance Documents: Just last month, following the announcement of our investment in CommonWealth, the board has unilaterally decided to make various amendments to CommonWealth’s bylaws that, on their face, sought to effectively eliminate shareholders’ right to act by written consent. As previously stated, such amendments conflict with the CommonWealth charter and Maryland law and therefore we believe they are invalid as a matter of law. |
| • | Eleventh-Hour Lobbying Efforts to Change the Law: Not satisfied, earlier this month the Portnoys hired a team of political consultants — likely paid for by YOU, as CWH shareholders — to secretly lobby the Maryland legislature in a failed attempt to adopt an eleventh-hour amendment to a pending bill that would have deprived shareholders of their right to act by written consent to remove the board without cause. |
| • | Bylaw Amendment to Try to Eliminate Shareholders’ Right to Remove Trustees Without Cause: Having failed to change the law in Maryland through their lobbying efforts, the Portnoys and their trustees have recently announced an additional unilateral amendment to CommonWealth’s bylaws that purports to eliminate the right shareholders have had since 1986 to remove trustees without cause. They have done this through a novel interpretation of the Maryland corporate statute which flies in the face of 14 years of public disclosures by CommonWealth. It is our and our lawyers’ view that such amendment is invalid. |
| • | Proposed Sale of the Company’s 56% Controlling Interest in Select Income REIT (SIR): On March 25, 2013, the board announced that it was contemplating selling CommonWealth’s 56% controlling equity interest in SIR in an underwritten offering, which we anticipate would be |
completed at a discount to market price and would effectively transfer control away from CommonWealth while allowing RMR to continue extracting fees from SIR. In our view, any sale of shares constituting a control position in SIR, however, should reflect a control premium free of the existing restrictive management contract, not a discount.
We must act now. If shareholders don’t act now to remove the entire board, we will be subject to at least three more years of Portnoy mismanagement – the minimum time needed to replace a simple majority of CommonWealth’s “super-charged” staggered board. WE MUST ACT BEFORE THE PORTNOYS AND THEIR TRUSTEES TAKE ANY ADDITIONAL ACTION TO DESTROY SHAREHOLDER VALUE.
SIGN, DATE AND RETURN OUR WHITE CONSENT AND TAKE THE FIRST STEP TO
ELECT A NEW BOARD OF INDEPENDENT AND HIGHLY QUALIFIED TRUSTEES
Once the current trustees are removed, CommonWealth is required to promptly call a special meeting for shareholders to elect new trustees. We will engage in an active dialogue with all shareholders to identify a truly independent slate of highly qualified nominees – focused on real estate industry veterans with pristine credentials – who are prepared to work for the interests of ALL shareholders, not just the Portnoys.
Upon removal of the current board, we are prepared to leverage our substantial resources and real estate expertise to benefit all shareholders. CBRE, the world’s largest commercial real estate services firm, has agreed to provide interim property management and leasing services to the CommonWealth portfolio as long as necessary to ensure a smooth change of guard to a new independent and properly functioning board elected by shareholders. Additionally, Jim Lozier, a well-respected real estate executive with more than 20 years of experience and co-founder and former CEO of Archon Group L.P., a subsidiary of Goldman Sachs and a diversified international real estate services and advisory company, has agreed to serve as interim CEO until a new board is appointed. During Jim’s tenure at Archon, the company grew from 320 employees to 8,500 employees managing 36,000 assets with a gross value of approximately $59 billion. As interim CEO, Jim will focus on transition of management services, continuity of financial reporting and building out a permanent management team. We have also already engaged Deutsche Bank Securities Inc. as financial advisor and we expect to work with Deutsche Bank Securities Inc. on any required financing in connection with our effort. Make no mistake, we will be prepared to move immediately with a more professional and aligned real estate team from the moment shareholders regain control from the Portnoys.
CORVEX AND RELATED HAVE A PLAN FOR
DRIVING VALUE AND RESTORING SHAREHOLDER WEALTH
We are proposing CommonWealth take the following simple, yet decisive actions:
| • | Internalize Management Structure, and transition to having its own management team instead of relying on the conflicted, overpaid services of RMR or another external manager. We note that RMR has received over $336 million just in the last five years from CommonWealth, while managing at least 5 other entities in the Portnoy Empire and engaging in over $2 billion of related party transactions at CommonWealth alone. During the same period CommonWealth has seen its stock decline by over 49% and cut its dividend by 70%. |
| • | Adopt Corporate Governance Best Practices, amending CommonWealth’s existing charter and bylaws to improve them and conform to ISS and Glass Lewis best practices, increasing rights for all shareholders CommonWealth’s board should no longer be insulated by a classified board, a “poison pill” with a “slow hand” provision and other entrenchment devices. |
| • | Cease Affiliate Transactions With, Or Managed By, RMR, which we believe are resulting in the transfer of enormous value to RMR and the Portnoys at YOUR expense. |
| • | Cease all acquisition and development activity until CommonWealth’s stock price exceeds its NAV, and use excess cash flow to buy back CommonWealth’s undervalued shares until its stock price exceeds NAV |
| • | Manage CommonWealth in ways which maximize long-term shareholder value, not fees paid to RMR. |
As a sign of our commitment to CommonWealth, and to offer an alternative path to unlock value, we delivered to the board a bona fide offer to acquire up to 100% of the outstanding shares for $24.50 in cash. We also encouraged the Company to welcome any additional offers from other potential bidders in excess of $24.50 per share in cash. We are focused on liberating CommonWealth from the Portnoys any way we can, and believe an acquisition with an option for existing shareholders to retain their equity is one way to achieve this goal. We very much believe there is higher value that can be unlocked if CommonWealth were run by the proper internal management team. As such, we are open to the idea of allowing fellow shareholders to retain their equity in order to share significant upside potential of CommonWealth under qualified management. So far the board of trustees, despite having received our firm offer at a premium of 55% to the share price on the day before we announced our position, has refused to engage in any good faith negotiations with us regarding this option, and has instead rejected our offer in favor of a so-called “strategic plan” which has led to a 45% stock price decline in the last two years.
Signing, dating and returning the WHITE consent card will send a firm and unequivocal message to the board that the time has come for them to be held accountable to shareholders. THIS PROCESS PRESENTS A CLEAR PATH FOR ALL SHAREHOLDERS TO EFFECT CHANGE NOW AND PARTICIPATE IN ELECTING REPLACEMENT TRUSTEES WITHOUT THE OVERSIGHT OF A SELF-INTERESTED BOARD.
We are encouraged by the support we have received over the past weeks from many shareholders – from large institutional holders, who have publicly stated their support for what we stand for, to small retail holders, who have seen their IRA accounts diminish in value as a result of the Portnoys’ mismanagement. Now is the time for all of us to act.
We note that, unless the entire board is removed, any remaining trustees will have the ability to fill vacancies created by the removal of individual trustees. YOUR CONSENT IS CRITICAL.
If you have any questions or require any assistance in executing your consent, please contact D.F. King & Co., Inc. at (800) 714-3313 (toll-free) or (212) 269-5550 (call collect).
We thank you for your continuing support.
|
| |
| Keith Meister | Jeff T. Blau | |
| Corvex Management LP | Related Fund Management, LLC | |
A copy of Related’s and Corvex’s consent solicitation materials can be obtained at www.shareholdersforcommonwealth.com or by calling D.F. King & Co., Inc., our proxy solicitor, at 1-800-714-3313.
About Corvex Management LP
Corvex Management LP is an investment firm headquartered in New York, New York that engages in value—based investing across the capital structure in situations with identifiable catalysts. Corvex was founded in March 2011 and follows an opportunistic approach to investing with a specific focus on equity investments, special situations and distressed securities largely in North America.
About Related Fund Management LLC
Related Fund Management, LLC is an affiliate of Related Companies, one of the most prominent privately-owned real estate firms in the United States. Formed 40 years ago, Related is a fully-integrated, highly diversified industry leader with experience in virtually every aspect of development, acquisitions, management, finance, marketing and sales. Related’s existing portfolio of real estate assets, valued at over $15 billion, is made up of best-in-class mixed-use, residential, retail, office and affordable properties. For more information about Related Companies please visit www.related.com.
Additional Information Regarding the Consent Solicitation
In connection with their solicitation of written consents, Corvex and Related have filed a definitive written consent solicitation statement with the U.S. Securities and Exchange Commission (the “SEC”) to solicit written consents from shareholders of CommonWealth REIT. Investors and security holders are urged to read the definitive written consent solicitation statement and other relevant documents when they become available, because they contain important information regarding the consent solicitation. The definitive written consent solicitation statement and all other relevant documents are available, free of charge, on the SEC’s website at www.sec.gov.
The following persons are participants in connection with the written consent solicitation of CommonWealth’s shareholders: Corvex Management LP, Keith Meister, Related Fund Management, LLC, Related Real Estate Recovery Fund GP-A, LLC, Related Real Estate Recovery Fund GP, L.P., Related Real Estate Recovery Fund, L.P., RRERF Acquisition, LLC, Jeff T. Blau, Richard O’Toole and David R. Johnson. Information regarding the participants in the consent solicitation and a description of their direct and indirect interests, by security holdings or otherwise, to the extent applicable, is available in the definitive written consent solicitation statement filed with the SEC on April 10, 2013 and Supplement No. 1 thereto filed on April 12, 2013.
# # #
For further information, contact:
D.F. King & Co., Inc.
Shareholders can call toll-free: (800) 714-3313
Banks and brokers call: (212) 269-5550
Rupal Doshi
Corvex
(212) 474-6750
rdoshi@corvexcap.com
Joanna Rose
Related
(212) 801-3902
jrose@related.com
 The
Case for Change Now at CWH Presentation to CWH Shareholders
April 18, 2013 |
 2
Disclaimer
This presentation does not constitute either an offer to sell or a solicitation of an offer to buy any
interest in any fund associated with Corvex Management LP (“Corvex”) or Related Fund
Management, LLC (“Related”). Any such offer would only be made at the time a qualified offeree receives a confidential offering
memorandum and related subscription documentation. The information in
this presentation is based on publicly available information about CommonWealth REIT (the “Company”). This document includes certain
forward-looking statements, estimates and projections prepared with respect to, among other
things, general economic and market conditions, changes in management, changes in the
composition of the Company’s Board of Trustees, actions of the Company and its subsidiaries or competitors, and the ability to
implement business strategies and plans and pursue business opportunities. Such
forward-looking statements, estimates, and projections reflect various assumptions
concerning anticipated results that are inherently subject to significant uncertainties and contingencies and have been included solely for
illustrative purposes, including those risks and uncertainties detailed in the continuous disclosure
and other filings of the Company, copies of which are available on the U.S. Securities and
Exchange Commission website (“EDGAR”) at www.sec.gov/edgar. No representations, express or implied, are made as
to the accuracy or completeness of such forward-looking statements, estimates or projections or
with respect to any other materials herein. Corvex and Related may buy, sell, cover or
otherwise change the form of their investment in the Company for any reason at any time, without notice, and there can be no
assurances that they will take any of the actions described in this document. Corvex and Related
disclaim any duty to provide any updates or changes to the analyses contained in this document,
except as may be required by law. Shareholders and others should conduct their own independent investigation and
analysis of the Company. Except where otherwise indicated, the information in this document
speaks only as of the date set forth on the cover page. Permission to quote third party
reports in this presentation has been neither sought nor obtained. Additional Information Regarding the Consent Solicitation In connection with
their solicitation of written consents, Corvex and Related have filed a definitive written consent solicitation statement with the U.S.
