 Restoring the Health to Commonwealth
Presentation to CWH Shareholders
February 26, 2013
Exhibit 3 |
 2
Disclaimer
This presentation does not constitute either an offer to sell or a solicitation of an offer to buy any
interest in any fund associated with Corvex Management LP (“Corvex”) or Related Fund
Management, LLC (“Related”). Any such offer would only be made at the time a qualified offeree receives a confidential offering
memorandum and related subscription documentation.
The information in this presentation is based on publicly available information about CommonWealth
REIT (the “Company”), which has not been independently verified by Corvex or Related.
This document includes certain forward-looking statements, estimates and projections prepared with respect to,
among other things, general economic and market conditions, changes in management, changes in the
composition of the Company’s Board of Trustees, actions of the Company and its
subsidiaries or competitors, and the ability to implement business strategies and plans and pursue business opportunities.
Such forward-looking statements, estimates, and projections reflect various assumptions concerning
anticipated results that are inherently subject to significant uncertainties and contingencies
and have been included solely for illustrative purposes, including those risks and uncertainties detailed in the
continuous disclosure and other filings of the Company, copies of which are available on the U.S.
Securities and Exchange Commission website (“EDGAR”) at www.sec.gov/edgar. No
representations, express or implied, are made as to the accuracy or completeness of such forward-looking statements, estimates
or projections or with respect to any other materials herein. Corvex and Related may buy, sell,
cover or otherwise change the form of their investment in the Company for any reason at any
time, without notice, and there can be no assurances that they will take any of the actions described in this document.
Corvex and Related disclaim any duty to provide any updates or changes to the analyses contained in
this document. Shareholders and others should conduct their own independent investigation
and analysis of the Company. Except where otherwise indicated, the information in this document speaks only
as of the date set forth on the cover page. |
 3
Table of Contents
I.
Executive Summary
4
II.
History of Underperformance
18
III.
Valuation Summary
29
IV.
Related / Corvex Recommendations
39
V.
Appendix
51 |
 4
Executive Summary |
 5
Executive Summary
Introduction
Company trades at 60% discount
(1)
to Related/Corvex estimate of $40 NAV per share based
on property-by-property valuation analysis (representing 153%+
upside) –
70%+ discount to Related/Corvex target stock price of $55+ at 12/31/14
(representing 247%+ upside) achieved through internalization of management,
improved operating performance, shareholder friendly capital allocation,
and multiple expansion Externally managed structure skews incentives, reduces
CWH cash flow through excessive fees, destroys investor confidence, and
impairs valuation multiple (off already depressed earnings)
–
Management fees are primarily based on gross historical cost basis and incentivize
growth through acquisitions regardless of financial returns or strategic
rationale –
$395 million of fees paid out from 2007-2012, nearly 30% of market cap
–
In contrast, management and board own less than 1% of CWH stock
Poor
corporate
governance
with
misaligned
incentives,
classified
board,
complicated
charter,
poison pill, and limited independent trustees
Extended track record of underperformance on key operating, return, and valuation
metrics –
However, diversified asset base with highly saleable properties
Commonwealth REIT (“CWH”
or the “Company”) represents a collection of hard
assets which are massively undervalued today due to the Company’s externally
advised management structure and track record of
underperformance (1) Based on CWH closing
price of $15.85 on February 25, 2013. |
 6
Executive Summary
Introduction (continued)
We believe CWH must take immediate steps to close the massive discount between its
public market value of $15.85 per share and Related/Corvex NAV per share of
$40 –
Terminate plan to raise $450 million of equity at massive discount (see next
page) –
Internalize
management
structure,
adopt
a
market
cost
structure,
and
align
management
compensation with shareholder returns
–
Replace its existing Charter and Bylaws with new ones which conform to ISS and
Glass Lewis best practices
–
Use excess cash flow and proceeds from asset sales to buy back stock or delever
until the Company’s stock price exceeds its NAV
–
We derive a target CWH stock price of $55+ as of 12/31/14 through these
actions If CWH is unable or unwilling to do so, the board should be removed
and replaced with leaders who can and will make the necessary changes
|
 7
Executive Summary
Proposed Equity Offering
On the morning of February 25, 2013, Company announced a 27.0 million share
follow-on offering (31.1 million shares including over-allotment
option) –
Would represent a 32% increase in share count (37% with over-allotment
option) As a backdrop, CWH stock has materially underperformed over
last year and multi-year time
periods
–
After a recent bounce in the stock price caused largely by Related / Corvex stock
purchases, Company apparently decided to pursue dilutive equity
offering –
At a recent price of $15.85, CWH is apparently seeking to sell equity at a 57%
discount to
book
value
of
$36.82
(2)
CWH’s proposed use of proceeds for equity offering at massive discount is to
repay investment grade debt trading at prices ranging from 102% to 111% of
par As
the
largest
shareholders
of
CWH
(1)
,
we
call
on
management
to
immediately
stop
the
equity offering and engage with us in discussions
Recently proposed equity offering serves as latest example of poor
management, skewed incentives, and unacceptable capital allocation
(1)
Per Bloomberg 13F filings as of 12/31/12.
