Commercial Real Estate Direct Staff Report
CommonWealth REIT, which has been repositioning its portfolio to focus more on office properties in strong downtown and gateway city markets, is aiming to sell 76 additional properties this year.
Since 2007, the Newton, Mass., REIT has sold roughly $1.5 billion of suburban properties and acquired some $3.8 billion of assets, mostly in central business districts.
And it hasn't made an acquisition since last November. Among its last deals was the $195.5 million purchase of the 1 million-square-foot Chase Tower office complex in downtown Indianapolis.
Meanwhile, late last year it identified 94 properties with 6.7 million sf that it would sell. The properties include 37 suburban office buildings with 3.1 million sf and 57 industrial properties with 3.6 million sf.
It has since sold 18 of those, which made up all its holdings in Dearborn, Mich., for $10.3 million. Those properties are comprised of the Parklane Towers, a 486,607-sf office complex, and Fairlane Commerce Park and Gulley Road Industrial Park, a pair of industrial complexes with a total of 570,416 sf.
The 94 properties that CommonWealth was aiming to sell were carried on its books at a value of $332.6 million. It has since written them down by $164 million to $168.6 million. After the sale of the Dearborn properties, the remainder have a value of $158.3 million.
The properties are only 26.5 percent occupied and generated $1.2 million of net operating losses last year.
Separately, the REIT might put the 607,000-sf office building at One Franklin Plaza in downtown Philadelphia on the sales block as well. The property is leased to GlaxoSmithKline through the end of next month, when it vacates its space.
CommonWealth has said that it was in talks to lease the entire 24-story building to one tenant, but if those talks fail, it could choose to redevelop the property for multiple tenant use or list it for sale. While the few office properties in downtown Philadelphia have changed hands for prices ranging from $100/sf to $175/sf, One Franklin would be vacant, impacting its value substantially.
Meanwhile, the REIT has come under pressure by investors Corvex Management and Related Fund Management, which collectively own 9.8 percent of the company, and sought to buy it, arguing that it has been managed poorly. CommonWealth, unlike many other publicly traded REITs, is externally managed. That is, it pays an annual fee to a third party, in this case, REIT Management & Research of Newton.
REIT Management is run by Barry Portnoy, its chairman, and his son, Adam, who is chief executive and also serves as president of CommonWealth.
Corvex and Related initially offered to pay $25, then $27 for every share in CommonWealth they didn't already own. Shares at the time were trading at $15.88 apiece.
But their offer was subject to the REIT not proceeding with a proposed offering of common shares, which would dilute existing shareholders. The REIT went ahead with the offering, ultimately selling 34.5 million shares at $19 apiece, with plans to use most of the proceeds to pay down debt.
Corvex and Related called the stock offering a "blatant destruction of shareholder value and a dereliction of your fiduciary duties," in a letter to the company's board.
Yesterday, the Delaware County Employees Retirement Fund filed a suit against the Portnoys and REIT Management in federal court in Boston alleging management abuse, self-dealing and a breach of fiduciary duties. It hopes to have the court halt CommonWealth's stock offering. And Luxor Capital, which owns 8 percent of the REIT's shares, has come out in support of the offer by Corvex and Related.
CommonWealth's share price was $23.77 today.
Comments? E-mail Orest Mandzy, or call him at (267) 247-0112, Ext. 211.