Securities and Exchange Commission (the “SEC”) to solicit written consents from shareholders
of the Company. Investors and security holders are urged to read the definitive
written consent solicitation statement and other relevant documents when they become available, because they contain
important information regarding the consent solicitation.
The following persons are participants in connection with the written consent solicitation of the
Company’s shareholders: Corvex Management LP, Keith Meister, Related Fund Management, LLC,
Related Real Estate Recovery Fund GP-A, LLC, Related Real Estate Recovery Fund GP, L.P., Related Real
Estate Recovery Fund, L.P., RRERF Acquisition, LLC, Jeff T. Blau, Richard O’Toole and David R.
Johnson. Information regarding the participants in the consent solicitation and a
description of their direct and indirect interests, by security holdings or otherwise, to the extent applicable, is available in the
definitive written consent solicitation statement filed with the SEC on April 10, 2013 and Supplement
No. 1 thereto filed on April 12, 2013.
The definitive written consent solicitation statement and all other relevant
documents are available, free of charge, on the SEC’s website at
www.sec.gov. |
 3
Table of Contents
I.
Executive Summary
4
II.
History of Underperformance
15
III.
Flawed RMR Structure and Poor Corporate Governance
30
IV.
Refuting the Portnoys’
Spurious Claims
45
V.
New Management Team and Strategy
51
VI.
Appendix
56 |
 4
Executive Summary |
 5
Executive Summary
Immediate Change is Needed
Outdated structure creates inherent conflicts of interest between shareholders and
external manager Reit Management and Research, LLC (“RMR”), which
is owned by Barry Portnoy and his son Adam, the two Managing Trustees of
CWH –
RMR receives fees based on gross historical cost basis of real estate,
incentivizing growth through acquisitions regardless of returns to CWH
shareholders –
CWH paid out $395 million in fees to RMR during 2007-2012 (nearly 30% of
CWH’s market
cap
as
of
2/25/13
(1)
),
while
CWH’s
share
price
declined
68%
during
this
time
Poor corporate governance has led to continued self-dealing for benefit of RMR
and the Portnoys in our view
–
Over $2 billion of related party transactions in the last 5 years alone
–
ISS has taken notice and recommended voting against incumbent trustees last
year –
Given
entrenching
devices
in
CWH’s
documents,
shareholders
must
act
now
to
remove
the
board
or
face
at
least
three
more
years
of
mismanagement
CWH’s performance on key shareholder return and operating metrics has been
poor in absolute
and
relative
terms
over
any
relevant
time
period
in
our
view
We
firmly
believe
Commonwealth
REIT
(“CWH”
or
the
“Company”)
is
in
desperate need of a shareholder referendum given its flawed externally advised
management structure, poor corporate governance, and track record of
underperformance
(1)
The day prior to Related and Corvex’s first public filing.
|
 6
Executive Summary
Shareholder Referendum: Path
Path: action by written consent requiring 2/3 vote to remove entire board of
trustees –
We filed definitive consent solicitation materials with the SEC on April 10,
2013 –
We delivered to CWH formal shareholder demands to fix a record date to determine
shareholders entitled to act by written consent on April 12, 2013
–
In
light
of
the
board’s
refusal
to
recognize
our
consent
solicitation
and
fix
a
record
date,
it
is
our
position
that
the
record
date
will
be
the
close
of
business
on
April
22
(i.e.
the
10
th
day after our request)
–
We and our lawyers believe CWH’s recent bylaw amendments, which would
effectively eliminate shareholder rights to remove trustees without cause,
are invalid and a desperate
attempt
to
disenfranchise
shareholders
(see
pg.
39
and
41
for
details)
–
With a successful 2/3 vote, shareholders can remove current trustees, elect new
trustees at a special meeting, terminate RMR’s management agreement,
and unlock significant value for all shareholders
–
Act
now:
the
future
of
the
Company
is
in
your
hands,
its
owners
We believe removing CWH’s entire board of trustees immediately is in the best
long-term interests of all shareholders, and the only near-term means
for shareholders to effect change |
 7
Executive Summary
Shareholder Referendum: Value
Value: $35 per share potential NAV at 4/17/13 after removal of current trustees,
and target stock price of $44+ per share at 12/31/14 (see Appendix for
details on valuation) –
$35
represents
upside
potential
of
55%
and
121%
to
current
share
price
(1)
and
unaffected
share
price
(2)
,
respectively,
after
removal
of
board
In our view, NAV represents current fair market value (if current trustees are
removed) based on bottom-up property-by-property valuation
analysis led by Related, one of the most prominent privately-owned real
estate firms in the U.S. –
Key changes from previous valuation include CWH’s massively dilutive equity
offering (followed by dilutive debt tender at a premium), sale of
CWH’s minority stake in GOV, and additional market input
–
We believe CWH could trade at a stock price of $44 or higher at 12/31/14 through
internalization of management, operational turnaround, improved capital
allocation, and multiple
expansion
–
a
straightforward
path
if
shareholders
act
now
to
remove
the
board
–
In
our
view,
potential
downside
of
-40%
or
greater
to
current
price
should
existing
trustees
remain
in
place,
due
to
market
overhangs
from
external
management,
poor
corporate
governance,
and
likelihood
of
continued
underperformance
–
(1)
Based on a closing price of $22.56 on April 17, 2013.
(2)
Based
on
a
closing
price
of
$15.85
on
February
25,
2013,
the
day
prior
to
Related
and
Corvex’s
first
public
filing.
We believe our path will unlock significant value for all shareholders, whereas
the
status
quo
will
lead
to
continued
value
destruction
and
self
dealing
for
the
benefit of the Portnoys |
 8
Executive Summary
Shareholder Referendum: Strategic Plan
Strategic
Plan:
manage
the
Company
in
ways
that
maximize
long-term
CWH
shareholder
value,
not
fees
paid
to
RMR.
Quite
simply,
CWH
must
adopt
best
practices
While corporate management will be replaced, we anticipate current property level
employees will be hired to work at the new CWH
–
Amend
existing
Declaration
of
Trust
and
bylaws
to
conform
to
ISS
and
Glass
Lewis
best
practices
–
no
more
shareholder
disenfranchisement
–
Cease
all
acquisition
activity
until
CWH’s
stock
price
exceeds
its
NAV
–
no
more
dilutive
equity
offerings
or
ignoring
the
views
of
shareholders
–
Use
excess
cash
flow
to
buy
back
CWH
stock
until
the
Company’s
stock
price
exceeds
its
NAV
–
no
more
‘buy
high,
sell
low’
capital
allocation
–
Cease
all
related
party
transactions
–
no
more
self-dealing
for
benefit
of
the
Portnoys
Jim
Lozier,
former
CEO
and
co-founder
of
the
Archon
Group
L.P.,
and
CBRE,
the
world’s
largest
commercial
real
estate
services
firm,
are
in
discussions
with
us
to
be
available
to
provide
interim
management,
property
management
services,
and
leasing
services
to
the
CWH
portfolio
as
necessary
While
a
new
board
selected
by
all
shareholders
will
ultimately
determine
the
details
of
CWH’s
new
strategic
plan,
we
propose
the
following
key
elements
as
a
starting
point
for
the
Company’s
new
direction
–
Internalize management, adopt a market cost structure, and align
management
compensation with shareholder returns –
no more skewed incentives |
 9
Executive Summary
“Structural Change is Much Needed”
(1)
Note: Citi was a lead underwriter in CWH’s recent massively dilutive equity
offering completed on February 27, 2013. Even CWH’s underwriter has taken
pains to point out the Company’s flawed structure and history of value
destruction |
 10
Executive Summary
Track Record of Underperformance
CWH has in our view performed poorly in absolute terms and underperformed
its peers
(1)
on almost any metric over any relevant time period
-17%, -45%, -43%, -45%, and -53% CWH stock price return over
the last 1 year, 2 years, 3 years,
5
years,
and
10
years,
respectively
(2)
Recent
valuation
nearly
40%
below
peers
on
unlevered
cap
rate
basis
(3)
53% and 41% discount to peers on a price / forward FFO multiple basis for last year
and 3 years, respectively
-23% cash available for distribution per share (CAD / share) growth since 2010,
the worst performance of its peers
$2.7
billion
of
net
acquisitions
and
capex
since
2007
(over
2x
CWH’s
recent
market
cap
(3)
),
while CWH book value per share is essentially flat
In
our
view,
there
is
absolutely
no
way
to
slice
and
dice
the
data
in
favor
of
the
Portnoys
–
their
performance
has
been
horrible
(1)
Select peers include Piedmont Office Realty (PDM), Highwoods Properties (HIW),
Mack-Cali Realty (CLI), Brandywine Realty (BDN), and Parkway Properties (PKY).
(2)
Returns
data
calculated
through
February
25,
2013,
the
day
prior
to
Related
and
Corvex’s
first
public
filing.
(3)
Based
on
a
closing
price
of
$15.85
on
February
25,
2013,
the
day
prior
to
Corvex
and
Related’s
first
public
filing. |
 11
Executive Summary
Flawed RMR Structure and Poor Corporate Governance
ISS
recommended
voting
against
incumbent
trustees
last
year
(per
ISS
Proxy
Advisory
Services
report,
April
25,
2012)
Proposal
to
Elect
Director
William
A.
Lamkin
–
ISS
RECOMMENDATION:
AGAINST
Proposal
to
Elect
Director
Adam
D.
Portnoy
–
ISS
RECOMMENDATION:
AGAINST
ISS Governance Risk Indicators:
–
“Shareholder Rights HIGH CONCERN”
“The board is classified”
“The company has a poison pill in effect”
“The company’s poison pill includes a dead-hand, slow-hand, or
similar provision” “The company’s poison pill has not been
approved by shareholders” –
“Board Structure MEDIUM CONCERN”
“40% of the directors are family members of executives or majority
shareholders” “The
company
has
a
poison
pill
that
contains
a
dead-hand,
slow-hand,
or
similar
feature.