(2)
Book value calculated using SIR and GOV market value as of 2/25/13.
If the Board fails to adequately respond, Corvex and Related are prepared to seek the
removal of the Board so that it may be replaced with five truly independent trustees.
Corvex and Related would also be prepared to acquire all the outstanding shares at a
significant premium to the current market value |
 8
Executive Summary
Company Overview
Commonwealth
REIT
is
a
REIT
which
owns
central
business
district
(CBD)
office buildings, suburban office properties, and industrial properties in the
U.S. and Australia
Market
capitalization
of
$1.3
billion
and
TEV
of
$4.9
billion
(1)
–
Book
value
of
$36.82
per
share
as
of
12/31/12
(2)
–
$549.5
million
of
Stabilized
NOI
(3)
and
$487.3
million
of
LQA
GAAP
NOI
as
of
4Q12
(4)
Company’s portfolio consists of 452 wholly owned properties
(5)
across the U.S. and Australia
with a gross cost basis of approximately $7.0 billion
–
CWH generated 45%, 35%, and 20% of 3Q12 NOI from CBD, suburban, and industrial
properties,
respectively
(5)
–
Diversified tenant mix, with no tenant accounting for more than 2% of NOI
CWH is externally advised by REIT Management & Research LLC
(“RMR”) –
$77.3 million of business and property management fees paid during 2012 (7.5% of
2012 rental income and 5.8% of CWH market cap)
Company also owns 56% of Select Income REIT (SIR) and 18% of Government Properties
Income Trust (GOV), two REITs which were spun out of the predecessor company
to CWH (1)
Based on CWH closing price of $15.85 on February 25, 2013. TEV calculated using SIR and GOV
market value as of 2/25/13.
(2)
Book value calculated using SIR and GOV market value as of 2/25/13. (3)
Stabilized NOI per Related / Corvex property analyses. See pg. 35 for additional detail on
Stabilized NOI. (4)
Represents LQA GAAP NOI from wholly owned properties as of 4Q12, per CWH Supplemental. (5)
Including properties moved to discontinued operations during 4Q12. |
 9
Executive Summary
Related & Corvex Overview
Related and Corvex collectively beneficially own 8.2 million shares of CWH
(9.8% of shares outstanding)
Related Companies
–
Related Fund Management, LLC is an affiliate of Related Companies
(“Related”), one of the most prominent privately-owned real
estate firms in the United States –
Formed 40 years ago, Related is a fully-integrated, highly diversified
industry leader with experience in virtually every aspect of development,
acquisitions, management, finance, marketing and sales
–
Related’s existing portfolio of real estate assets, valued at over $15
billion, is made up of best-in-class mixed-use, residential,
retail, office and affordable properties Corvex Management
–
Value-based
investing
across
the
capital
structure
in
situations
with
clearly
identifiable
catalysts
–
Active investing to create asymmetric risk/reward opportunities
–
13D investments since inception include AboveNet (acquired by Zayo in March 2012),
Corrections Corporation of America (elected REIT status in February 2013),
Ralcorp (acquired by ConAgra in November 2012), and ADT (Keith Meister
joined Board in December 2012) |
 10
Executive Summary
Investment Thesis
CWH represents a collection of hard assets which are massively undervalued
today due to the Company’s externally advised management structure and
track record of underperformance
Assets with cost basis of $7.0 billion and Related/Corvex NAV estimate of $40 per
share, trapped inside an entity which structurally fails shareholders,
resulting in enterprise value of only $4.9 billion and stock price of
$15.85 Externally advised structure distorts management incentives, reduces
CWH cash flow through excessive fees, destroys investor confidence, and
impairs valuation multiple (off already depressed earnings)
–
Management fees are primarily based on gross historical cost basis and incentivize
growth through acquisitions regardless of financial returns or strategic
rationale –
Over the last 3 years, CWH has paid out $209 million of management fees to RMR,
while
CWH’s
market
cap
has
declined
by
$647
million
(1)
Management
and
Board
collectively
own
only
630,000
shares
of
CWH
(0.8%
of
the
Company) but 100% of RMR
–
We estimate difference between management fees and market cost structure alone
represents a 15%+ improvement in CWH equity value (before multiple
expansion) –
Company trades at nearly 40% discount to peers on unlevered cap rate basis
(1)
Based on CWH closing price of $15.85 on February 25, 2013. Change in market
capitalization excludes impact of CWH follow-on offerings during the last three years
and SIR IPO and follow-on offering. |
 11
Executive Summary
Investment Thesis (continued)
–
However, disconnect between CWH asset fundamentals and valuation, with diversified
tenant mix, staggered lease expirations, and highly saleable
properties 4 of
CWH’s
top
5
cities
ranked
in
top
40
office
investment
markets
(1)
Poor corporate governance with misaligned incentives, classified
board, complicated charter,
poison pill, and limited independent trustees
–
“Independent”
Trustees
appear
conflicted
by
common
sense
definition
–
Poor ISS and Glass Lewis corporate governance scores
–
Over $2 billion of CWH related party transactions in the last 5 years
Management has track record of absolute and relative underperformance on basically
every metric, over any relevant time period
–
Negative 8% three year FFO per share CAGR
–
12-28% annualized stock price underperformance over 1, 2, and 3 year time
frames Poor investor disclosure and investor communications
–
Unclear and inconsistent strategy
–
No published asset list
Given its misaligned incentives and continued underperformance, management has lost
the credibility of the investment community
(1)
Per Marcus & Millichap’s 2012 National Office Report.
