How to (Try to) Prevent a REIT Takeover

Newton, Mass.-based Commonwealth REIT, trying to fend off a takeover by New York investors, has posted a new management agreement that attempts to address the problems investors have with the way the company is run. 

As noted on QuidnuncRE earlier this month, Corvex Management LP, a hedge fund, and real estate development and management firm Related Cos., which have been leading investors in pressuring the family-dominated Commonwealth ownership. 

Corvex and Related have forced Commonwealth to send out consent solicitations to its investors, asking shareholders to dump the Commonwealth board. 

The gist of the takeover demand is explained on a website, ShareholdersforCommonwealth.com:

We believe change is desperately needed at CWH. CommonWealth is one of the few remaining externally managed equity REITs in the public markets. Because, Reit Management and Research, LLC (“RMR”) has historically received virtually all of its remuneration through lucrative fee streams rather than an ownership interest in the Company, we believe RMR is highly incentivized to manage the Company in a way that maximizes such fee income by continuously growing the size of the Company, rather than in a manner that creates value for shareholders. We note that RMR’s annual fees have grown from $59.7 million in 2007 to $77.3 million in 2012, an increase of 29.5%.

The point is that Commonwealth makes bad investments because it increases its property holdings to boost the fees.

An arbitration ruling has allowed the consent solicitation to go forward. Commonwealth REIT has no employees, with its operations all run via the RMR entity.

Commonwealth's management--specifically, father-and-son team Barry M. Portnoy, who is managing trustee under the Maryland-organized REIT's bylaws, and his son Adam D. Portnoy, who is managing trustee and president--has been fighting back hard to maintain control.  Yesterday, Commonwealth issued a release announcing extensive changes to the REIT's management agreement with RMR. 

The new payment plan to RMR comes in two parts--base fees and incentive fees.

The base fee will now be "based on approximately 0.5% multiplied by the lower of: (i) the historical cost of [Commonwealth's] real estate assets or (ii) [its] total market capitalization," 10% of which will be paid in common shares.  Under the new plan, "management's share ownership is expected to increase over time."

The incentive fee is a complicated formula that will take a three-year running average measuring the firm's performance against a benchmark, the SNL U.S. REIT Office Index, which includes Commonwealth.

So no official incentive will be paid before the 2016 tally can be made--except Commonwealth provides for interim fees at the end of 2014 and 2015.  The incentive will be in Commonwealth common shares, and capped at 1.5% of the shares outstanding.

Previously, Commonwealth explains in the press release, the incentive fee was based on a percentage of annual increases in funds from operations per share. "The new incentive fee formula," the company states, "is intended to more directly align the fee paid with the total return realized by shareholders relative to CWH's office REIT peers."

Commonwealth notes it consulted with FTI Consulting Inc., on the RMR compensation plan, which takes effect on Jan. 1.

You can find the release discussing the specifics of the incentive fee as well as Commonwealth's other new agreements with its management company points on Commonwealth's website, HERE.

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