CWH Affirms Debt Buyback Plan Despite Complaint

NEWTON, MA-CommonWealth REIT on Friday sweetened the pot for its debt tender offer, increasing the maximum tender amount from $450 million to $650 million. Earlier in the week, the locally based REIT reaffirmed its intention to repurchase senior notes that mature between 2014 and 2016, and issue 30 million common shares, despite a complaint filed in Maryland state court by shareholders Corvex Management LP and Related Fund Management LLC. Subsequently, however, CWH cautioned in an SEC filing that in view of the complaint, the stock offering might be delayed past its scheduled March 5 closing or might not be consummated at all.

In the complaint, filed Feb. 27 in the Circuit Court for Baltimore, Corvex and Related allege that CWH and its external manager, REIT Management & Research LLC, breached their fiduciary duties to CWH's shareholders. Among other things, the two shareholders—which between them own 9.8% of CWH stock—allege that CWH and RMR commenced, “with very suspicious timing,” an equity offering that the suit describes as “massive and dilutive” at a time when CWH stock was trading at a 57% discount from its intrinsic value.

Further, the complaint alleges that CWH and RMR implemented a strategy of “purchasing properties at a high valuation and selling equity at a much lower implied valuation in order to maximize RMR's incentive management fees, which are based on the volume of CommonWealth's acquisitions, regardless of their impact on shareholder value.” The complaint asks the court to rescind the equity offering and enjoin CWH and RMR from taking any action to implement it.

According to an SEC filing this past Friday, CWH priced the stock offering at $19 per share and granted underwriters an option to purchase up to 4.5 million additional shares. The REIT expects to use the $545.3 million of net proceeds from the offering, as well as cash on hand, to buy back 5.75% senior notes that mature in February '14 and November 2015, 6.25% senior notes due in August '16 and 6.40% senior notes due in February '15.

In a letter to CWH's board of trustees a day before filing the complaint, Corvex and Related, both headquartered in New York City, demanded that CWH terminate the equity offering. The two shareholders offered to buy all outstanding shares for at least $25 apiece, “with the opportunity to meaningfully increase this offer after completing due diligence.” The offer was subsequently raised to $27 per share.

In the letter, Corvex and Related asserted that they were “also open minded to pursuing structures that enable existing like-minded shareholders to participate. However, we note that if the company proceeds with the proposed equity offering, our proposed valuation would be significantly negatively impacted. We are bewildered how the board of trustees could proceed down a path of a dilutive share issuance in light of these facts.”

In an SEC filing this past Wednesday, CWH said its board had considered this letter as well as the complaint and had decided to proceed with the stock offering and debt buyback nonetheless. A subsequent 8-K filing by CWH this past Friday cautioned that staying the course on the offering and repurchase “could provoke shareholder litigation or arbitrations, dissident shareholder trustee nominations or dissident shareholder proposals and result in the substantial decline in the market price of the company's common shares.” GlobeSt.com's calls to CWH for further comment were not returned by deadline on Friday.