|
 12
Executive Summary
Multiple Ways to Create Value
We believe CWH must take immediate steps to close the massive discount
between its public market value and NAV; if CWH is unable or unwilling to do
so, the board should be removed and replaced with leaders who can and will
make the necessary changes
We call on CWH to immediately:
–
Terminate plan to raise $450 million of equity at massive discount
–
Internalize its management structure, adopt a market cost structure, and align
management compensation with shareholder returns
–
Replace its existing Declaration of Trust and Bylaws with new ones which conform
to ISS and Glass Lewis best practices
–
Appoint three new independent trustees
–
Cease all related party asset sales
–
Cease all acquisition and development activity until CWH’s stock price
exceeds its NAV; no more dilutive equity offerings
–
Use excess cash flow and proceeds from asset sales to buy back stock or delever
until the Company’s stock price exceeds its NAV
–
Manage the Company in ways which maximize long-term CWH shareholder value,
not fees paid to RMR |
 13
Executive Summary
Multiple Ways to Create Value (continued)
If
CWH
disagrees
with
our
proposal
or
fails
to
respond
within
30
days,
we
plan
to
seek
to
remove the Board and replace it with 5 independent trustees
–
Requires action by written consent and 2/3 shareholder vote, which we believe is
achievable
–
New independent board would then pursue same strategy we recommend on previous
page
Significant financial leverage enhances equity returns once CWH is properly
structured, faith in operations and capital allocation is restored, and the
Company’s assets are no longer severely mispriced
–
As
summarized
on
the
following
pages,
Related/Corvex
estimate
an
NAV
of
$40
per
share, and a target stock price of $55+ at 12/31/14
–
Book
value
of
$36.82
per
share
(1)
as
of
12/31/12,
reaffirmed
by
Board’s
independent
compensation committee each time fees are paid to RMR
(1)
Book value calculated using SIR and GOV market value as of 2/25/13.
|
 14
Executive Summary
Valuation Summary
We
estimate
an
NAV
per
share
of
$40
based
on
bottom-up
property-by-property
analysis and a target price of $55+
at 12/31/14
NAV represents estimate of value today if market overhangs from external
management, poor corporate governance, and extended underperformance are
removed NAV can also be thought of as liquidation value of the current
portfolio, before benefit from any other value enhancing actions (which we
believe are plentiful) We value CWH at a stock price of $55 or higher at
12/31/14 through internalization of management,
operational
turnaround,
improved
capital
allocation,
and
multiple
expansion
Stock
Related / Corvex
Price
NAV
Stock Price
$15.85
$40.07
% Change
--
152.8%
Cap
Rate
of
Stabilized
NOI
(1)
11.18%
7.91%
Cap
Rate
of
LQA
GAAP
NOI
(2)
9.92%
7.02%
Price / LQA Normalized FFO
5.9x
14.9x
Price / GAAP Book Value per Share
0.43x
1.09x
Price / Square Foot
(3)
$89
$125
Dividend Yield @ Current $0.25 / Qtr
6.31%
2.50%
(1)
Stabilized NOI assumes stabilization costs of approximately $141 million. (2)
Wholly-owned LQA GAAP NOI of $487.3 million per CWH 4Q12 Supplemental. (3)
Wholly-owned square feet per Company filings and Related / Corvex analysis. |
 15
Executive Summary
Valuation Summary (continued)
While some metrics and peers are more relevant than others, it is clear that
CWH trades at an enormous discount to comps across a variety of key
measures
(1)
Office Comps group for Cap Rate, FFO, AFFO, and Price / Square Foot based on PDM,
HIW, CLI, BDN, and PKY. (2)
Office Comps group for LQA EBITDA and Dividend Yield per Citi Research.
Office
Implied
Comps
CWH
%
Current
Avg.
