CommonWealth REIT could face battle for control

by Mike Armstrong, Inquirer Columnist

One of Philadelphia's largest commercial landlords may be facing a battle over control.

CommonWealth REIT, the Newton, Mass.-based owner of the 54-story BNY Mellon Center and 24-story One Franklin Plaza, had released its 2012 financial results Monday and disclosed plans to raise $450 million by issuing more shares.

On Tuesday, two of the company's largest shareholders blasted that plan in a regulatory filing and urged CommonWealth to change its management structure, buy back stock, and deleverage its balance sheet.

Related Cos., the New York real estate firm begun by billionaire Stephen Ross, and Corvex Management L.P., followed up that filing with a letter to CommonWealth's board of trustees that stated their interest in offering $25 per share for all outstanding shares. That would amount to a $1.89 billion bid.

CommonWealth may not have the profile of Brandywine Realty Trust or Liberty Property Trust, both of which are based in the region and have developed many of the city's signature buildings, including Comcast Center, One Liberty Place, and Cira Centre.

But CommonWealth's Center City holdings include the twin-tower Centre Square complex across from City Hall and 1600 Market St., a black-glass tower nicknamed the "Darth Vader building."

In fact, CommonWealth owns a total of 4.60 million rentable square feet of office space in Center City, placing it just behind Brandywine's 4.85 million. Philadelphia is CommonWealth's largest market, accounting for 11.2 percent of its consolidated net operating income.

However, the 607,000-square-foot One Franklin Plaza will be vacant once GlaxoSmithKline, which provided 1.3 percent of CommonWealth's annualized rental income, completes its relocation to its Navy Yard office building this spring.

During a Monday conference call about its 2012 financial results, CommonWealth president Adam Portnoy said the company was negotiating with a new tenant "to possibly lease the entire building." He also added the caveat that those negotiations may not lead to an agreement and that other options were to lease to multiple tenants or list the property for sale.

A CommonWealth representative declined to discuss the One Franklin negotiations.
But then, it would seem the company now faces a much bigger challenge from two shareholders who make the case that the company has been underperforming its peers, including Brandywine.
Funds from operations (FFO) is the metric that matters most to REITs. CommonWealth, owner of 440 properties, reported FFO of $284.03 million, or $3.39 per share, in 2012. That was largely flat from the $262.28 million, or $3.39 per share, in 2011.
Related and Corvex, who collectively own 9.8 percent of CommonWealth's shares, said they believe the REIT's "intrinsic value" is $40 per share. CommonWealth shares closed Monday at $15.85.
As news of the possible offer spread Tuesday, CommonWealth shares soared 54 percent to close at $24.40, up $8.55.
www.omegare.com