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CommonWealth REIT Announces Restructuring Of Management Agreement With RMR And Significant Governance Enhancements

CommonWealth REIT (NYSE:CWH) today announced the restructuring of its management agreement with Reit Management & Research LLC (RMR) and several significant governance enhancements.

Restructuring of Management Agreement with RMR.

CWH and RMR have agreed to restructure their business management agreement as follows:

  • The base business management fees paid by CWH to RMR, which are included in CWH’s “G&A” expenses, are currently calculated at the annual rate of approximately 0.5% of the gross historical cost of CWH’s real estate assets. Beginning in 2014, these fees will be calculated on the basis of the lower of: (i) gross historical cost of CWH’s real estate assets or (ii) CWH’s total market capitalization. Market capitalization will include the market value of CWH’s common shares, plus the liquidation preference of preferred shares and the principal amount of debt. The market value of CWH’s common shares will be calculated based on the average shares outstanding multiplied by the average closing share price during the period in which the fees are earned. Accordingly, CWH’s fees paid to RMR may decline when the market value of CWH’s common shares declines.
  • All of the base business management fees currently paid by CWH to RMR are paid in cash. Beginning in 2014, 10% of the base business management fees will be paid in common shares of CWH. The amount of CWH common shares granted as part of the base business management fee will be calculated based on the average closing share price during the period in which the fees are earned. Accordingly, RMR’s common share ownership of CWH is expected to increase over time.
  • Annual incentive fees payable by CWH to RMR included in CWH’s “G&A” expenses are currently calculated based upon increases in funds from operations (FFO) per share and are paid in common shares of CWH which vest immediately. Beginning in 2014, the incentive fees which may be earned by RMR will be calculated based upon total returns realized by CWH common shareholders (i.e., share price appreciation plus dividends) in excess of benchmarks. The benchmarks will be set by the Compensation Committee of CWH’s Board (which is comprised solely of Independent Trustees) and will be disclosed in CWH’s annual meeting proxy statements. Incentive fees will be paid in common shares of CWH which will vest over a multiyear period and will be subject to a “claw back” 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 CWH common shareholders.

Changing Board of Trustees.

The CWH Board of Trustees intends to increase the size of the CWH Board from its current five members and to increase the ratio of Independent Trustees to total Trustees from the current 60% to at least 75%. The Nominating & Governance Committee of CWH’s Board (which is comprised solely of Independent Trustees) has retained the services of the executive search firm Korn / Ferry International to help identify potential Independent Trustee candidates. The CWH Board also anticipates that the Independent Trustees of the expanded Board will designate a Lead Independent Trustee soon after the new Trustees join the Board.

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