Price
Change
Cap Rate of Stabilized NOI
11.2%
7.2%
$48.20
204.1%
LQA EBITDA Multiple
10.6x
17.5x
$54.32
242.7%
Price / LQA Normalized FFO
5.9x
11.8x
$31.72
100.1%
Price / Square Foot
$89
$175
$72.79
359.2%
Dividend Yield @ Current $0.25 / Qtr
6.31%
3.30%
$30.30
91.2%
Stock Price (Current / Avg.)
$15.85
$47.46 |
 16
Executive Summary
Summary Public Comparables
(1)
Reflects
recurring
FFO
per
share
for
the
year
ended,
December
31,
2012.
CWH trades at a significant discount to peers on all key measures
BDN
PKY
HIW
CWH
CLI
RMZ
PDM
(1)
Market Comparables
($
in
millions,
except
per
share
amounts)
As of 1/15/13
Equity
Enterprise
Implied
Ent. Value
G&A / Equity
Net Debt /
Total Debt /
LTM FFO
LTM AFFO
Credit Ratings
Ticker
Company
Name
Price
Div. Yield
Market Cap.
Value
Cap Rate
/ SF
Market Cap.
Ent. Value
Gross Assets
Multiple
Multiple
Moodys / S&P
CWH
CommonWealth REIT
$15.85
6.3%
$1,338
$4,914
9.9%
$88.70
3.9%
76.3%
44.1%
4.7x
10.1x
Baa3
/
BBB-
PDM
Piedmont Office Realty Trust Inc.
$18.70
4.3%
$3,133
$4,538
6.5%
$221.39
0.7%
30.9%
27.6%
13.9x
23.1x
NR / BBB
HIW
Highwoods Properties Inc.
34.77
4.9%
2,933
4,869
7.3%
164.02
1.3%
39.2%
44.8%
12.7x
NA
NR
/
BBB
CLI
Mack-Cali Realty Corp.
26.51
6.8%
2,656
4,802
8.3%
151.54
1.8%
44.7%
36.4%
9.9x
NA
NR / BBB
BDN
Brandywine Realty Trust
12.76
4.7%
1,867
4,576
7.5%
192.81
1.6%
55.1%
47.3%
11.0x
16.0x
NR
/
BBB
PKY
Parkway Properties Inc.
15.83
2.8%
889
1,750
6.7%
147.66
1.8%
41.5%
44.8%
11.4x
20.6x
NR / NR
Average
$21.71
4.7%
$2,296
$4,107
7.2%
$174.83
1.4%
42.3%
40.2%
11.8x
19.9x
Indexed Price Performance (LTM 1/15/13 Total Return)
1/15/12
3/28/12
6/8/12
8/21/12
11/2/12
1/15/13
60
80
100
120
140
160
180
(15.0%)
16.1%
71.7%
13.1%
32.1%
6.4%
0.8%
-
- |
 17
Executive Summary
Work Completed to Date
Valuation
–
Property-level valuation and due diligence of 384 CWH properties, representing
approximately 90% of the Company’s wholly owned assets by square
footage and historical cost basis
Work included analysis of market rental, vacancy and cap rate trends,
stabilization costs, capital expenditures, comparable transactions,
meetings and calls with local brokers, and site visits
–
Analysis of historical operating performance, total shareholder return, valuation,
and other metrics as compared to peers
Corporate Governance
–
Retained Gibson Dunn as corporate counsel, Ober Kaler as Maryland counsel, Ice
Miller as Indiana insurance counsel, and D.F. King as proxy advisor
–
Review of CWH Declaration of Trust, Bylaws, Proxy, and SEC filings
Review of Maryland corporate law and Indiana insurance regulations as
applicable –
Review of CWH bond indentures and credit agreements
–
Review of ISS and Glass Lewis proxy advisory reports
|
 18
History of Underperformance |
 19
History of Underperformance
CWH has performed poorly in absolute terms and underperformed its peers on
almost any metric over any relevant time period
Valuation
Stock price performance and total shareholder return
NOI, EBITDA, FFO, and CAD / share growth
Acquisitions and return on investment
Cost structure
Corporate governance |
 ($ in
millions, except per share amounts) As of 1/15/13
Equity
Enterprise
Implied
Ent. Value
G&A / Equity
Net Debt /
Total Debt /
LTM FFO
LTM AFFO
Credit Ratings
Ticker
Company Name
Price
Div. Yield
Market Cap.
Value
Cap Rate
/ SF
Market Cap.
Ent. Value
Gross Assets
Multiple
Multiple
Moodys / S&P
CWH
CommonWealth REIT
$15.85
6.3%
$1,338
$4,914
9.9%
$88.70
3.9%
76.3%
44.1%
4.7x
10.1x
Baa3 / BBB-
PDM
Piedmont Office Realty Trust Inc.
