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CommonWealth REIT Board Sends Letter To Shareholders Highlighting Potential Value Destruction Caused By Related/Corvex Consent Solicitation

Stocks in this article: CWH

CommonWealth REIT (NYSE:CWH) today mailed the following letter to its shareholders:

March 12, 2014

To the Shareholders of CommonWealth REIT:

Protect the value of your investment in CommonWealth REIT: sign, date and return the WHITE consent revocation card enclosed with this letter.

Related Fund Management, LLC and Corvex Management LP (together “Related/Corvex”) have recently sent you several letters claiming to be champions of shareholders rights. Don’t be fooled. Related/Corvex’s real purpose is to seize control of your company without paying for it, and their reckless actions could destroy the value of your investment.

Related/Corvex are soliciting written consents to remove the entire CommonWealth Board without cause. Removal of the entire board of a public company without the simultaneous election of a new board is unprecedented – for good reason. When Related/Corvex solicited consents last spring, we and many shareholders knew it was a non-binding referendum, and the arbitration panel has so ruled. However, if the current solicitation succeeds, it may have serious adverse consequences for your investment in CommonWealth, including the following:

  • The removal of the entire Board would constitute an event of default under the standard terms of CommonWealth’s bank loan agreements. This event of default would allow the bank creditors to accelerate their loans and cancel their commitments to make future loans. CommonWealth has $735 million of bank loans outstanding at this time. 1
  • Under applicable law, only the CommonWealth Board may declare dividends. If the Related/Corvex consent solicitation succeeds, there would be no CommonWealth Board and dividends to CommonWealth’s preferred and common shareholders would be suspended, at least until a new Board may be elected.
  • If the Related/Corvex consent solicitation succeeds, we believe Moody’s and S&P would likely downgrade CommonWealth’s investment grade ratings because of the uncertainty about CommonWealth’s future financial management, because of Related/Corvex’s announced plan to increase debt, and because of Related’s track record of mismanagement of publicly owned real estate companies. Rating Agencies’ downgrades of CommonWealth’s debt would immediately raise the interest cost of CommonWealth’s floating rate debts, and ratings downgrades would make it more difficult and more expensive for CommonWealth to raise future capital, including the capital necessary to cure any defaults which Related/Corvex’s actions cause.
  • According to the terms of CommonWealth’s Series D preferred shares, the removal of the entire CommonWealth Board without cause as proposed by Related/Corvex would be a fundamental change that permits CommonWealth’s series D preferred shares to be converted into common shares at an exchange ratio which would dilute existing common shares.
  • Equally important as these financial defaults, if the Related/Corvex consent solicitation succeeds, we believe CommonWealth’s day to day business would suffer. In 2013, CommonWealth executed over 370 leases for approximately 5.2 million square feet of leasable space, and CommonWealth is on a similar pace for 2014. While CommonWealth is without a Board, we fully expect that competing landlords and some tenants would attempt to exploit the uncertainties which would result from removal of the entire Board at the expense of CommonWealth and its shareholders.

The CommonWealth Board and management have made good faith efforts to engage with all shareholders, including Related/Corvex.

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