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CommonWealth REIT Amends Management Agreement With RMR

Stocks in this article: CWH

CommonWealth REIT (NYSE: CWH) today announced that it has amended its business management agreement with Reit Management & Research LLC, or RMR, effective January 1, 2014.

The CWH Independent Trustees issued the following statement regarding today’s announcement:

“We want to thank all of CWH’s shareholders who provided suggestions during the past few months as we worked toward revising our business management agreement with RMR. With the assistance of an independent compensation consultant engaged by the Independent Trustees, we have incorporated many shareholder suggestions. We believe the revised business management agreement further aligns the interests of management with CWH’s shareholders, while at the same time allowing CWH’s shareholders to continue receiving high quality management services at below average costs.”

The amended agreement implements the previously announced plan to change the business management agreement, as follows:

New Base Management Fee:

  • The new calculation of the base management fee will be based on approximately 0.5% multiplied by the lower of: (i) the historical cost of CWH’s real estate assets or (ii) CWH’s total market capitalization. The comparatively low level of general and administrative, or G&A, expenses that CWH has historically enjoyed will continue, but with this change it is possible that G&A expenses may further decline if the market value of CWH’s common shares declines.
  • 10% of the base fee will be paid in CWH’s common shares. As a result, management’s share ownership is expected to increase over time.

New Incentive Fee:

  • The new incentive fee will be calculated based on total return per share (dividends and share price changes) realized by CWH’s shareholders in comparison to the total return of the SNL U.S. REIT Office Index, or the Benchmark. The incentive fee formula will be based on the amount of outperformance, if any, realized by CWH’s shareholders during the measurement periods compared to the Benchmark, multiplied by a 12% participation rate. For example, if CWH’s shareholders’ total return is 10% during the measurement period and the Benchmark’s total return is 5% during that same period, the incentive fee will be 12% of the 5% of total outperformance realized by CWH’s shareholders.
  • The measurement period for the new incentive fee will be a rolling, cumulative three year period starting January 1, 2014. In other words, the incentive fee payable at the end of 2016 will be based upon the outperformance realized by CWH’s shareholders compared to the Benchmark cumulatively during 2014, 2015 and 2016; the incentive fee payable at the end of the 2017 would be based upon the cumulative outperformance realized in 2015, 2016 and 2017; etc.
  • No incentive fee will be payable by CWH in the event the total return realized during any measurement period is negative, even if the total return realized by CWH’s shareholders exceeds the Benchmark. Also, the incentive fee formula includes a “high performance modifier” so that, within specific parameters, if the total return realized by CWH’s shareholders over a three year period exceeds 36% an adjusted incentive fee may be paid.
  • The incentive fee will be paid in CWH’s common shares. The annual payment of the incentive fee will be limited, or capped, at 1.5% of the number of CWH’s common shares outstanding at the end of each measurement period. Common shares issued for payment of the incentive fees will vest over a multi-year period and the shares will be subject to “claw back” in the event of subsequent financial restatements. Also, because it will take three years for the new incentive fee formula to become fully effective, a one year interim fee may be paid at the end of 2014 and a two year cumulative interim fee may be paid at the end of 2015 based on outperforming the pro-rata hurdles in each of those periods.

The previous incentive fee arrangement was based on a percentage of annual increases in funds from operations, or FFO, per share. The new incentive fee formula is intended to more directly align the fee paid with the total return realized by shareholders relative to CWH’s office REIT peers.

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