Investors in CommonWealth REIT (CWH) awoke to another volatile session as share prices jumped more than 40% intraday on February 26, 2013. The strong move comes on the back of disappointment over the company's latest action. Of particular relevance was the proposal of a rather large offering which could dilute existing shareholders with an additional 31 million shares.
The news of the offering contributed to the drop in share price Monday as the company fell by over 10%. Yet by Tuesday, this loss was more than covered and accomplished on heavy volume. Intraday, the company saw volume of over 12 million shares traded, which far surpassed the average daily volume of 684,000 shares.
Ironically, the powerful reversal in share price can be attributed to an unlikely source apart from management itself. On Tuesday, shareholder activism played the key role in the spotlight as investors Corvex Management, LP and Related Fund Management LLC jointly announced their lack of confidence in the company's management decision. The investment funds issued a press release that included an open letter to the Issuer's Board of Trustees demanding that the Issuer immediately cease its recently announced equity offering and debt repurchase.
Citing a "misalignment of incentives" between the company's external advisor REIT Management & Research LLC, the investment funds presented a framework of action for maximizing shareholder value apart from the proposed offering. In a detailed Schedule 13D found here, the investment funds included the threat of being "prepared to seek the removal of the Board through an action by written consent." It also threatened that the investment funds would be prepared to acquire all the outstanding shares at a significant premium to the current market value.
It is this last thought that has helped spur the share price to the levels it now witnesses. For some time, Commonwealth REIT has traded at discounted levels in relation to its book value. Despite having a $1.34 billion market capitalization on Monday, the company carried a total shareholder's equity of $3.5 billion as of December 2012. In highlighting this large discrepancy by the market, Corvex and Related went on to announce the following as stated in the above mentioned Schedule 13D:
"The Reporting Persons intend to have conversations, meetings and other communications with the management and board of trustees of the Issuer, shareholders and other persons, in each case to discuss the Issuer's business, strategies and other matters related to the Issuer. These communications may include a discussion of options for enhancing shareholder value through various strategic alternatives including, but not limited to, transitioning the Issuer to becoming an internally-managed real estate investment trust ..."
At its core, this thought strikes at what is largely perceived to be a problem built into the structure of the real estate investment trust. With REIT Management & Research LLC serving as an external advisor collecting fees for its services, some would question if CommonWealth REIT has often acted in ways that ultimately benefit its shareholders. As I wrote over a year ago in an article found here, the external advisor has often presented itself as a large question mark for CommonWealth REIT.
Taken altogether, the news today of Corvex and Related presents an actionable event for shareholders of CommonWealth REIT. Not only does the threat raise the profile of the company and bring attention to a possible problem in management, but it also brings to light the large discrepancy in share value. The willingness of the investment funds to buy the outstanding shares of the company at a premium provides a sense of leadership amongst the shareholder base. While the fight for control over the company appears to just be starting, it would also appear that shareholders can welcome this conflict with open arms.
Disclosure: I am long CWH.