Such
features
are
uncommon
and
are
unjustifiable
from
a
governance
standpoint.
Not
only
do
dead-hand
poison
pills
and
their
variants
exclude
shareholders
from
the
corporate
governance
process,
but
they
also
disenfranchise
future
directors…” |
 12
Executive Summary
“Gigantic Conflicts of Interest”
“The externally managed REIT structure creates conflicts of interest that are
so severe, we don’t believe we can quantify the share price discount an
investor should require to buy any of these companies. As a result, we have
long deemed the Portnoy
REITs to be ‘uninvestable.’”
“For most externally advised REITs, the fee paid to the advisor is predicated
on the company’s size –
not on its success (or lack thereof). Therein lies the conflict
of
interest. The advisor carries a strong incentive to constantly sell common stock in
order to raise funds for acquisitions. The price at which the equity is
raised matters little to the advisor –
making the REIT bigger and increasing the advisory fee is a
primary objective.”
“The Portnoy REITs –
What It Means to be ‘Uninvestable’,”
Green Street Advisors,
March 1, 2013 |
 13
Executive Summary
Questions All CWH Shareholders Should be Asking
Have
current
trustees
created
value
for
CWH
shareholders?
Is it possible for existing trustees to fairly represent shareholders given their
conflicts of interest? Why have RMR’s fees gone up 30% since 2007 while
CWH’s stock has declined 68%? Why are the Portnoy REITs some of the last
remaining externally managed equity REITs in the public markets?
Will
CWH
ever
trade
at
a
peer
valuation
with
RMR
as
its
external
manager?
How
much
of
the
Portnoy
fortune
has
been
extracted
from
the
savings
of
retail
investors?
Why does CWH lag peers on nearly every relevant operational metric?
Why did CWH seek to sell equity at a 48% discount to book value to repay debt
trading above par with no maturities or liquidity needs?
Why did CWH sell its $240 million minority stake in GOV only after massively
diluting shareholders by issuing $650 million in new CWH equity at
$19.00? How can existing trustees defend selling equity at $19.00, a massive
discount, at the same time they ignored an offer at $27.00, a significant
premium? How
can
CWH
call
its
hand-picked
trustees
“independent?” |
 14
Executive Summary
Questions All CWH Shareholders Should be Asking (cont’d)
Why
haven’t
CWH’s
“independent”
trustees
formed
an
independent
committee
and
hired
independent advisors?
How have CWH shareholders been compensated for the multiple new RMR platforms
launched with CWH’s assets?
Does
CWH
even
have
a
strategy,
or
is
it
simply
recycling
capital
to
create
the
appearance
of doing
something?
Why does CWH refuse to hold Q&A on its conference calls and roadshows?
Why
are
the
Portnoys
trying
to
change
Maryland
law
rather
than
face
a
shareholder
vote?
Why haven’t current trustees prepared a detailed presentation of their
own demonstrating how much
value they have created for CWH shareholders?
Why isn’t anyone in the REIT industry speaking up to defend the Portnoys?
How much CWH shareholder money have existing trustees already wasted in the
last seven weeks trying to further entrench themselves?
How
much
more
damage
will
be
inflicted
on
CWH
shareholders
in
the
next
3
years
if
current
trustees
are
not
removed
immediately? |
 15
History of Underperformance |
 16
History of Underperformance
CWH has in our view performed poorly in absolute terms and underperformed
its peers on almost any metric over any relevant time period
Stock price performance and total shareholder return
Valuation
Cost structure
Acquisitions and return on investment
NOI, EBITDA, CAD, and FFO / share growth
Corporate governance
In
our
view,
there
is
absolutely
no
way
to
slice
and
dice
the
data
in
favor
of
the
Portnoys
–
their
performance
has
been
horrible |
 ($ in millions, except
per share values and TEV / sq. ft.) Enterprise
Implied
G&A /
Current
Equity
value
nominal
TEV /
equity
Net debt /
P / FFO
TEV / EBITDA
Div
Ticker
Company
price
mkt cap
(TEV)
cap rate
Sq. Ft.
mkt cap
TEV
2013E
2014E
2013E
2014E
yield
CWH
CommonWealth REIT
$15.85
$1,338
$4,914
11.1%
$89
3.9%
76%
5.4x
5.5x
12.0x
12.3x
6.3%
HIW
Highwoods Properties Inc.
$35.35
$2,983
$4,999
6.6%
$144
1.3%
40%
13.1x
12.7x
15.6x
14.8x
4.8%
BDN
Brandywine Realty Trust
$12.96
$1,885
$4,689
7.1%
$176
1.3%
58%
9.0x
8.6x
14.1x
13.8x
4.6%
CLI
Mack-Cali Realty Corp.
$27.15
$2,715
$4,983
8.2%
$158
1.8%
44%
10.6x
10.5x
13.4x
13.3x
6.6%
PDM
Piedmont Office Realty Trust Inc.
$19.66
$3,294
$4,699
6.9%
$229
0.6%
30%
14.0x
13.5x
15.8x
15.1x
4.1%
PKY
Parkway Properties Inc.
$16.39
$920
$2,096
6.0%
$177
1.8%
37%
13.3x
12.4x
14.2x
13.7x
2.7%
High
$3,294
$4,999
8.2%
$229
1.8%
58%
14.0x
13.5x
15.8x
15.1x
6.6%
Mean
2,359
4,293
7.0%
177
1.4%
42%
12.0x
11.5x
14.6x
14.1x
4.6%
Median
2,715
4,699
6.9%
176
1.3%
40%
13.1x
12.4x
14.2x
13.8x
4.6%
Low
920
2,096
6.0%
144
0.6%
30%
9.0x
8.6x
13.4x
13.3x
2.7%
17
History of Underperformance
Summary Public Comparables
CWH trades at a significant discount to its peers on all key measures
(1)
Note: Share price and estimates updated as of 2/25/2013, the day before Related and Corvex's 13D
filing Financial information as of Q4 2012. Implied nominal cap rate is calculated as GAAP LTM
NOI / TEV. (1) CWH implied cap rate based on CWH standalone TEV of $4,914 million and Related
and Corvex estimates of comparable, stabilized NOI of $547 million Source: Company filings
and FactSet |
 18
History of Underperformance
Total Returns –
1 year
HIW: 15.5%
PDM: 15.3%
CWH: (9.4%)
PKY: 65.5%
CLI: 1.5%
BDN: 25.2%
RMZ: 10.6%
Note: Total returns include dividends
Source: SNL
1 year
3 year
PKY
65.5%
6.9%
BDN
25.2%
35.8%
HIW
15.5%
42.1%
PDM
15.3%
39.1%
CLI
1.5%
(2.7%)
Average
24.6%
24.2%
RMZ
10.6%
52.5%
CWH
(9.4%)
(26.6%)
CWH –
Avg.
34.0%
50.8%
CWH has underperformed its peers over the last year
CWH's peer with the closest total return performance is CLI, which has consistently outperformed
CWH notwithstanding having 80% of its office markets either struggling or in secular decline |
 19
History of Underperformance
Total Returns –
3 years
CWH has underperformed its peers over the last 3 years
HIW: 42.1%
PDM: 39.1%
CWH: (26.6%)
PKY: 6.9%
CLI: (2.7%)
BDN: 35.8%
RMZ: 52.5%
Note: Total returns include dividends
Source: SNL
1 year
3 year
PKY
65.5%
6.9%
BDN
25.2%
35.8%
HIW
15.5%
42.1%
PDM
15.3%
39.1%
CLI
1.5%
(2.7%)
Average
24.6%
24.2%
RMZ
10.6%
52.5%
CWH
(9.4%)
(26.6%)
CWH –
Avg.
34.0%
50.8% |
 20
History of Underperformance
Share Price Performance –
1 year
CWH has underperformed its peers over the last year
HIW: 9.8%
PDM: 10.1%
CWH: (16.9%)
PKY: 60.2%
CLI: 5.0%
BDN: 19.1%
Source: Factset
1 year
3 year
PKY
60.2%
(0.7%)
BDN
19.1%
15.4%
HIW
9.8%
21.4%
PDM
10.1%
16.1%
CLI
(5.0%)
(18.9%)
Average
18.8%
6.6%
CWH
(16.9%)
(42.9%)
CWH –
Avg.
35.7%
49.5% |
 21
History of Underperformance
Share
Price
Performance
–
3
years
CWH has underperformed its peers over the last three years
HIW: 21.4%
PDM: 15.4%
CWH: (42.9%)
PKY: (0.7%)
CLI: (18.9%)
BDN: 16.1%
Source: Factset
1 year
3 year
PKY
60.2%
(0.7%)
BDN
19.1%
15.4%
HIW
9.8%
21.4%
PDM
10.1%
16.1%
CLI
(5.0%)
(18.9%)
Average
18.8%
6.6%
CWH
(16.9%)
(42.9%)
CWH –
Avg.
35.7%
49.5% |
 22
History of Underperformance
FFO Multiples
CWH traded at the lowest price to FFO multiple of its peers prior to our 13D
filing PDM: 14.0x
CWH: 5.4x
HIW: 13.1x
CLI: 10.6x
BDN: 9.0x
Source: Factset
PKY: 13.3x
Average
1 year
3 year
PKY
9.9x
7.9x
BDN
8.9x
8.6x
HIW
12.3x
12.8x
PDM
12.6x
12.3x
CLI
10.4x
11.1x
Average
10.8x
10.5x
CWH
5.0x
6.2x
CWH –
Avg.