$18.70
4.3%
$3,133
$4,538
6.5%
$221.39
0.7%
30.9%
27.6%
13.9x
23.1x
NR / BBB
HIW
Highwoods Properties Inc.
34.77
4.9%
2,933
4,869
7.3%
164.02
1.3%
39.2%
44.8%
12.7x
NA
NR / BBB-
CLI
Mack-Cali Realty Corp.
26.51
6.8%
2,656
4,802
8.3%
151.54
1.8%
44.7%
36.4%
9.9x
NA
NR / BBB
BDN
Brandywine Realty Trust
12.76
4.7%
1,867
4,576
7.5%
192.81
1.6%
55.1%
47.3%
11.0x
16.0x
NR / BBB-
PKY
Parkway Properties Inc.
15.83
2.8%
889
1,750
6.7%
147.66
1.8%
41.5%
44.8%
11.4x
20.6x
NR / NR
Average
$21.71
4.7%
$2,296
$4,107
7.2%
$174.83
1.4%
42.3%
40.2%
11.8x
19.9x
20
History of Underperformance
Summary Public Comparables
(1)
Reflects
recurring
FFO
per
share
for
the
year
ended,
December
31,
2012.
CWH trades at a significant discount to peers on all key measures
BDN
PKY
HIW
CWH
CLI
RMZ
PDM
(1)
1/15/12
3/28/12
6/8/12
8/21/12
11/2/12
1/15/13
60
80
100
120
140
160
180
(15.0%)
16.1%
71.7%
13.1%
32.1%
6.4%
0.8%
Market
Comparables
Indexed
Price
Performance
(LTM
1/15/13
Total
Return) |
 ($ in millions)
For the Fiscal Year Ending December 31,
2010
2011
2012
Total Return (if held since)
(1)
(21.3%)
(24.3%)
6.6%
SF Owned per Share (% growth)
(15.9%)
(5.2%)
(0.6%)
NOI per Share (% growth)
(19.1%)
(4.2%)
16.1%
EBITDA per Share (% growth)
(22.1%)
(4.7%)
(27.2%)
FFO per Share (% growth)
(13.8%)
(9.4%)
0.0%
CAD per Share (% growth)
(23.7%)
(26.5%)
(16.9%)
Fees Paid to RMR
$62.2
$69.5
$77.3
% growth
3.4%
11.7%
11.2%
(1)
Total return includes dividends paid. Total return assumes stock is held since
January 1st of the specified year through January 15th, 2013.
21
History of Underperformance
Operating Performance
Value
accruing to
RMR, not
shareholders
Poor performance on key financial metrics, while fees paid to RMR continue to
grow |
 22
History of Underperformance
Cost Structure Comparison
At a median peer operating expense level of 40.0% of rental income, CWH property
operating expenses could be reduced by $32 million
CWH’s cost structure is worse than peers despite greater scale
(1)
Analysis excludes PKY, which offers fee-based real estate services through
wholly owned subsidiaries of the company, which in total manage and/or lease approximately
10.8 million square feet for third-party owners at January 1, 2013 (compared to
a property portfolio of 11.9 million square feet). Peer
: Peer
CWH
PDM
HIW
CLI
BDN
Median
(1)
less CWH
LQA Rental Income / Revenue
$1,047
$544
$536
$665
$570
LQA Operating Expenses
$450
$220
$197
$269
$225
% of Rental Income
43.0%
40.5%
36.8%
40.4%
39.5%
40.0%
(3.1%)
GAAP NOI
$596
$324
$339
$396
$345
% Margin
57.0%
59.5%
63.2%
59.6%
60.5%
60.0%
3.1%
LQA G&A
$58
$21
$36
$50
$29
% of Rental Income
5.6%
3.8%
6.8%
7.6%
5.1%
5.9%
0.3%
% of Gross Real Estate Assets
0.8%
0.5%
1.0%
0.9%
0.6%
0.7%
(0.1%)
% of Market Cap
3.9%
0.6%
1.2%
1.8%
1.5%
1.3%
(2.5%)
GAAP EBITDA
$538
$303
$302
$346
$316
% Margin
51.4%
55.7%
56.4%
52.0%
55.5%
55.6%
4.2% |
 23
History of Underperformance
Acquisitions/CapEx and Return on Investment
Management
continues
to
pursue
growth
acquisitions
/
development
despite
poor
returns and
significantly undervalued CWH stock due to skewed incentives created by RMR’s
external management of the Company
CWH has spent $2.7 billion on net acquisitions and capex (over 2x CWH’s
entire market cap) since 2007, while book value per share has grown 2.4%
cumulatively and 0.5% on an annualized basis
(1)
Book
value
calculated
using
SIR
and
GOV
market
value.
2012
Book
value
uses
stock market prices as of 2/25/13.
(2)
Metric shown includes SIR.
