CommonWealth REIT (NYSE:CWH) today released additional information concerning the previously undisclosed conflict of interest of Sam Zell. Zell recently joined the consent solicitation to remove the entire CWH Board, without cause, that is being conducted by Related Fund Management LLC and Corvex Management LP (together “Related/Corvex”).
Last week, Jeff Blau, CEO of the Related Companies, revealed during a television interview 1 that Zell was motivated to join Related/Corvex’s consent solicitation because of a dispute involving property in Hawaii which is owned by Select Income REIT (NYSE:SIR), a 44% owned subsidiary of CWH. CWH believes this motivation is the type of conflict of interest which must be disclosed in consent solicitation materials. CWH has notified the Securities and Exchange Commission (the “SEC”) of this apparent violation and requested that the SEC take appropriate actions.
Since the revelation of Zell’s conflict of interest last week, CWH has investigated the background of Zell’s dispute regarding the Hawaii property as follows:
- Zell, or one of his entities, is a controlling shareholder (33.4%) of Par Petroleum Corp. (OTCQB Marketplace:PARR). The recently appointed CEO of PARR, Will Monteleone, also simultaneously serves as a Vice President of Equity Group Investments, a Zell controlled private investment company.
- In September 2013, Par Petroleum acquired Hawaii’s largest oil refinery for approximately $365 million. The funding for this acquisition was largely provided by Zell or entities that he controls.
- The Hawaii refinery leases approximately 3.1 million sq.ft. of land and easements from SIR. CWH believes that some of these lands and easements may be essential for the continued operation of the refinery by Par Petroleum.
- There are three leases from SIR to Par Petroleum. These were long term leases, but are now nearing expiration with no further renewal options available to Par Petroleum when the current terms expire in 2019 and 2024.
- The current rent payable by Par Petroleum to SIR in 2013 was approximately $5.6 million/year. The rent under one of the leases is scheduled to reset effective April 1, 2014. Par Petroleum has recently been pressuring SIR to lower this rent. The rent under this lease was previously reset 10 years ago, and, consistent with market rents for similar property in the area, SIR believes the rent should materially increase. If the parties do not reach agreement on a rent reset, the new rent will be set at fair market value by an appraisal process pursuant to the lease terms.
- SIR was a 100% owned subsidiary of CWH until 2012. As noted above, CWH currently owns 44% of the shares of SIR and, therefore, CWH may significantly influence the election of all SIR’s Board of Trustees and other actions by SIR, including rents and renewals of leases which may be essential for Par Petroleum’s refinery operations.
- Related/Corvex have publicly announced that, if their consent solicitation succeeds, they intend to nominate Zell to be the Chairman of CWH and Zell’s long time lieutenant, David Hefland, to be the new president of CWH.
- In consent solicitation materials filed with the SEC and mailed to all CWH shareholders, Related/Corvex have stated that Zell does not have “any financial interest concerning the Company” other than valuable options granted to him by Related/Corvex. Also, in repeated mailings, press releases and public statements, Related/Corvex and Zell have proclaimed that they have identified a “truly independent” slate of replacement trustees for CWH which will be “led by Sam Zell.”
- If Zell and the rest of the Related/Corvex hand-picked slate of trustees for CWH are elected, Zell will be in a position to influence lease negotiations between SIR and Par Petroleum in a way that could be self-interested by Zell and detrimental to the shareholders of SIR, including CWH. CWH believes these facts constitute a clear conflict of interest by Zell with CWH.
- Last week, when Zell’s conflict of interest was first questioned by CWH, a spokeswoman for Related asserted that “there is simply no conflict of interest” and that the allegation is “laughable,” but she did not address the substance of the matter. 2 In response to a media question, Zell reportedly promised to buy “at least $50 million” of CWH shares, as if his doing so might somehow cure his conflict of interest. 3 Apparently, Zell and Related/Corvex are unwilling or unable to explain the contradiction between their representations to CWH shareholders in their SEC filings and the facts set forth above.
Adam Portnoy, President and Managing Trustee of CWH, made the following comments regarding the facts set forth above.
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