(53.4%)
(40.7%) |
 23
History of Underperformance
Operating Performance
Value
accruing to
RMR, not
shareholders
Poor performance on key financial metrics, while fees paid to RMR continue to
grow
(1)
Share price performance assumes stock is held since January 1st of the specified
year through February 25th, 2013. Source: Company filings and SNL
($ in millions)
For the Fiscal Year Ending December 31,
2010
2011
2012
Share
Price
Performance
(if
held
since)
(1)
(38.2%)
(39.0%)
(6.9%)
SF Owned per Share (% growth)
(15.9%)
(5.2%)
(0.6%)
NOI per Share (% growth)
(19.1%)
(4.2%)
16.1%
EBITDA per Share (% growth)
(22.1%)
(4.7%)
(27.2%)
FFO per Share (% growth)
(13.8%)
(9.9%)
0.0%
CAD per Share (% growth)
(23.7%)
(27.7%)
(17.3%)
Fees Paid to RMR
$62.2
$69.5
$77.3
% growth
3.4%
11.7%
11.2% |
 24
History of Underperformance
Same Store Underperformance
CWH trails its core office REIT peers by 225 bps and 265 bps on same store rental
growth and NOI growth, respectively
Despite its greater scale, CWH’s cost structure results in the lowest same
store NOI margins of its peers
CWH’s total rental and NOI growth is dependent upon its outsized acquisition
activity CWH underperforms its peers on a same store basis
Note: Analysis excludes PDM, which does not disclose same store rent
(1)
(2)
(3)
Source: Company filings
9
months
ended
9/30/2012
rent
growth
(1)
9
months
ended
9/30/2012
NOI
growth
(1)
9
months
ended
9/30/2012
NOI
margin
(1)
CommonWealth excluded 94 underperforming properties as discontinued properties in its same store
financials ending 12/31/2012. 9 months ended 9/30/2012 is shown as a more representative
reflection of company performance Average does not include CWH
Unlike CWH, 80% of CLI’s markets are either struggling or in secular decline
(3.0%)
(2.0%)
(1.0%)
0.0%
1.0%
2.0%
3.0%
4.0%
2.8%
2.2%
0.8%
(1.1%)
(2.0%)
PKY
HIW
BDN
CWH
CLI
6.5%
3.3%
2.7%
0.2%
(1.1%)
(2.0%)
(1.0%)
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
PKY
HIW
BDN
CWH
CLI
70.5%
67.7%
61.0%
59.8%
57.7%
50.0%
55.0%
60.0%
65.0%
70.0%
75.0%
BDN
HIW
CLI
PKY
CWH
Avg
(2)
: 1.2%
Avg
(2)
: 2.8%
Avg
(2)
: 64.7%
(3)
(3) |
 25
History of Underperformance
Same Store Underperformance (cont’d)
CWH has consistently underperformed its peers on a same store basis
historically Note: Analysis excludes PDM, which does not disclose same store
rent (1)
Average does not include CWH
Source: Company filings
2010 rent growth
2010 NOI growth
2010 NOI margin
2011 rent growth
2011 NOI growth
2011 NOI margin
0.3%
(2.8%)
(2.5%)
(3.5%)
(5.2%)
(6.0%)
(5.0%)
(4.0%)
(3.0%)
(2.0%)
(1.0%)
0.0%
1.0%
HIW
BDN
CLI
CWH
PKY
Avg
(1)
:
(2.5%)
(0.9%)
(3.3%)
(3.7%)
(6.2%)
(8.5%)
(9.0%)
(8.0%)
(7.0%)
(6.0%)
(5.0%)
(4.0%)
(3.0%)
(2.0%)
(1.0%)
0.0%
HIW
CLI
BDN
PKY
CWH
Avg
(1)
:
(3.5%)
68.4%
66.6%
60.2%
55.7%
54.3%
50.0%
55.0%
60.0%
65.0%
70.0%
BDN
HIW
CLI
PKY
CWH
Avg
(1)
:
62.7%
(1.6%)
(2.6%)
(3.0%)
(3.4%)
(3.7%)
(4.0%)
(3.5%)
(3.0%)
(2.5%)
(2.0%)
(1.5%)
(1.0%)
(0.5%)
0.0%
CWH
BDN
HIW
CLI
PKY
Avg
(1)
:
(3.2%)
0.0%
(0.9%)
(3.1%)
(4.3%)
(6.4%)
(7.0%)
(6.0%)
(5.0%)
(4.0%)
(3.0%)
(2.0%)
(1.0%)
0.0%
1.0%
HIW
PKY
BDN
CWH
CLI
Avg
(1)
:
(2.6%)
69.5%
67.3%
60.2%
55.9%
53.6%
50.0%
55.0%
60.0%
65.0%
70.0%
75.0%
BDN
HIW
CLI
CWH
PKY
Avg
(1)
:
62.7% |
 26
History of Underperformance
Acquisition Activity
CWH has grown primarily through asset acquisitions, which we believe benefit
RMR and not shareholders
(1)
Market cap as of 12/31/12. Metric shown includes SIR.
(2)
Includes net sale proceeds from consolidated joint venture
(3)
Weighted by market cap
Source: Company filings and Factset
Net
acquistions
/
CapEx
as
%
of
Recent
Market
Cap
(1)
2007
2008
2009
2010
2011
2012
Cumulative
Parkway Properties Inc. (PKY)
6.4%
26.2%
2.2%
8.7%
42.4%
75.2%
161.1%
Highwoods Properties Inc. (HIW)
5.3%
5.2%
2.3%
3.4%
6.1%
9.0%
31.3%
Mack-Cali Realty Corp. (CLI)
15.0%
3.6%
0.8%
3.6%
3.6%
3.3%
29.9%
Piedmont
Office
Realty
Trust
Inc.
(PDM)
(2)
1.5%
4.1%
1.2%
2.1%
(2.5%)
0.5%
6.9%
Brandywine Realty Trust (BDN)
(6.6%)
(12.8%)
6.0%
10.4%
0.9%
0.3%
(1.8%)
Average
(3)
4.7%
3.1%
2.2%
4.6%
4.9%
8.7%
28.2%
CWH
31.0%
6.1%
33.5%
27.3%
44.6%
55.6%
198.1%
CWH share price
$30.92
$13.48
$25.88
$25.76
$16.64
$15.84
CWH price / FFO multiple
6.8x
3.1x
6.0x
6.9x
4.9x
4.7x
CWH has spent $2.7 billion on acquisitions since 2007 as the stock has
underperformed Its peers acquired at approximately one-seventh of
CWH’s rate over the same period PKY
has
also
been
acquisitive,
but
is
internally
managed
and
has
made
accretive
capital
allocation
decisions, leading to 42% stock price appreciation from 2011 to 2012
|
 27
History of Underperformance
Management and Board Ownership
CWH trustees and senior management hold a smaller stake than those of peers
CWH’s insiders currently hold a 0.3% stake in the company
The ownership level is approximately one-tenth the insider ownership of the
comp set We believe management is not aligned with shareholders
Peer Director and Executive Officer Ownership
(1)
Average does not include CWH
Source: Company filings, CWH holdings per proxy filed 2/25/13
CWH Insider Holdings
Position
% of S/O
Directors and Executive Officers:
1
Barry M. Portnoy
233,086
0.20%
2
Adam D. Portnoy
38,599
0.03%
3
John C. Popeo
33,500
0.03%
4
David M. Lepore
29,250
0.02%
5
Frederick N. Zeytoonjian
10,967
0.01%
6
William A. Lamkin
8,812
0.01%
7
Joseph L. Morea
2,000
0.00%
356,214
0.30%
Total CWH Director and Executive
Officer Ownership
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
6.8%
3.0%
3.0%
2.8%
0.5%
0.3%
CLI
HIW
PKY
BDN
PDM
CWH
Avg. (1): 3.2% |
 28
History of Underperformance
Externally Managed Equity REITs
Out of approximately 90 equity REITs with greater than $1 billion market cap and
greater than 1 year in the public markets, only six are externally managed
today The externally managed REITs have consistently underperformed their
internally managed peers SNH peers include HCP, VTR, HCN, ARE, BMR, OHI, HTA,
HR, NHI, MPW, LTC, SBRA, and UHT HPT peers include HST, LHO, DRH, RHP, RLJ,
SHO, PEB, BEE, HT, AHT, FCH, CHSP, INN, CLDT, MDH, and SPPR CWH and GOV peers
include PKY, PDM, BDN, CLI, and HIW As of March 12, 2013
Source: SNL
: CWH –
Avg.
Company (ticker)
Property type
External corporate
adviser
Market cap
($M)
Premium/
discount to NAV
(%)
3-year total
return (%)
Senior Housing Properties Trust (SNH)
Health care
RMR
4,742.7
(33.6)
(25.0)
Hospitality Properties Trust (HPT)
Hotel
RMR
3,277.6
1.2
(0.7)
CommonWealth REIT (CWH)
Office
RMR
2,573.1
(40.8)
(32.5)
Government Properties Income Trust (GOV)
Office
RMR
1,361.7
2.7
0.7
Select Income REIT (SIR)
Diversified
RMR
1,028.8
NA
NA
Average
2,596.8
(17.6)
(14.4)
RMR manages five of those six REITs
The sixth is Alexander’s (ALX), which is managed by Vornado; however Vornado,
also holds a 32% stake in the company |
 29
History of Underperformance
No Management Credibility
Management appears to lack an understanding of their own finances given a 50%
cut in the dividend one quarter after dismissing the question
CWH appears to have now discontinued Q&A on all of its conference calls
“Yeah.
I'm
glad
you
asked
that,
John,
because
it's
something
that
a
lot
of
investors
have
asked
us
about,
and
it's
the
security
of
the
dividend.
Right
now,
we
acknowledge
that
it
certainly
appears
that
the
market
is
expecting
a
dividend
cut.
We
disclosed
our
CAD
payout
ratio
as
a
104%.
That
is
above
100%,
it's
not
much
above
100%.
We
think
we
can
maintain
this
dividend
for
the
foreseeable
future.
If
the
payout
ratio
were
to
balloon
up,
well
above
104%,
well
above
100%,
and
be
there
for
quite
some
time,
I
think
we'd
have
to
seriously
consider
reducing
the
dividend.
But
right
now,
there's
no
intention
from
management
or
the
Board,
to
do
anything
with
the
dividend.
Now
that
might
change
as
circumstances
change.
But
today,
we
have
no
intention
of
changing
the
dividend.
And
I
have
to
tell
you,
it
is
–
at
times
it
is
perplexing
to
us,
because
we
look
at
our
numbers
and
say
we
can
afford
the
dividend,
and
the
dividend
doesn't
look
like
it
should
be
at
risk.
Yet
the
stock
price
seems
to
indicate
that
everybody
else
doesn't
see
that.
They
think
that
we're
going
to
–
that
there
should
be
a
dividend
cut.
Maybe
they
are
anticipating
something
years
from
now,
or
a
long
time
from
now.
But
I
don't
–
it
is
–
sometimes
it's
as
perplexing
to
us
as
to
maybe
you,
John,
but
that's
our
thoughts
on
it.”
“And
then
the
last
question,
the
obvious
question,
as
you
are
bouncing
around
$18,
$19
a
share,
high
10s
on
the
dividend,
clearly
when
you're
at
that
level,
people
are
either
anticipating
a
diminution
or
a
decline
in
share
value
and/or
a
dividend
adjustment.
And
it
seems
to
me
that
if
the
stocks
price
can't
get
back
up
into
the
low
to
mid
20's,
a
dividend
cut
would
be
the
prudent
thing
to
do.