'07-'12
'07-'12
2007
2008
2009
2010
2011
2012
CAGR
Cumulative
Book Value
(1)
$2,198
$2,217
$2,259
$2,702
$2,816
$3,097
7.1%
40.9%
Book Value per Share
$36.11
$34.68
$35.66
$37.53
$33.24
$36.96
0.5%
2.4%
Memo: Shares Outstanding
60.9
63.9
63.4
72.0
84.7
83.8
6.6%
37.6%
Gross Real Estate Assets
(2)
$6,156
$6,242
$6,324
$6,357
$7,244
$7,829
4.9%
27.2%
Cumulative
Real estate acquisitions and improvements
$423
$416
$665
$973
$868
$763
$4,109
Proceeds from sale of properties, net
4
334
212
604
264
10
1,428
Net Acquisitions/CapEx
$419
$83
$453
$369
$604
$753
$2,681
% of Recent Market Cap
31.0%
6.1%
33.5%
27.3%
44.6%
55.6%
198.1%
Total RMR Management Fees
$59.7
$63.2
$62.6
$62.2
$69.5
$77.3
$395
% of Recent Market Cap
4.4%
4.7%
4.6%
4.6%
5.1%
5.7%
29.2% |
 24
History of Underperformance
Poor Corporate Governance
ISS
recommended
voting
against
incumbent
board
members
last
year
(per
ISS
Proxy Advisory Services report, April 25, 2012) |
 25
History of Underperformance
Board of Trustees
Significant overlap of board members across RMR entities, including
“Independent”
trustees
Travel Centers
Five Star
RMR Real Estate
Name
Title
CWH
HPT
SNH
GOV
SIR
of America
Senior Living
Income Fund
Senior Management:
Adam D. Portnoy
Vern D. Larkin
Jennifer B. Clark
Board of Directors:
Adam D. Portnoy
Barry D. Portnoy
William A. Lamkin
President & Managing Trustee
Director of Internal Audit
Secretary
President & Managing Trustee
Managing Trustee
Partner at Ackrell Capital
Founder
&
CEO
of
Turf
Products
Same Job, Different Company?
“Independent”
trustees appear to be far from independent
Frederick N. Zeytoonjian
|
 26
History of Underperformance
Analyst Perspectives
Management has lost the credibility of the analyst community
Okay, okay. And then, Adam [Portnoy], we’re both fiduciaries to investors, so
don’t take this personally and take it constructively please. But when
I talk to investors about CommonWealth, the investment strategy, the balance sheet, the operations, there’s just zero investor
confidence out there. The term that most people use is
“uninvestable.” ”
Stifel Nicholas: Q2 2012 Earnings Call, August 8, 2012
Well, Adam [Portnoy] I have to say this, you’ve spent a lot of time blaming
the problems on others and I guess it worked well for someone yesterday who
just got reelected, your leverage is up debt plus preferred is now over 80%, your G&A quarter over quarter went from $12.7
million
to
$14.6
million.
You
are
on
a
$58
million
run
rate
for
G&A.
You
have
concluded
that
greater
than
50%
of
your
assets
are
challenged
and
CommonWealth’s
year-to-date
performance
is
down
14.7%
versus
the
RMZ
which
is
up
11.2%.
I
don’t
have
any
questions,
thanks.
”
Stifel Nicholas: Q3 2012 Earnings Call, November 7, 2012
CWH appears to have chosen to discontinue Q&A portion of its conference call as
of 4Q12 earnings |
 27
History of Underperformance
Analyst Perspectives (continued)
Analysts explicitly discount CWH for its externally managed structure and track
record of underperformance
Citi Research: February 25, 2013
Comment from underwriter firm on same day as proposed equity offering
We rate the shares of CWH Sell (3). We believe that CommonWealth REIT's track record of operational
underperformance relative to the office REIT peer group stems from the company’s
externally advised and managed structure, which results in uneconomic decisions and
puts shareholders and management on an uneven playing field. We view the conflicts of interest inherent
in the company’s structure as the primary factor for avoiding shares of CWH. Nor do we, however, view the current valuation as sufficiently compelling.
|
 28
History of Underperformance
Management Commentary
Management
commentary
appears
out
of
touch
with
business
given
a
50%
cut
in
CWH dividend only one quarter later
And
then
the
last
question,
the
obvious
question,
as
you
are
bouncing
around
$18,
$19
a
share,
high
10s
on
the
dividend,
clearly
when
you're at that level, people are either anticipating a diminution or a decline in
share value and/or a dividend adjustment. And it seems to me that if the
stocks price can't get back up into the low to mid 20's, a dividend cut would be the prudent thing to do. In fact, if you cut the dividend
down
to
$1.20
you'd
still
have
one
of
the
highest
dividends
in
the
office
industrial
REIT
space.
So
what's
your
thought
process
on
all
that?
”
Stifel Nicholas: Q1 2012 Earnings Call, May 3, 2012
Yeah.
