Monday, March 25, 7:07 AM ET
CommonWealth REIT (CWH) files a shelf offering for up to all of its shares in Select Income REIT (SIR). The move seems a step towards what dissident shareholders - Comvex and Related - are agitating for: A simplifying of the business lessening of the fees paid to CommonWealth's manager RMR. (PR)
I don't believe that selling the GOV and SIR assets lessens the fees paid to RMR. RMR gets paid from assets under management not for holdings of other companies. RMR collects those fees from SIR and GOV not CWH. Nothing has changed
Gov was overvalued at the time of sale,but SIR at 26 had a lot of room to grow. My guess is that RMR wanted to get SIR out of the equation in case they lost control of CWH.
RMR would still control HPT,GOV,SNH,and SIR along with TA and FVE
My thought as to why the sale of SIR as well as GOV was the possibility that each was recorded on the books at historical cost which could be less than the current value today--hence, hidden value that Corvex and the boys might want to surface. And firther, should that be the case--a reason that CWH/RMR would want to sell the GOV and SIR positions (seems to me that if CWH/RMR wated to reduce debt that sould have simple sold GOV and SIR positions and used THAT cash to reduce debt and NOT issue shares under book value which diluted equity owners. That was a big mistake, and may well have been associated with a desire to place 40 mil shares in friendly hands pending the consent vote.
Fritz, are you saying that SIR and GOV are/were held at current market value on the books at CWH? Or that they are held at historical cost on the books and that the value of these two have not materially increased relative to the historical cost?
If there is no material gain then I agree with you that CWH will pay down debt and then issue more debt at a lower rate to buy more properties (likely at an elevated price as that is where RMR's incentive is). Frankly, I don't think the big problem of dilution for GOV or any other CWH spin becomes a problem UNTIL such time as CWH has issued nearly as much debt as it can in these spins without materially degrading their credit profiles--at which point RMR--to keep the management fees growing--will blatantly show its true color and issue shares--and there is the rub, I think the market will have pushed down the prices of these spins to discounts juts as it did with CWH as it will see the same game plan forthcoming. As such, while the spins which have room to add debt are safe at this point--in the future they will need to be sold ahead of the point the market begins to discount the shares relative to peer REIT multiples.
Selling the SIR stake is a loser for CWH shareholders,its on the books for a little over 500m,the best they will net from the sale is 525m.
CWH collects 37m in divs from SIR and SIR will probably raise the div about 12 cents this year,if CWH applies the money from the sale towards debt they will save less in interest than they would collect in dividends.
CWH stated that they were going to buy more CBD buildings with the proceeds,what they are going to do is first pay down debt and the buy more properties with NEW debt.
RBC for one has a target price for SIR of 31.00 and the average is 28.00,why sell now