|Shares Out. (in M):||129||P/E||0.0x||0.0x|
|Market Cap (in M):||3,238||P/FCF||0.0x||0.0x|
|Net Debt (in M):||3,203||EBIT||0||0|
CommonWealth REIT is one of the few “externally managed” REITS. The founding family (run by father and son team Barry and Adam Portnoy) owns less than 0.3% of the shares, yet owns 100% of the REIT’s management company (RMR) which has been collecting a juicy fee equal to 3% of gross revenues plus all sorts of extra fees. For years the founding family has been milking the REIT for fees while shareholders suffered. In 2013, Corvex Capital Management (run by Keith Meister who used to work for Carl Icahn) and Related (Jeff Blau) used a provision in the company’s charter to try to remove the whole board. The company fought back and the situation ended up in court for over a year. However, in 2014, on March 25th the activists successfully removed the entire board with support from 81% of the shares. A special meeting to elect the new board will be held on May 23rd. The activists are the only people who have put up a slate and theirs includes Sam Zell (a renowned office real estate investor you may have heard of) as chairman and David Helfand (former CIO of Zell’s Equity Office Properties) as president. Essentially, I believe CommonWealth is about to replace value destroying management with a team that can successfully grow the business and generate returns for shareholders. The net asset value of CWH is around $30-$35 today and we agree with the activists that the value could be $40+ in a year or two under Zell’s tutelage. Meanwhile, we should be picking off a dividend that only increases from its recent $0.25/qtr rate as the portfolio improves and some of the excess RMR cost is removed.
Corvex and Related have done an excellent job laying out the investment case here in multiple decks over the course of their year-long battle to remove the Portnoys. I refer you to:
This gives a good overview of Zell’s record of success and the value destruction by the Portnoys.
This one makes many of the same points as the above presentation, but shows the property valuation by the activists from page 67.
The complete timeline of the battle for control is available here:
The complete slate of new directors and their backgrounds is available here:
To update the valuation math here to account for recent Q, dilution from Series D preferred conversion, etc:
Properties: ~$6,950 +/- (from activist valuation deck see page 71)
Cash: $177 million
Rents Receivable: $239 million
22 mil shares of SIR: $628 million (NB: Portnoys just issued 9 million shares at $29 to dilute CWH on May 14th – I’m not sure this is going to work for them given how badly they got beaten at CWH. CWH’s stake after the dilution is 37%. However, it does appear like they are going to put up a fight to retain management of SIR assets).
Total Assets: $7,994 million (excludes $206 mil in other assets)
Less Total Liabilities: -$3,241 million
Less Pref Series D 6.5% (portion not converted): -$116
Less Pref Series E 7.25%: -$275
Remaining Value to Equity: $4,362
Shares Out (post Series D conversion): 128.8 mil shares
~$33.86 per share
So at $25.14 we feel like we are buying at a decent discount to NAV. In addition I think Zell’s plan is to “do another EOP” as this clip suggests: http://video.cnbc.com/gallery/?video=3000249372)
Hat tip to abra399 for an excellent write up of the series D preferreds and a trade which worked out well. With the common stock trading at $25.14, I think there is substantial upside here and good margin of safety. It’s not $15 like when the activists first got involved, but it is not near fair value yet either and much of the risk has come out of the story. Zell and Helfand should run a value creating strategy from here starting on May 24th. In a world where value is scarce, I like the odds at CWH from here. Sorry this is not the world’s most creative idea, but I’m struggling to find great values this year as I am sure many of you are.
|Entry||05/28/2014 11:59 AM|
Any chance anyone saved files/PDFs of activists presentations. They've already shutdown the website and thus all links listed above are dead.
|Subject||RE: RE: docs|
|Entry||05/28/2014 08:24 PM|
Buggs, thank you!!!