In
fact,
if
you
cut
the
dividend
down
to
$1.20
you'd
still
have
one
of
the
highest
dividends
in
the
office
industrial
REIT
space.
So
what's
your
thought
process
on
all
that?”
Stifel Nicolaus: Q1 2012 Earnings Call, May 3, 2012
Adam Portnoy: Q1 2012 Earnings Call, May 3, 2012 |
 30
Flawed RMR Structure and
Poor Corporate Governance |
 31
Flawed RMR Structure and Poor Corporate Governance
RMR Fees vs. CWH Shareholder Returns
Fees paid to RMR continue to grow, while CWH shareholder value continues to
decline
RMR extracted nearly 30% of CWH’s market cap during 2007-2012, as CWH
stock continued to plummet
'07-'12
2007
2008
2009
2010
2011
2012
Total
Fees Paid Out to RMR
$59.7
$63.2
$62.6
$62.2
$69.5
$77.3
$394.6
RMR Fees % Growth
--
5.9%
(1.0%)
(0.5%)
11.7%
11.2%
29.5%
RMR
Fees
as
%
of:
CWH Market Cap
4.5%
4.8%
4.7%
4.7%
5.2%
5.8%
29.7%
CWH Market Cap, Cumulative
4.5%
9.3%
14.0%
18.6%
23.9%
29.7%
29.7%
CWH Cumulative Stock Price Return
(37.4%)
(74.7%)
(46.0%)
(48.4%)
(66.3%)
(67.9%)
(67.9%)
(1)
Market cap of $1.3 billion based on a closing price of $15.85 on February 25, 2013, the day prior to
Related and Corvex’s first public filing.
(2)
RMR fees paid per CWH public filings. |
 32
Flawed RMR Structure and Poor Corporate Governance
Flawed RMR Structure
We believe CWH’s externally managed structure skews incentives, reduces
cash flow through excessive fees, destroys investor confidence, and impairs
valuation multiple (off already depressed earnings)
RMR receives fees based on gross historical cost basis, incentivizing growth
through acquisitions regardless of returns to CWH shareholders or strategic
rationale –
$2.7 billion of net acquisitions and capex since 2007 (over 2x CWH’s recent
market cap
(1)
), while CWH book value per share essentially flat
Trustees
own
less
than
1%
of
CWH
stock,
but
certain
trustees
own
100%
of
RMR,
skewing
their incentives in favor of the external manager
–
RMR, a private company, is owned by Barry Portnoy and his son Adam Portnoy
–
All executive officers of CWH are also officers of RMR
–
Barry Portnoy’s son-in-law is also an officer of RMR
Given
these
inherent
and
widely
recognized
problems,
CWH
and
the
other
Portnoy
REITs
are
some of the last remaining publicly traded equity REITs today
(1)
Market cap of $1.3 billion based on a closing price of $15.85 on February 25, 2013, the day prior to
Related and Corvex’s first public filing. |
 33
Flawed RMR Structure and Poor Corporate Governance
“External Manager RMR Causes Concern”
“We recommend investors avoid the shares of CWH at this time due to the
uncertainty generated by the spinoff of SIR and the continuous decline in
per share values. SIR is the second spinoff since 2009 and a recent one,
GOV, did not seem to benefit the share holders. It appears that SIR, which
carried little debt and all of the highest margin properties from CWH to its
own portfolio, may become an acquisition vehicle. The
manager
seems
to
be
making
decisions
which
are
beneficial
to
the
management
company and detrimental to the shareholders. The management contract awards
compensation for growing the portfolio but not as much for improving share
value. The
portfolio
is
in
good
shape
and
could
be
worth
more
to
an
acquirer…
An
acquirer
could also reduce the operating costs by about $50 million annually by replacing
RMR.”
“External Manager RMR Causes Concern At CommonWealth REIT,”
Seeking Alpha,
August 27, 2012 |
 34
Flawed RMR Structure and Poor Corporate Governance
Poor Corporate Governance
In our view trustees have crossed the limits of legally enforceable corporate
governance time and time again in order to disenfranchise CWH shareholders,
insulate
management,
and
maximize
control
and
financial
benefits
for
RMR
One of the Portnoys’
latest legal maneuvers was a secret, failed attempt (likely using CWH
funds)
to
insert
an
11
th
hour
amendment
into
a
Maryland
House
Bill
that
would
have
allowed
CWH to unilaterally eliminate shareholders right to remove trustees without
cause –
Trustees would rather intervene in the Maryland legislative process and change the
law than face their own shareholders
Over $2 billion of related party transactions in last 5 years
–
CWH assets have been repeatedly used to seed new platforms for RMR, creating new
income streams for RMR without, in our view, due compensation for CWH
shareholders, and worsening the cash flow profile of CWH
We
believe
3
so-called
“independent”
trustees
are
conflicted
by
any
common
sense definition
–
2
of
CWH’s
“independent”
trustees
serve
on boards of other RMR-managed entities
–
3
rd
“independent”
trustee
was
former
RBC
banker
in
capital
markets
division (retired in
2012), which regularly receives lucrative business from CWH (including recent
dilutive equity offering) and RMR’s other entities
Other issues include a classified board, poison pill, and slow hand provision
ISS
has
taken
notice
and
recommended
voting
against
incumbent
trustees
last
year |
 35
Flawed RMR Structure and Poor Corporate Governance
Scorched Earth Policies Require Action Now
These value destructive actions include:
–
A massively dilutive equity offering done 48% below book value to repay debt
trading above par
–
Two separate bylaw amendments that in our view are invalid and seek to
disenfranchise shareholders by effectively eliminating their ability to act
by written consent to remove trustees without cause
–
A failed attempt to secretly change Maryland law to make it impossible for
shareholders to remove trustees without cause
–
A contemplated sale of CWH’s 56% controlling interest in SIR at a potential
discount to the
market
price
rather
than
a
control
premium
(which
would
also
allow
RMR
to
continue
extracting fees from SIR)
If any shareholders had doubts as to where the trustees’
allegiances lie, these actions have
made clear it is with the Portnoys and not shareholders
Since our first call for change seven weeks ago, the Portnoys and their
hand- picked trustees have used Company funds in a self-serving
campaign aimed at in our view advancing their own financial interests and
entrenchment If shareholders don’t act now to remove the entire board, we
will be subject to at least
three
more
years
of
mismanagement,
the
minimum
time
needed
to
replace
a
simple
majority
of
CWH’s
“super-charged”
staggered
Board
If less than the entire board is removed, vacancies will be filled by the
remaining trustees and no change will be effected
|
 36
Flawed RMR Structure and Poor Corporate Governance
Conflicted Board of Trustees
Significant overlap of board members across RMR entities, including so-called
“independent”
trustees
In
our
view
Portnoys
and
“independent”
trustees
conflicted
by
any
common
sense
definition
2
of
3
“independent”
trustees
serve
on
other
Portnoy
boards
3
“independent”
trustee
just
retired
from
RBC
capital
markets
division
in
2012,
a
division
which regularly receives lucrative business from CWH (including the recent dilutive
equity offering) and RMR’s other entities
Same Job, Different Company?
Travel Centers
Five Star
RMR Real Estate
Name
Title
CWH
HPT
SNH
GOV
SIR
of America
Senior Living
Income Fund
Senior
Management:
Adam D. Portnoy
President & Managing Trustee
Vern D. Larkin
Director of Internal Audit
Jennifer B. Clark
Secretary
Board
of
Directors:
Adam D. Portnoy
President & Managing Trustee
Barry D. Portnoy
Managing Trustee
William A. Lamkin
Partner at Ackrell Capital
Frederick N. Zeytoonjian
Founder & CEO of Turf Products
Joseph Morea
Retired RBC Banker
rd |
 37
Flawed RMR Structure and Poor Corporate Governance
Dilutive Equity Offering
Despite protests from some of its largest shareholders, a bona fide offer for
$27.00 per share, and in our view no need to issue equity, on March 5, 2013
CWH sold 34.5 million shares at $19.00
–
Transaction increased CWH’s share count by 41% and diluted CWH’s NAV by
over $6 per share
Why did CWH sell its $240 million minority stake in GOV only after issuing new CWH
shares at a 48% discount to book value?
–
Perhaps recognizing its actions were indefensible, trustees insulated themselves
from questioning and ignored shareholder demands to stop offering
–
Canceled investor lunch and did not hold Q&A on roadshow call
CWH’s use of proceeds for the equity offering, at a massive discount, was to
repay debt trading at prices ranging from 102% to 111% of par
–
Remarkably, CWH did not have any upcoming maturities or liquidity issues
associated with this debt or any debt
–
We believe recently completed equity offering serves as clear example of poor
management, skewed incentives, and terrible capital allocation
However,
equity
offering
increases
Company’s
equity
base,
creating
additional
capacity
to
do
acquisitions
and
thereby
pay
more
management
fees
to
RMR |
 38
Flawed RMR Structure and Poor Corporate Governance
“Acting in the best interest of RMR rather than as a fiduciary”
“[Related and Corvex] are spending their own dollars, while CWH is spending
shareholder
money
to
prevent
RMR
from
being
terminated
-
an
outcome
we
think
virtually all shareholders favor. Ironic.”
“RMR, with $77mm of high-margin annual revenue on the line, has too much
to lose and is directing the CWH board to fight to the finish (using
shareholder dollars to do so).”
“The CWH board, controlled by external manager RMR, is in the unique
position of acting in the best interest of RMR rather than as a
fiduciary to the CWH
Shareholders.”
“If RMR prevails, we believe the end result is the instantaneous resumption
of CWH shares trading at a significant discount to NAV -
we believe a $15/sh price...”
Stifel Nicolaus, March 7, 2013 |
 39
Flawed RMR Structure and Poor Corporate Governance
March 1 Bylaw Amendment
On Friday, March 1, 2013, CWH announced its bylaws had been amended to
“clarify that a shareholder seeking to take action to remove one or
more Trustees must comply with the same bylaw requirements as a shareholder
making a nomination of an individual for election to the Board.”
