CommonWealth REIT (CWH) is a REIT that owns and operates office and industrial buildings. It has no employees, but is managed by Reit Management & Research LLC (RMR). RMR collects a management fee from CWH. Besides CWH, RMR also manages
- Hospitality Properties Trust (HPT)
- Government Properties Income Trust (GOV)
- Senior Housing Properties Trust (SNH)
- Select Income REIT (SIR)
- Five Star Quality Care, Inc. (FVE)
- TraveCenters of America LLC (TA)
- AEW Real Estate Income Fund (RIF)
- Sonesta International Hotels Corporation.
CWH's stock is at a 52 week low of $13.58 and is down almost 40% from the 52 week high. It is down much more over the last 2 years. Although, some of this can be attributed to the weak job market, most of it is a result of RMR's self interest to fatten its pocket at the expense of shareholders.
CWH pays RMR management fees "based in part upon the historical cost of our investments (including acquisition costs)". It also pays "3.0% of gross collected rents and construction supervision fees equal to 5.0% of construction costs." This incentivizes management to grow the asset base in order to collect higher management fees at the expense of shareholders. RMR has been doing exactly that by:
- Spinning-off its best assets and using the proceeds to buy more real estate. In 2009, it spun-off GOV and in 2012, it spun-off SIR. Of course, RMR manages the spin-offs and collect management fees from them too. Since, they are all separate public companies, the executive also get share based compensation. The asset base of CWH, and GOV continue to grow year after year. This means more management fees for RMR.
- Selling undervalued common shares. Every year, management sells more common shares to fund acquisitions. In 2010, they sold $430 million of common shares. In 2011, they sold $264 million of common shares. In the first six months of 2012, they have sold $180 million of common shares.
As a result, management fees at CWH keep climbing. In 2009, 2010, 2011, management fees were $62.6 million, $62.2 million and $69.5 million respectively. At GOV, in 2009, 2010, 2011, they were $5.6 million, $8.3 million, and $14.1 million respectively. Management is making more and more money as shareholders continue to suffer.
The management trustees of CWH are father and son, Barry Portnoy and Adam Portnoy. Adam is also the president of CWH. Ethan Bornstein, who is the son-in-law of Barry Portnoy, is an executive officer at HPT. In fact, the same set of characters are on the management team or the board of trustees at all the aforementioned companies.
There is no independence on the board or the management team. As a result, there is no one to look out for the interests of the shareholders.
Conflict of Interest
In a clear conflict of interest, RMR is in business with the companies it manages. CWH, "RMR, SNH, GOV, HPT, Five Star and TA each currently own approximately 14.3% of AIC, an Indiana insurance company. All of our Trustees, all of the trustees and directors of the other publicly held AIC shareholders and nearly all of the directors of RMR currently serve on the board of directors of AIC. RMR provides management and administrative services to AIC pursuant to a management and administrative services agreement with AIC." AIC provides CWH with property insurance. From the looks of it, it is another way for RMR to make more money at the hands of the companies it manages.
Although, the amount CWH invested in AIC is small compared to its size, it should not be in a business partnership with RMR.
Management needs to do the following to increase shareholder value:
- Stop spending money on acquisitions.
- Sell off non-core assets and use the proceeds to buy back shares.
- Distribute its interest in GOV (9.95 million shares) and SIR (22 million shares) to shareholders. This would be equivalent to a $8/dividend and would immediately increase the share price.
- Spin-off the Australian unit and distribute the shares.
Given management's incompetence, it is not advisable to buy the common shares. As detailed at HypeZero, the best way to play CWH is to buy long term call options in the hopes that an activist investor pressures management to increase shareholder value.
See the latest 10-K filing here.