March 3, 2013 4:21 pm

CommonWealth Reit: shaking up the status quo

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Activists can give investors a say on management performance

It doesn’t have to be about ego. Cute puns (David Einhorn’s Apple iPrefs) and public brawls (Carl Icahn and Bill Ackman’s proxy war over Herbalife) aside, an investor who is both clever and loud can shake up the status quo. Take last week’s tussle at CommonWealth Reit, a $2bn commercial property investment trust, as a case in point.

Corvex Management, run by Icahn acolyte Keith Meister, and the investment arm of property titan Related Companies attempted to halt a large stock offering from CommonWealth, on the grounds that the investment trust’s management faced a serious conflict of interests. CommonWealth’s executives are employed by a separate entity, RMR, which manages the company’s operations. RMR has instituted a fee structure that rewards management for building a large portfolio, regardless of how profitable that portfolio is. Indeed, proceeds from the equity offering will be used to pay down debt, giving management freedom to make acquisitions and increase their own compensation. (Worse, because the equity is dear and the debt cheap, CommonWealth is doing capital structure arbitrage in reverse.)

Corvex is not the first to notice that things are amiss. Research analysts and proxy advisers such as ISS have been critical. Before the activists got involved, the stock was down 13 per cent during the past year, while Reit indices were up a fifth. But the activists can back up their arguments – Corvex and Related assert that the company trades at half net asset value – with cash. They hold a 10 per cent stake in CommonWealth and have offered to buy the rest.

The common complaint about activists (aside from megalomania) is that they make a quick buck at the expense of long-term value creation. But examples such as CommonWealth are a reminder that activists can also give shareholders the opportunity to decide for themselves about management’s performance.

Email the Lex team in confidence at lex@ft.com

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