I'm
glad
you
asked
that,
John,
because
it's
something
that
a
lot
of
investors
have
asked
us
about,
and
it's
the
security
of
the
dividend.
Right
now,
we
acknowledge
that
it
certainly
appears
that
the
market
is
expecting
a
dividend
cut.
We
disclosed
our
CAD
payout ratio as a 104%. That is above 100%, it's not much above 100%. We think we can maintain this dividend for the foreseeable
future.
If the payout ratio were to balloon up, well above 104%, well above 100%, and be
there for quite some time, I think we'd have to seriously
consider
reducing
the
dividend.
But
right
now,
there's
no
intention
from
management
or
the
Board,
to
do
anything
with
the
dividend.
Now that might change as circumstances change. But today, we have no intention of
changing the dividend. And
I
have
to
tell
you,
it
is
–
at
times
it
is
perplexing
to
us,
because
we
look
at
our
numbers
and
say
we
can
afford
the
dividend,
and
the
dividend
doesn't
look
like
it
should
be
at
risk.
Yet
the
stock
price
seems
to
indicate
that
everybody
else
doesn't
see
that.
They
think
that
we're
going
to
–
that
there
should
be
a
dividend
cut.
Maybe
they
are
anticipating
something
years
from
now,
or
a
long
time
from
now.
But
I
don't
–
it
is
–
sometimes
it's
as
perplexing
to
us
as
to
maybe
you,
John,
but
that's
our
thoughts
on
it.
”
Adam Portnoy: Q1 2012 Earnings Call, May 3, 2012 |
 29
Valuation Summary |
 Related did not rely on book value and
instead, did a bottoms up real estate
valuation on 90% of the portfolio
30
Valuation Summary
Underwriting Methodology
Related performed site visits,
met with local brokers and had
appropriate internal Related teams
review underwriting assumptions
Related used Gross Asset Value
(“GAV”) and Cap Rate Valuation
methodologies to determine NAV per
share.
Related analyzed market rental,
vacancy and cap rate trends as
well as market research reports
Related and Corvex believe CWH’s wholly owned real estate is worth $7.0 billion
today (compared to a cost basis of $7.0 billion and implied market value of
$4.9 billion) based on property-by-property underwriting
(1)
CWH $4.9 billion enterprise value calculated using SIR and GOV market value as of
2/25/13. 1
2
3
4 |
 31
Valuation Summary
Underwriting Methodology (continued)
The most extensive property level detail that CWH provides is a Schedule 3
(accumulated
depreciation
schedule)
produced
at
the
end
of
every
fiscal
year.
This
report
does
not
show
the
assets’
names
or
addresses
and
is
merely
a
list
of properties identified by an ID number. The following represents our
underwriting methodology:
1.
Associate each property ID in the Schedule 3 with an address, name and portfolio where
appropriate
2.
Remove any SIR spin-off properties (76 total) based on Schedule 1.1 of Form 8-K dated
3/31/12
3.
Account for any acquisitions and dispositions during 2012 and 2013 4.
Perform extended due diligence on 367 properties •
Represents 90% of the portfolio’s total SF •
Represents 90% of the portfolio’s total cost basis 5.
Extrapolate results to the rest of the portfolio 6.
Analyze market rental, vacancy and cap rate trends and meet with brokers, research
comparable transactions and perform site visits to further improve property level
assumptions 7.
Determine CWH’s NAV per share based on gross asset value (“GAV”) and cap rate
methodologies
We believe GAV is a more appropriate indicator of valuation because of the nature of
CWH’s portfolio |
 32
Valuation Summary
Underwriting Summary
($ and SF in millions, except PSF)
Total Portfolio
Underwritten Portfolio
Variance
# of
# of
% of
% of
% of
Property Type
Properties
Cost Basis
(1)
SF
Properties
Cost Basis
SF
Properties
Cost Basis
SF
Office -
CBD
47
$3,367
20.5
43
$3,067
19.5
91%
91%
95%
Office -
Suburban
198
2,543
19.6
162
2,360
17.3
82%
93%
88%
Industrial
86
583
9.7
69
399
7.3
80%
68%
75%
Hallwood portfolio
98
358
4.1
80
299
3.0
82%
83%
74%
Flex -
Suburban
7
79
0.4
7
79
0.4
100%
100%
100%
Specialty
6
74
0.5
6
74
0.5
100%
100%
100%
Portfolio
442
$7,004
54.8
367
$6,278
48.1
83%
90%
88%
Remaining Properties
75
726
6.7
17%
10%
12%
Total Portfolio
442
$7,004
54.8
442
$7,004
54.8
100%
100%
100%
($ and SF in millions, except PSF)
Total Portfolio
Underwritten Portfolio
Variance
# of
# of
% of
% of
% of
Vintage
Properties
Cost Basis
(1)
SF
Properties
Cost Basis
SF
Properties
Cost Basis
SF
Before 2000
80
$1,318
10.5
57
$1,014
7.3
71%
77%
70%
2000 -
2005
166
1,591
15.2
136
1,484
13.5
82%
93%
89%
2006 -
2008
128
1,065
11.6
124
1,043
11.5
97%
98%
99%
2009 -
2011
63
2,474
14.0
45
2,181
12.3
71%
88%
87%
Since 2012
5
557
3.5
5
557
3.5
100%
100%
100%
Portfolio
442
$7,004
54.8
367
$6,278
48.1
83%
90%
88%
Remaining Properties
75
726
6.7
17%
10%
12%
Total Portfolio
442
$7,004
54.8
442
$7,004
54.8
100%
100%
100%
(1)
Portfolio Summary -
by Vintage
Portfolio Summary -
by Property Type
Cost basis reflects CWH's purchase price accounting (land plus building and improvements) adjusted for
actual transaction prices according to RealCapitalAnalytics and therefore might not be
reflective of actual acquisiton prices. |
 33
Valuation Summary
GAV Methodology
We
calculate
an
NAV
of
$40
per
share
for
CWH.