(3% / 3 year requirement)
–
‘Clarification’
is actually an attempt to re-craft bylaws in order to effectively eliminate a
shareholder
right
(action
by
written
consent
to
remove
trustees)
granted
in
CWH’s
Declaration of Trust since 1986
–
The Declaration of Trust can only be changed through a shareholder vote,
explaining why trustees are attempting to use the bylaws in this backdoor
manner The Declaration of Trust supersedes the bylaws, and bylaws cannot be
used to remove a right granted in the Declaration of Trust
–
Amateurish word games suggest to us that trustees are terrified of facing their
own shareholders, and have looked to throw up any obstacle or delay tactic
they can We
are
litigating
this
matter
in
Maryland
Court
and
have
a
hearing
scheduled
for
May
3
rd
–
We
and
our
legal
team
believe
the
board’s
attempted
‘clarification’
is
inconsistent
with
CWH’s
own
Declaration
of
Trust
and
thus
null
and
void
as
a
matter
of
law
Related
and
Corvex
believe
CWH’s
March
1
bylaw
amendment
is
invalid
and
a
desperate attempt to disenfranchise shareholders
st |
 40
Flawed RMR Structure and Poor Corporate Governance
Failed Maryland House Bill Amendment
Proposed amendment would have opened door to make it impossible to remove trustees
without cause in many Maryland companies (regardless of voting threshold),
even if shareholders had explicit right to do so in a company’s
charter Similar to March 1st bylaw amendment, CWH couched proposed amendment
as a “clarification”
We believe notion that amendment was a “clarification”
is absurd, as existing Maryland law
expressly contemplates removal of staggered board without cause when provided for
in a company’s
charter
–
as
is
unequivocally
done
in
CWH’s
Declaration
of
Trust
CWH used deceptive letters (which were later withdrawn) from a conflicted attorney
in an attempt to mislead Maryland senators into believing amendment had
broad legal support and was
ministerial,
when
in
fact
it
had
not
even
been
discussed
by
key
Maryland
bar
committee
(1)
Fortunately for CWH shareholders and all shareholders of Maryland-based
corporations and trusts,
the
amendment
quickly
died
once
legislators
became
aware
of
CWH’s
manipulative
behavior and the clear fact that the amendment was substantive and not at all a
“clarification” Current
trustees
would
rather
manipulate
the
Maryland
legislative
process
and
change
the
law
than
face
their
own
shareholders
One
of
the
Portnoys’
latest
legal
maneuvers
was
a
secret
attempt
(likely
using
CWH money) to insert an 11
th
hour amendment into a Maryland House Bill
(1)
The proposed amendment was not even discussed by the Corporation Law Committee of the Business Law
Section of the Maryland State Bar Association, a group which typically reviews and comments on
all changes to Maryland corporate and REIT law before changes are heard by the General Assembly. |
 41
Flawed RMR Structure and Poor Corporate Governance
April 12 Bylaw Amendment
On
April
12,
2013,
CWH
purported
to
“opt-in”
to
Section
3-803
of
the
Maryland
General
Corporation Law, which allows Maryland companies to adopt a classified board
(something CWH has had in place since 1986)
CWH
has
taken
the
view
that
“opting
in”
to
Section
3-803
enables
them
to
unilaterally
eliminate shareholders’
right to remove trustees without cause
–
We
and
our
lawyers
firmly
believe
that
they
are
wrong
In fact, CWH recently sought to amend Section 3-803 to
“clarify” that a company opting-in to
Section 3-803 could eliminate shareholders right to remove trustees without
cause. The Maryland legislature did not approve the proposed amendment.
Various senators noted during hearing that CWH’s proposed amendment
represented a substantive change in the law, not a
“clarification” CWH’s novel interpretation of Section
3-803 conflicts with 14 years of public filings by CWH, which not once
mention the potential effects of opting into Section 3-803, notwithstanding
extensive disclosure of Maryland law applicable to shareholder rights, and CWH
’s continuous reminder to shareholders that trustees can be removed
without cause by a two-thirds vote CWH’s latest bylaw amendment
conflicts with 14 years of their own public disclosure
|
 42
Flawed RMR Structure and Poor Corporate Governance
No Shareholder Return on Investment
Trustees continue to spend on acquisitions and issue more shares
despite poor shareholder
returns due to skewed incentives created by RMR’s external management
Management has spent $2.7 billion on acquisitions and capex since 2007 (over
2x
CWH’s
entire
market
cap
(1)
), while CWH book value per share is essentially
flat
(1)
Market
cap
of
$1.3
billion
based
on
a
closing
price
of
$15.85
on
February
25,
2013,
the
day
prior
to
Related
and
Corvex’s
first
public filing.
(2)
Historical book values calculated using SIR and GOV market values. Market cap
and 2012 book value uses stock market prices as of 2/25/13. (3)
Metric shown includes SIR.
'07-'12
'07-'12
2007
2008
2009
2010
2011
2012
CAGR
Cumulative
Book Value
(2)
$2,198
$2,217
$2,259
$2,702
$2,816
$3,086
7.0%
40.4%
Book Value per Share
$36.11
$34.68
$35.66
$37.53
$33.24
$36.82
0.4%
2.0%
Memo: Shares Outstanding
60.9
63.9
63.4
72.0
84.7
83.8
6.6%
37.6%
Gross Real Estate Assets
(3)
$6,156
$6,242
$6,324
$6,357
$7,244
$7,829
4.9%
27.2%
Cumulative
Net Acquisitions and CapEx
$419
$83
$453
$369
$604
$753
$2,681
% of Recent Market Cap
31.6%
6.2%
34.1%
27.8%
45.5%
56.7%
201.9%
Total RMR Management Fees
$59.7
$63.2
$62.6
$62.2
$69.5
$77.3
$394.6
% of Recent Market Cap
4.5%
4.8%
4.7%
4.7%
5.2%
5.8%
29.7% |
 43
Flawed RMR Structure and Poor Corporate Governance
“A Dinosaur”
“As the REIT industry grew rapidly during the ‘90s, the externally
advised model became a dinosaur. The IPO wave of the ‘90s brought forth
companies with top-notch managers/employees whose financial interests
were strongly aligned with those of shareholders.
While
the
externally
advised
structure
remains
the
norm
in
the non-
traded REIT world, where conflicts of interest run rampant, the Portnoy REITs stand
out like a sore thumb in the publicly traded REIT domain.
If
the
conflicts
of
interest
are
so
detrimental
to
shareholders,
why
don’t
they
and the
Boards of the REITs terminate the advisory contract and staff the REIT with its own
employees?
With
respect
to
the
Portnoy
REITs,
a
primary
reason
is
that
the
corporate
governance impediments are substantial. Staggered boards are a primary obstacle.
Poison
pills
are
another.
In
addition,
the
valuation
gap
between
the
Portnoy
companies
and
their
REIT
peers
has
usually
been
wide,
but
rarely
wide
enough to
make the financial reward worthwhile for the vast effort required to enact
change.” “The
Portnoy
REITs
–
What
It
Means
to
be
‘Uninvestable’,”
Green
Street
Advisors,
March 1, 2013 |
 44
Flawed RMR Structure and Poor Corporate Governance
A Case Study in Skewed Incentives
How does a misalignment in incentives manifest itself in financial losses for
CWH
shareholders
and
profits
for
RMR?
Capital Investment
$10,000,000
Equity Investment
$10,000,000
Current Occupancy
0.0%
Financing at 60% LTV
$15,000,000
New Occupancy
80.0%
Total Capital Investment
$25,000,000
Incremental NOI
$2,000,000
Incremental NOI (6% cap rate)
$1,500,000
Less: Financing Cost (4.5%)
($675,000)
Equity Cash Flow
$825,000
Return on Equity
20.0%
Return on Equity
8.3%
Incremental Fees to RMR
Incremental Fees to RMR
% of historical cost basis
0.5%
% of historical cost basis
0.5%
Incremental historical cost basis
$10,000,000
Incremental historical cost basis
$25,000,000
Incremental Fees to RMR
$50,000
Incremental Fees to RMR
$125,000
Capital Allocation Option "B"
Capital Allocation Option "A"
Acquire New Property at lower ROE
Reinvest in Existing Property to Maximize ROE
Which option would you have chosen?
Which option do you think RMR chose?
Is
it
any
wonder
that
CWH’s
stock
is
down
43%
over
the
past
3
years?
•
The case study below is based on extensive due diligence performed by Related on a specific
vacant property in CWH’s portfolio, which we believe management is unwisely looking to sell |
 45
Refuting the Portnoys’
Spurious Claims |
 46
Refuting the Portnoys’
Spurious Claims
Shareholders are Being Asked to “Relinquish Control”
Existing trustees falsely claim Related and Corvex are asking shareholders to
“relinquish control”
–
in fact it is totally the opposite
We
believe
our
consent
solicitation
to
remove
the
board
will
serve
as
a
shareholder
referendum
on
the
current
board
of
trustees
and
senior
management
and
their
value
destructive
behavior
–
Shareholders
are
not
being
asked
by
Related/Corvex
to
“relinquish
control”
of
CWH
in
any
way;
they
are
being
asked
to
take
back
CWH
from
the
grip
of
the
Portnoys
and
RMR,
and
restore
control
to
all
CWH’s
shareholders
–
The only group at risk of losing control is RMR and the Portnoys, which we believe
have used CWH as their own personal piggy bank for years
Once the current trustees are removed, CWH is required to promptly call a special
meeting for all shareholders to elect new trustees
–
At
that
time
we
hope
and
expect
all
CWH
shareholders
will
work
to
collectively
identify
an
independent
slate
of
highly
qualified
nominees
–
including
real
estate
industry
veterans
with
pristine
credentials
–
that
are
prepared
to
work
for
the
interests
of
all
shareholders
We
also
hope
and
expect
a
newly
elected
board
would
adopt
ISS
and
Glass
Lewis
corporate
governance
best
practices,
restoring
appropriate
shareholder
rights
for
all
CWH
shareholders
going
forward |
 47
Refuting the Portnoys’
Spurious Claims
CWH Has a “Strategic Plan”
Existing trustees claim to have a “strategic plan”
Unfortunately, in our view the so-called strategic plan consists largely of
capital recycling, without any path to actual value creation for
shareholders –
Creates
the
appearance
of
activity,
but
does
not
actually
result
in
any
progress
–
Only figures associated with strategic plan reference volume of activity, and make
no mention of shareholder returns or value creation
–
Strategic
plan
continues
management’s
historical
practice
of
“buy
high,
sell
low”
capital
allocation
The two “key elements”
of the so-called strategic plan are:
“Strategic Plan”
Says:
We Believe “Strategic Plan”
Actually Means:
Improving CommonWealth's Financial
Condition and Liquidity
Sell equity at a massive discount to repay debt
trading at a premium, to give the appearance of
changing capital structure (i.e. buy high, sell low)
Continued Repositioning of
CommonWealth's Property Portfolio
Sell vacant suburban properties at a massive
discount and recycle proceeds to acquire fully
occupied CBD properties at premium valuations
(i.e. buy high, sell low) |
 48
Refuting the Portnoys’
Spurious Claims
CWH Will be Unable to Continue Normal Operations
The Portnoys have tried to paint a bleak picture of CWH upon removal of
themselves
and
their
conflicted
trustees
–
a
fictional
picture
of
a
company
without leadership, unable to comply with basic regulatory obligations
These
statements
represent
a
scare
tactic
employed
by
current
trustees
in
a
desperate
attempt
to
intimidate
CWH’s
shareholders;
nothing
could
be
further
from
the
truth
Upon removal of the current board, we are committed to put at the immediate
disposal of CWH and all its shareholders all of our considerable resources,
including highly qualified property and financial managers
–
Jim Lozier, former CEO and co-founder of the Archon Group L.P., has agreed to
a potential interim CEO position
–
CBRE, the world’s largest commercial real estate services firm, has agreed to
provide interim
property
management
services
and
leasing
services
to
the
CWH
portfolio
as
necessary |
 49
Refuting the Portnoys’
Spurious Claims
“Change of Control”
under Credit Agreement, Other Agreements
In connection with their scare tactics, current trustees have also emphasized
risk that a termination of RMR’s agreements could lead to a “change of
control”
under CWH’s credit agreements and other agreements
We, along with our financial advisor Deutsche Bank, have analyzed the
Company’s credit agreements
Deutsche Bank has already given us highly confident letters for necessary
refinancings which may arise under a change of control, positioning CWH for
a smooth transition |
 50
Refuting the Portnoys’
Spurious Claims
Current Trustees and RMR “Acting in Best Interests”
of CWH
Existing trustees claim they and RMR are acting in the best interests of CWH
Based on what track record and what evidence?
