Published September 23, 2013
NEW YORK – CommonWealth REIT plans to add at least three new independent trustees and change how it calculates its management fees as the office property company defends itself against efforts by activist investors to unseat its board.
Hedge fund Corvex Management and real estate fund Related Fund Management together own nearly 10 percent of CommonWealth's shares. They have criticized the REIT's payments to management company Reit Management & Research LLC (RMR), a firm run by CommonWealth trustees Adam Portnoy and Barry Portnoy, and called the changes "window dressing by a rogue board."
CommonWealth said in a statement on Monday that it plans to add the new trustees to ensure that at least 75 percent of its board are independent trustees.
It also said that beginning in 2014, RMR's management fees would be determined by a new formula that might result in lower payments to the firm. RMR also agreed to take 10 percent of its base management fees in CommonWealth common stock.
"We think we're addressing the vast majority, if not all, of the major complaints we heard when we were out talking to shareholders," CommonWealth managing trustee Adam Portnoy said in an interview.
The firm said the changes were meant to align RMR's payments with shareholder returns.
Under the new plan, RMRs fees will be determined by calculating the historical cost of the REIT's real estate assets as well as CommonWealth's total market capitalization, and paying the management company 0.5 percent of the lower of those two measures. For the purposes of this calculation, total market capitalization includes the market value of CommonWealth's common shares, plus the liquidation preference of its preferred shares and the principal amount of debt.
It previously based its payments to the management firm only on the historical cost of CommonWealth's assets.
Portnoy said that in 2012, the changes would have reduced fees to RMR by around $8 million, or roughly 20 percent. The company's shares have risen significantly since the activists began clamoring for change at the REIT in 2013, but Portnoy said that if the new formula were applied to this year's performance, it would also result in a lower suggested payment.
Incentive fees to RMR will now be based on total returns by CommonWealth shareholders, the company said.
CommonWealth also backed annual elections for all of its board, delayed the date when shareholders can nominate new directors by two and a half months, and announced plans to cancel its "poison pill" shareholder rights plan upon resolution of its conflict with Corvex and Related.
The REIT and the activists are currently in arbitration over their dispute.
"Today's announcement is nothing more than hollow rhetoric and a desperate attempt to keep Barry Portnoy and his son Adam in control of CommonWealth," Corvex and Related said in a statement. "Shareholders should note that these "to-be proposed" governance changes contain widespread caveats and would not even be considered, if ever, until after the arbitration is expected to be completed."
CommonWealth shares rose 35 cents, or 1.6 percent, to $22.89 in late morning trading on the New York Stock Exchange.
(Reporting by Michael Erman; Editing by Stephen Coates and Andrew Hay)