Glass Lewis, ISS Endorse Ouster of CWH Board

NEWTON, MA—CommonWealth REIT's senior management on Tuesday sent a letter to shareholders reaffirming the value creation in its business plan, even as two leading proxy advisory firms have recommended the ouster of the office REIT's entire board. A vote by shareholders on the ouster question is scheduled to conclude a week from Thursday.

Keith Meister of Corvex Management LP and Jeff T. Blau of Related Fund Management LLC, the shareholders behind the drive to remove CWH's board, say the recommendations by Glass Lewis & Co. and Institutional Shareholder Services “send a clear message.” That message, say Meister and Blau, is that CWH shareholders “must put a stop to the nearly three decades of abysmal governance practices and end the value destruction” at the REIT. Separate funds managed by Corvex and Related control a combined 9.6% of CWH stock.

For their part, the members of CWH's board say the advisory firms “failed to take full account of the progress CWH has made in implementing its business plan and in changing its governance and management compensation, and the real and substantial risks inherent in the Related/Corvex solicitation.” Among those risks, they note, is the specter of a ratings downgrade by Moody's Investors Services on $2 billion worth of CWH securities.

The ratings agency said last week it would place the securities on review for possible downgrade if the Corvex and Related succeed in removing the CWH board.  “If the activist shareholders are successful, Moody's will focus on potential for increased leverage, secured debt and/or core asset sales, as well as execution risk associated with transitioning the operations of a large, nationally diverse real estate portfolio to a new management team and infrastructure.”

The salvos fired from both sides represent the latest action in a yearlong battle for control of CWH. Last March, Corvex and Related offered to buy 100% of CWH's common stock for approximately $2.9 billion, and said they'd seek the removal of the REIT's board if the company didn't accept the offer.

The following month, CWH's board formally rejected the offer, saying that Corvex and Related sought to “seize control of CWH for their own benefit, or, alternatively, to realize a quick profit by forcing a sale of CWH before the full benefits of CWH's current business plan are realized.” The matter went to arbitration, and this past December Corvex and Related filed solicitation materials with the SEC seeking shareholder approval for the board's removal and the election of five new trustees, with Sam Zell as board chairman.