CWH, Subsidiaries Revamp Manager Fees

NEWTON, MA-Responding to shareholder concerns that performance incentives for the external manager of CommonWealth REIT and its subsidiaries should be more closely aligned with investor returns, CWH on Monday said it would implement a new management fee plan beginning next year. The REIT and its four subsidiaries—Select Income REIT, Hospitality Properties Trust, Senior Housing Properties Trust and Government Properties Income Trust—are externally managed by REIT Management and Research, which is owned by the father-and-son team of Barry and Adam Portnoy, who also serve as managing trustees for all five REITs.

Currently, the base business management fees paid to RMR by CWH and its subsidiaries are calculated at the annual rate of approximately 0.5% of the gross historical cost of each REIT's real estate assets. Beginning in 2014, these fees will be calculated based on either the gross historical cost of the assets or each REIT's total market capitalization, whichever is lower.

Additionally, the fees from each REIT will be paid partly in common shares, as opposed to the all-cash payment that is currently entailed. The shares will be subject to a clawback in the event of certain material restatements of financial results. Accordingly, “the incentive fees payable to RMR are expected to have a direct relationship to total returns” realized by shareholders in each REIT, according to CWH.

Further, the boards of CWH and its subsidiaries will recommend annual election of trustees, who currently serve staggered three-year terms. CWH's trustees additionally intend to increase the size of the REIT's board from its current five members and to increase the ratio of independent trustees from the current 60% to at least 75%. The nominating and governance committee of CWH's board has hired executive search firm Korn / Ferry International to help identify potential independent trustee candidates.

A CWH “poison pill” plan currently in effect until Oct. 17, 2014 will sunset sooner. The REIT's board will push up the expiration of the plan to date soon after resolution of the pending disputes with Corvex Management LP and Related Fund Management LP. Corvex and Related own a combined 9.8% of CWH's stock and have sought removal of the company's board.

In August, an arbitration panel handed both sides in the dispute a mixed verdict, declaring that CWH's recently imposed minimum requirements for requesting a vote on removal of its board were “unreasonably difficult,” while also denying partial summary judgment for Corvex and Related. An evidentiary hearing before the panel on matters still in dispute between Corvex/Related and CWH is scheduled to begin on Oct. 7.

In a statement, CWH's board and management say that “a persistent theme” of recent conversations with shareholders has been that RMR's incentives should be more closely aligned with shareholder returns. “The changes announced today are intended to address these concerns, while allowing CWH shareholders to continue receiving high quality management services at or below average costs,” according to the statement, which also states that CWH's longstanding business plan—focusing on high-quality office properties in CBDs and divesting non-core suburban assets—is not affected by the changes. Similar statements have been issued by the subsidiary REITs.

Separately, SNH announced on Friday that it had sold two rehabilitation hospitals to a joint venture of the Sanders Trust LLC of Birmingham, AL and Chicago-based Harrison Street Real Estate Capital LLC for $90 million. The two hospitals to be sold are New England Rehabilitation Hospital in Woburn, MA and Braintree Rehabilitation Hospital in Braintree, MA. SNH acquired the two properties, both of which are leased to Five Star Quality Care, in 2002.