Select Income REIT (NYSE:SIR) has been in a proxy battle led by its activist private equity investor Lakewood Capital Management (holder of 5.8% of SIR). The fight for control of the REIT trustees focuses on actions by management which Lakewood asserts are contrary to shareholder interests. This includes 3 issues summarized in a recent Open Letter to SIR Trustees, as reproduced here in part:
In our seven years in business, we have never been pushed to the point of publicly expressing opposition to the governance of any company in which we have invested, so we do not take the contents of this letter lightly. During the past five weeks, we have witnessed a sickening series of events unfold whereby the SIR Trustees have deliberately taken multiple steps to protect their own interests at the expense of shareholders in clear breach of their fiduciary duties. We have spoken with several other significant SIR shareholders and they share our outrage. We believe SIR's shares are substantially undervalued (please see the attached Exhibit A: SIR's Undervaluation), and we urge the Board to start minding the interests of the shareholders they were elected to represent and immediately cease any activities that further entrench the Board and management including, but not limited to, (1) diluting existing shareholders through any further equity offerings at prices below the fair value of the Company's underlying assets, (2) expanding the size of SIR's Board and (3) offering to repurchase shares directly from SIR's largest shareholder, CommonWealth REIT ("CommonWealth"), thereby reducing its ability to exercise influence over SIR, without making such offer available to all shareholders on equal terms.
CommonWealth shareholders recently ousted its entire Board of Trustees, including RMR principals, Barry and Adam Portnoy, and William Lamkin. These 3 individuals represent 60% of seats on SIR's Board of Trustees. RMR was also removed as manager of the CommonWealth REIT. Having disposed of its Trustees and managers and being SIR's largest shareholder, it was anticipated that CWH would join Lakewood's efforts against the current RMR related SIR management.
My recent article on SIR discusses the developing proxy fight and potential legal battles to undo the alleged self-interest malfeasance. Last night's announced preferential buyout of SIR's largest shareholder, CommonWealth, by RMR and GOV (its apparent White Knight), together with the payment of a preferential premium price for the SIR shares completes the final and total of the 3 alleged self-interest-dealing acts Lakewood called-out in their Letter. The move will make it difficult at best for Lakewood to prevail in its proxy battle and will likely shift the focus to the courts or the exist of Lakewood from its investment and the consolidation of its power controlling SIR by the RMR group. Shares have plummeted in after market trading in spite of the 5%+ premium paid for 22 million SIR shares (37% of total outstanding) in this buyout.
My outlook has changed somewhat in light of this latest development. First, Lakewood will probably not prevail in its proxy fight and will likely seek court relief or a green-mail buyout of its own to exit with a profit now. None the less, the $40.00+ Net Asset Value of SIR holdings cited by Lakewood remains along with a pile of cash raised in the recent supplemental share offering. Yesterday's action further sets a minimum reasonable value of $31.50 per share to SIR units. Therefore, current holders should stand pat and other investors should watch closely as the dust settles to stake out positions at very favorable suppressed values that have been generated by this type of rarely seen no holds barred slugfest.
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Disclosure: The author is long SIR. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.