As the underwriters exercise their allotment option for an additional 1.2 million shares, the full IPO process of Select Income REIT (SIR) came to a close on Monday. In its completion, the real estate investment trust raised a rough $196 million. The company had become a publicly listed entity on March 7 through an offering of 8 million shares priced at $21.5/share. With 30 million shares outstanding, the company now stands valued with a market capitalization of $653.40 million as of March 12, 2012.
With the finalization of Select Income's IPO, the company now shares a common history alongside Hospitality Properties Trust (HPT), Senior Housing Properties Trust (SNH) and Government Properties Income Trust (GOV). All four companies were originally subsidiaries of the now defunct HRPT Properties Trust, which has since been renamed as CommonWealth REIT (CWH). More importantly, all five of these companies continue to be managed by Reit Management & Research LLC (RMR), a private real estate management company founded in 1986.
As investors begin to familiarize themselves with Select Income, shareholders should be reminded that RMR remains as the ultimate controlling authority behind these REITs. It might be perceived as questionable if each entity is being best managed with the respective shareholder's interest being looked after by RMR. With the spun-off subsidiaries of HPT, SNH, GOV, and now SIR, we see that the once-broad portfolio of CWH has increasingly been narrowed down to a very specific focus on commercial properties. We can also see the possible conflict of interest in the IPO of Select Income itself as it served to dilute CommonWealth's interest in key properties that were formerly seen as a linchpin to the company's operations. After all, RMR has much to gain from the increasing size of assets under its management when one considers the compensation.
Yet such a conflict of interest may very well be overstated, as the success of RMR can be seen in the thriving REITs it manages. HPT, SNH, GOV, and CWH all continue to yield a dividend north of 7% annually, and utilizing an outsourced management entity has only helped to lower expenses for the companies. For CommonWealth, the spin-off IPO of Select Income may even serve as beneficial as a means of offloading properties without having to struggle with an actual sale of them.
According to Select Income's form S-11, we see that CommonWealth will continue to see diluted interest primarily in its Hawaiian properties. Such properties, which include some very valuable industrial and warehouse properties, make up a rough 68% of Select Income's revenues. Though a lucrative portion of CommonWealth's revenues, such Hawaiian properties have been troublesome in recent times as the state itself attempted to control the company's profitability. The ability to sell shares over real property can serve to be beneficial from a transition standpoint.
Ultimately, Select Income's IPO ushers in yet another tool that Reit Management & Research have to manage and use at their disposal. It brings additional capital under management for the private company which are sure to increase the fees they receive. Yet such a public infusion of additional capital could also help to increase the flexibility and value of both CommonWealth and Select Income as they're sure to further grow and refine their property portfolios in a discounted property market.
Disclosure: I am long CWH.