–
Why would trustees acting in the best interests of shareholders pursue and even
upsize an unnecessary, massively dilutive equity offering?
–
Why would trustees acting in the best interests of shareholders attempt to pass
bylaw amendments to disenfranchise shareholders?
–
Why would trustees acting in the best interests of shareholders attempt to
secretly pass a new Maryland law making it impossible to remove them?
–
Why would trustees acting in the best interests of shareholders make plans to
potentially sell
CWH’s
controlling
stake
in
SIR
at
a
discount
to
market
rather
than
a
premium? |
 51
New Management Team and Strategy |
 52
New Management Team and Strategy
New Strategic Plan
Internalize
management,
adopt
a
market
cost
structure,
and
align
management
compensation
with
shareholder
returns
–
no
more
skewed
incentives
–
While corporate management will be replaced, we anticipate current property level
employees will be hired to work at the new CWH
Amend
existing
Declaration
of
Trust
and
bylaws
to
conform
to
ISS
and
Glass
Lewis
best
practices
–
no
more
shareholder
disenfranchisement
Cease
all
acquisition
activity
until
CWH’s
stock
price
exceeds
its
NAV
–
no
more
dilutive
equity
offerings
and
ignoring
the
views
of
shareholders
–
We believe reinvesting in CWH’s existing portfolio can lead to a stabilized
NOI of $547 million, an increase of ~20% from the Company’s LQA 4Q12
cash NOI Use excess cash flow to buy back CWH stock until the Company’s
stock price exceeds its NAV
–
no
more
‘buy
high,
sell
low’
capital
allocation
Cease
all
related
party
transactions
–
no
more
self-dealing
for
benefit
of
the
Portnoys
Adopt
best
practices
and
manage
the
Company
in
ways
which
maximize
long-term
CWH
shareholder
value,
not
fees
paid
to
RMR
While a new board selected by all shareholders will ultimately determine the
details of CWH’s new strategic
plan, we propose the following key elements as a starting point for the
Company’s new direction |
 53
New Management Team and Strategy
About Related
Founded in 1972 by Stephen Ross, Related is amongst the most prolific and respected
real estate developers, operators and investors in the nation
Owns and operates a portfolio valued at over $15 billion including 5 million square
feet of commercial space and over 40,000 apartment units
Over 2,000 employees located in Boston, Chicago, Dallas, Los Angeles, Miami, New
York, San Francisco, Shanghai, Abu Dhabi and Sao Paulo
Experience with portfolios of assets in distressed or hostile situations,
including: -
Several assets representing hundreds of millions of dollars in value in contested
foreclosure or adversarial bankruptcy proceeding, including acting as agent
for court appointed receivers between 2010-2012
-
Portfolio of 32 REO properties comprised of 10,000 multifamily units on behalf of
GSE Founded over 40 years ago, Related operates a real estate portfolio valued
at over $15 billion today including residential, office, mixed-use, and
affordable properties |
 54
New Management Team and Strategy
Potential Interim CEO
Mr. Lozier served as co-founder and CEO of the Archon Group L.P., a subsidiary
of Goldman Sachs, from its formation in 1996 until 2012
Archon is an international real estate services and advisory company based in
Dallas, TX During Mr. Lozier’s tenure at Archon, the company grew from
320 employees to 8,500 employees managing 36,000 assets with a gross value of
approximately $59 billion Archon underwrote, acquired and asset managed real
estate and real estate debt for Goldman Sachs with a concentration in
office, multi-family and limited service hospitality Prior to the
formation of Archon, Mr. Lozier was an employee of the J.E. Robert Company and had
been
responsible
for
managing
the
GS
/
JER
joint
venture
for
two
years.
Mr.
Lozier
directed
the
acquisition
efforts
of
the
joint
venture
between
GS
and
JER
from
1991-1995
Mr. Lozier could serve as interim CEO until the new board decides to hire a
permanent CEO. As interim CEO, he would focus on transition of management
services, continuity of financial reporting, and building out a permanent
management team Related/Corvex have identified a potential interim CEO, Jim
Lozier, to help transition
CWH
to
internal
management.
Mr.
Lozier
is
a
30+
year
real
estate
industry veteran with impeccable credentials who has created significant value
for equity holders during his career |
 55
New Management Team and Strategy
About CBRE
CBRE Asset Services group provides property management, financial reporting and
construction management to clients
CBRE
(1)
employs 42,000+ people in 430+ offices and manages more than 3.3 billion square
feet of commercial property and corporate facilities across the globe
Successfully
managed
transition
of
leasing
/
management
services
for
1.2
billion
square
feet
of
commercial properties in the U.S. over the previous nine years, including
transitions done under significant time pressure
(1)
Employees,
offices,
and
square
footage
under
management
includes
CBRE
affiliate
offices.
CBRE, the world’s largest commercial real estate services firm, has agreed to
provide interim property management and leasing services to the CWH
portfolio as necessary |
 56
Appendix |
 57
Appendix
Valuation Summary
(1)
Includes value of SIR stake as of April 17, 2013.
(2)
Stabilized NOI of $547 million.
(3)
Wholly-owned LQA GAAP NOI of $487.3 million per CWH 4Q12 Supplemental.
(4)
Wholly-owned square feet per Company filings and Related / Corvex
analysis. (1)
With the removal of current trustees, we estimate an NAV per share of $35
today (4/17/13) based on bottom-up property-by-property analysis, and a
target stock price of $44 or higher at 12/31/14
We believe NAV can be thought of as fair market value of the current portfolio,
before benefit from any other value enhancing actions (which we believe are
plentiful) Valuation was led by Related, one of the most well respected real
estate developers, operators, and investors in the U.S. with a 40 year
history and a portfolio of over $15 billion of real estate operating assets
today We believe CWH could trade at a stock price of $44 or higher at
12/31/14 through internalization of management, operational turnaround,
improved capital allocation, and multiple expansion
Stock Price
Related / Corvex
@ 2/25
NAV @ 4/17
Stock Price
$15.85
$34.92
% Change
--
120.3%
Cap Rate of Stabilized NOI
(2)
11.12%
7.66%
Cap Rate of LQA NOI
(3)
9.92%
6.83%
Price / LQA Normalized FFO
5.9x
13.0x
Price / GAAP Book Value per Share
0.43x
0.95x
Price / Square Foot
(4)
$89
$135
Dividend Yield @ Current $0.25 / Qtr
6.31%
2.86% |
 58
Appendix
Underwriting Methodology
Related and Corvex believe CWH’s wholly owned real estate is worth $7.1 billion
today after removal of current trustees (compared to a cost basis of $7.0
billion and
implied
market
value
of
$4.9
billion
as
of
2/25/13)
based
on
property-by-
property underwriting
(1)
CWH $4.9 billion enterprise value calculated using SIR and GOV market value as of
2/25/13. Related did not rely on book value and
instead, did a bottoms up real estate
valuation on 90% of the portfolio
Related analyzed market rental,
vacancy and cap rate trends as
well as market research reports
Related performed site visits,
met with local brokers and had
appropriate internal Related teams
review underwriting assumptions
Related used Gross Asset Value
(“GAV”) and Cap Rate Valuation
methodologies to determine NAV per
share. |
 59
Appendix
Underwriting Methodology (continued)
The
most
extensive
property
level
detail
that
CWH
provides
is
a
Schedule
3
(accumulated
depreciation
schedule)
produced
at
the
end
of
every
fiscal
year.
This
report
does
not
show
the
assets’
names
or
addresses
and
is
merely
a
list
of
properties
identified
by
an
ID
number.
The
following
represents
our
underwriting
methodology:
1.
Associate each property ID in the Schedule 3 with an address, name and portfolio where
appropriate
2.
Remove any SIR spin-off properties (76 total) based on Schedule 1.1 of Form 8-K dated
3/31/12
3.
Account for any acquisitions and dispositions during 2012 and 2013 4.
Perform extended due diligence on 367 properties •
Represents 90% of the portfolio’s total SF •
Represents 90% of the portfolio’s total cost basis 5.
Extrapolate results to the rest of the portfolio 6.
Analyze market rental, vacancy and cap rate trends and meet with brokers, research
comparable transactions and perform site visits to further improve property level assumptions 7.
