NEW YORK CITY—Just weeks after Sam Zell becamethe new chairman of CommonWealth REIT in asequence of events that was precipitated by activist shareholdersdissatisfied with the company's governance, a major shareholder inan affiliated REIT has made public its own concerns aboutgovernance. The REIT in question is Select IncomeREIT, whose board includes the father-and-son team ofBarry and Adam Portnoy, both of whom had alsoserved on CWH's board prior to an ouster of CWH's entire board. ThePortnoys also control REIT Management &Research, which externally manages both CWH and SIR.

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A June 11 letter from New Yiork City-based LakewoodCapital Management LP, over the signature of managingpartner Anthony T. Bozza, takes the netlease REIT's board to task for what Lakewood sees aslapses in governance. “During the past five weeks, we havewitnessed a sickening series of events unfold whereby the SIRtrustees have deliberately taken multiple steps to protect theirown interests at the expense of shareholders in clear breach oftheir fiduciary duties,” according to Lakewood's letter. “Webelieve SIR's shares are substantially undervalued and we urge theboard to start minding the interests of the shareholders they wereelected to represent and immediately cease any activities thatfurther entrench the board and management.”

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Among those activities is what Lakewood sees as dilution ofexisting shareholders via “further equity offerings at prices belowthe fair value of the company's underlying assets.” Lakewoodcurrently controls 5.8% of SIR's stock; its interest in the companywas 6.8% prior to a recent equity offering that diluted the value.Lakewood also took the trustees to task for expanding the size ofthe REIT's board and offering to repurchase shares directly fromSIR's largest shareholder, CWH, “without making such offeravailable to all shareholders on equal terms.”

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In reponse, SIR's board says it's reviewing the Lakewood letter“and is open to constructive dialogue with shareholders. SIR hassuccessfully executed its growth strategy and has delivered totalreturns to shareholders that have exceeded the SNL US REIT EquityIndex by over 15%. The board and management believe all their prioractions have been done in SIR's best interest, and they arecommitted to continuing to do so.” Headquartered in Newton, MA, theREIT controls a portfolio of 26.1 million square feet, abouttwo-thirds of which is on the island of Oahu.

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Paul Bubny

Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.