Determine CWH’s NAV per share based on gross asset value (“GAV”) and cap rate
methodologies
•
We believe GAV is a more appropriate indicator of valuation because of the nature of
CWH’s portfolio
|
 60
Appendix
How RMR is Paid
Business management agreement
–
Requires
CWH
to
pay
RMR
at
annual
rate
of
0.7%
of
the
historical
cost
basis
of
U.S.,
Canadian, and Puerto Rican investments for the first $250 million of such
investments and 0.5% thereafter
1.0% fee level for investments outside the U.S., Canada, and Puerto Rico
–
Additionally, RMR is entitled to an incentive fee equal to 15% of the product of
(i) weighted average fully diluted shares outstanding and (ii) the excess
of FFO per share over FFO per share in the preceding fiscal year
No incentive paid in recent years given continued FFO per share declines
Property management agreement
–
Provides for fees equal to 3.0% of gross collected rents, and construction
supervision fees equal to 5.0% of construction costs
CWH is managed under two agreements with RMR (terminable by Company
with 60 days notice), which generate steady fees based on gross historical cost
basis and gross rents
'07-'12
2007
2008
2009
2010
2011
2012
Cumulative
Business Management Fees
$31.0
$33.4
$33.6
$34.7
$39.2
$43.6
$215.6
Property Management Fees
28.7
29.8
29.0
27.5
30.3
33.7
$179.0
RMR Management Fees
$59.7
$63.2
$62.6
$62.2
$69.5
$77.3
$394.6
% of Recent Market Cap
4.5%
4.8%
4.7%
4.7%
5.2%
5.8%
29.7%
% of Rental Income
7.1%
8.4%
7.4%
7.3%
7.6%
7.5% |
 61
Appendix
CWH Related Party Transactions
5 Year
Related
Party
Transactions
2008
2009
2010
2011
2012
Cumulative
SNH
$346.8
$214.6
$374.1
$262.9
$1,198.3
GOV
395.3
231.0
626.3
SIR
400.0
400.0
AIC
5.2
5.3
5.4
6.7
5.3
28.0
Total
$352.0
$615.2
$610.5
$269.6
$405.3
$2,252.6
Figures discussed in presentation per disclosure in CWH public filings. Figures above do not
include fees paid to RMR and distributions from minority stakes, which would have the impact of
increasing the amount of related party transactions.
|
 62
Appendix
Related & Corvex Overview
Related and Corvex collectively own 10.9 million shares of CWH (9.2% of
shares outstanding)
Related Companies
–
Related Fund Management, LLC is an affiliate of Related Companies
(“Related”), one of the most prominent privately-owned real
estate firms in the United States –
Formed 40 years ago, Related is a fully-integrated, highly diversified
industry leader with experience in virtually every aspect of development,
acquisitions, management, finance, marketing and sales
–
Related’s existing portfolio of real estate assets, valued at over $15
billion, is made up of best-in-class mixed-use, residential,
retail, office and affordable properties Corvex Management
–
Value-based investing
across the capital structure in situations with clearly identifiable
catalysts
–
Active investing to create asymmetric risk/reward opportunities
–
13D investments since inception include AboveNet (acquired by Zayo in March 2012),
Corrections Corporation of America (elected REIT status in February 2013),
Ralcorp (acquired by ConAgra in November 2012), and ADT (Keith Meister
joined Board in December 2012) |
Additional Information Regarding the Consent Solicitation
In connection with their solicitation of written consents, Corvex Management LP and Related Fund Management, LLC have filed a definitive written consent solicitation statement with the U.S. Securities and Exchange Commission (the “SEC”) to solicit written consents from shareholders of CommonWealth REIT. Investors and security holders are urged to read the definitive written consent solicitation statement and other relevant documents when they become available, because they contain important information regarding the consent solicitation. The definitive written consent solicitation statement and all other relevant documents are available, free of charge, on the SEC’s website at www.sec.gov.
The following persons are participants in connection with the written consent solicitation of the Company’s shareholders: Corvex Management LP, Keith Meister, Related Fund Management, LLC, Related Real Estate Recovery Fund GP-A, LLC, Related Real Estate Recovery Fund GP, L.P., Related Real Estate Recovery Fund, L.P., RRERF Acquisition, LLC, Jeff T. Blau, Richard O’Toole and David R. Johnson. Information regarding the participants in the consent solicitation and a description of their direct and indirect interests, by security holdings or otherwise, to the extent applicable, is available in the definitive written consent solicitation statement filed with the SEC on April 10, 2013 and Supplement No. 1 thereto filed on April 12, 2013.
Welcome
Timeline
Presentations
Press Releases
Consent Materials
Corporate Governance
Contact
RESTORING WEALTH TO COMMONWEALTH HOW TO PARTICIPATE
Welcome
Welcome to the website devoted to Corvex Management LP and Related Fund Management^ LLC’s consent solicitation for Commonwealth REIT (NYSE: CWH).
Read our Letter to Shareholders
On April 10, 2013 Corvex and Related filed a definitive consent solicitation statement with the U.S. Securities and Exchange Commission for shareholders to act by written consent to remove the entire board of trustees of CWH.
We believe change is desperately needed at CWH. Commonwealth is one of the few remaining externally managed equity REITs in the public markets. We believe CWH’s external manager, Reit Management and Research, LLC C’RMR”), has sought to maximize management fees while mismanaging CWH’s assets - CWH has paid out $209 million in management fees over the last 3 years while CWH’s market cap has declined by $647 million during the same period.
RMR has in our view crossed the limits of corporate governance and related party transactions in order to maintain control of CWH and maximize RMR’s financial benefits. In addition, the Company has significant governance issues, including a classified board, poison pill with “slow hand” provision and questionable “independent’ trustees.
Additionally, the Company has taken extraordinary steps in an effort to disenfranchise shareholders, including completing a highly dilutive equity offering, passing shareholder disenfranchising amendments to governance documents, engaging in eleventh-hour lobbying efforts to change a Maryland law and considering a sale of its controlling interest in Select Income REIT at a presumably discounted price.
Our consent solicitation presents a clear path for shareholders of CWH to remove the current board, bring change to CWH, and unlock significant value for ALL shareholders. We are urging CWH shareholders to sign, date and return our WHITE consent card or vote online by following the instructions on the voting materials you will be receiving.
We encourage you to read the materials on this website carefully and continue to visit often for any updates. Thank you for your continued support
Copyright© 2013 | Important Information
HOW TO PARTICIPATE
Welcome
Timeline
Presentations
Press Releases
Consent Materials
Corporate Governance
Contact
Timeline
CWH Actions
Corvex and Related Actions
May 3: Hearing scheduled in the Circuit Court for Baltimore
adopted on March lr 2013 to effectively eviscerate right to act
April 22: Record date for solicitation
April 15: CWH announces that it has “elected to classify Its
Board” under (he Section 3-803 of the Maryland General Corporation Law and twists the language of the law in declaring ... that effectively members of its Board may now only be removed ‘ “for cause.11 It is our firm view that maneuver is invalid under
Maryland law
-’
April 18: Corvex and Related issue tetter to shareholders
April 12: Corvejt and Related deliver formal shareholder demand for CWH to fix record date for consent solicitation
April ID: Coivex and Related file definitive consent stetment
March 25: CWH announces that It was considering selling CWH’s controlling equity interest In Select Income REIT, which we anticipate would be completed at a discount to market price
April 3: CWH secretly lobbies the Maryland legislature In a failed attempt to Introduce amendment that would have eliminated the right of shareholders to remove members of the Board without cause
March 15: Corvex and Related amend their complaint in Maryland State Court to declare various CWH bylaw amendments null and void
March 5: CWH completes dilutlve equity offering of 34.5 million shares at $19,00 per share
March 13: Corvex and Related file preliminary consent solicitation statement and engage Deutsche Bank Securities Inc. as financial advisor
March 1: CWH attempts to re-write its bylaws to effectively eviscerate a shareholder right granted under its Declaration of Trust to remove trustees without cause by written consent
February 26: Corvex and Related announce 9.9% stake, lay out specific steps to maximize value for shareholders and call on the company to cancel dilutive equity offering
February 25: CWH announces dilulive equity offering, CWH shares decline 12.1% and close at $15.85
Copyright ©2013 | Important Inforrnation
RESTORING WEALTH TO COMMONWEALTH
HOW TO PARTICIPATE
Welcome
Timeline
Presentations
Press Releases
Consent Materials
Corporate Governance
Contact
Corporate Governance
IN OUR VIEW COMMONWEALTH REIT IS THE POSTER CHILD OF POOR CORPORATE GOVERNANCE PRACTICES
Fees paid to RMR continue to grow, while CWH shareholder value continues to decline
. CWH paid out $395 million in fees to RMR during 2007-2012 (nearly 30% of CWH’s market cap as of 2/25/13), while CWH stock plummeted 68%
We believe CWH’s externally managed RMR structure skews incentives, reduces CWH cash flow through excessive fees, destroys investor confidence, and impairs valuation multiple (off already depressed earnings)
* RMR receives fees based an grass historical cast basis, incentivizing growth through acquisitions regardless of
returns to CWH shareholders or strategic rationale
* Trustees own less than 1% of CWH stock, but 100% of RMR, skewing their incentives in favor of the external
manager
In our view trustees have crossed the limits of legally enforceable corporate governance time and time again in order to disenfranchise CWH shareholders, insulate management, and maximize control and financial benefits for RMR
* One of the Portnoys’ latest legal maneuvers was a secret, failed attempt (likely using CWH funds) to insert an llth
hour amendment into a Maryland House Bill that would have allowed CWH to unilaterally eliminate shareholders’
right to remove trustees without cause
* Cver $2 billion of related party transactions in last 5 years
CWH assets have been repeatedly used to seed new platforms for RMR, creating new income streams for RMR
without, in our view, due compensation for CWH shareholders, and worsening the cash flow profile of CWH
* In our view 3 so-called “independent’trustees are conflicted by any common sense definition
• 2 of CWH’s “independent’ trustees serve on boards of other RMR-cantrolled entities
• 3rd “independent” trustee was former RBC banker in capital markets division (retired in 2012), which regularly
receives lucrative business from CWH (including recent dilutive equity offering) and RMR’s other entities
Same Jab, afferent C
Tltift
Senior MaragE mE m:
Adar D. Pcrtnoy President tMnagingTrustee
VemD. LrJtin Direttord Internal Audit
Jenni ie r 1 Cl ark Secretary
Bcanjof Djrertcfs:
Adam D.pertnoy Frej1d«rtt&ManagingTrustee
flacfy 0- Fortrtfty Mailing Tiuitee
WilliamA. Lamldn partner * Ack/etl Capital
F rtderi c* N. ZeytMnj i an Founders CEOot Turf ProducL
Joseph Wtei Retired ngCBgrtter
of America Senior tilling.
Poorly constructed corporate governance documents have insulated management and further misaligned the interests of management and shareholders
* Governance Issues include:
• Classified Board
• “Poison pill” trigger by the acquisition of only 10% of CWH’s outstanding shares, with a “slow hand” provision
• No true Independent trustees
ISS has taken notice and recommended voting against incumbent trustees last year
Copyright ©2013 | Important Information
Welcome
Timeline
Presentations
Press Releases
Consent Materials
Corporate Governance
Contact
RESTORING WEALTH TO COMMONWEALTH HOW TO PARTICIPATE
How to Participate
Please sign, date and return the WHITE consent card as soon as possible.
Internet voting may be available, please refer to your consent card for specific instructions.
If you have any questions, please contact:
D.F. King & Co., Inc
48 Wall Street, 22nd Floor
New York, NY 10005
Shareholders can call toll-free: (800) 714-3313 Banks and brokers call: (212) 269-5550
Copyright © 2013 | Important Information