This
represents
a
132%
premium
to the Company’s stock price of $15.85 as of 2/25/13.
1.
Stratify the portfolio into 5 vintages
2.
Analyze the variances between current market value and original cost basis
3.
Extrapolate to rest of portfolio to derive GAV of CWH’s real estate
4.
Subtract CWH’s unsecured credit facilities, term loans, mortgage notes and
preferred stock 5.
Add CWH’s cash, and pro rata ownership of SIR and GOV shares
Main Assumptions
Output Range (NAV per Share)
Premium (Discount) to Share Price
8%
$40.07
GAV
Methodology
Before 2000
2000 -
2005
2006 -
2008
2009 -
2011
Since 2012
(4)%
(17)%
5%
9%
1
132% |
 34
Valuation Summary
Cap Rate Methodology
Based
on
a
cap
rate
approach,
we
calculate
an
NAV
of
$35.88
-
$46.85
per
share
for CWH. This is a 126%
- 196% premium to the Company’s stock price of $15.85
as of 2/25/13.
1.
Analyze the NOI generated from the 367 subset properties ($493 million)
2.
Extrapolate results to remaining portfolio to derive a portfolio NOI ($550
million) 3.
Assess average cap rate for the 367 subset properties
4.
Establish
a
range
of
cap
rates
(7.25%
-
8.25%)
5.
Subtract CWH’s unsecured credit facilities, term loans, mortgage notes and
preferred stock 6.
Add CWH’s cash, and pro rata ownership of SIR and GOV shares
Please note that while a cap rate valuation may be informative, we believe that
GAV is a more appropriate method of measuring CWH’s real estate because
of the potential for value creation if the portfolio is better managed
Main Assumptions
Output Range (NAV per Share)
Premium (Discount) to Share Price
Cap Rate
Valuation
Cash NOI ($ in millions)
Cap Rate
$550
7.25%
–
8.25%
2
$35.88
–
$46.85
126%
–
196% |
 35
Valuation Summary
Stabilized NOI Bridge
Related has underwritten $550 million of NOI for the wholly owned portfolio
through better property management and investment in challenged properties
NOI Bridge
($ in millions)
LTM
12/31/12
Portfolio NOI
$593.4
Wholly-Owned NOI
513.7
Wholly-Owned % of Portfolio
86.6%
Portfolio Straight Line Rent
$39.0
Wholly-Owned % of Portfolio
86.6%
Wholly-Owned Straight Line Rent
$33.8
Wholly-Owned NOI
$513.7
Wholly-Owned Straight Line Rent
33.8
Wholly-Owned Cash NOI
$479.9
Wholly-Owned Cash NOI
$479.9
LTM Property Management Savings
11.0
Stabilization Value
59.1
Underwritten NOI
$550.0 |
 36
Valuation Summary
Accretive Case Study –
109 Brookline Avenue (Boston, MA)
Location
Property Description
Property Type:
Office -
CBD
Asset Class:
B
Estimated Occupancy:
100.0%
Net Rentable Square Feet:
287,946
Date Acquired:
9/1/95
Cost Basis:
$34 million
Cost Basis PSF:
$117.30
Mark-to-Market Assumptions
Rental Income:
$36.00 PSF
Recoveries:
$0.55 PSF
Vacancy & CL:
5.0%
Total Operating Expenses:
$11.00 PSF
NOI:
$7 million
Cap Rate:
6.00%
Stabilization Costs:
NA
Concluded Value:
$114 million
Concluded Value PSF:
$395.83
Commentary
Site
The Property is a 3-story, Class-B office building located in the
Brighton/Allston/Fenway submarket of Boston, MA. More
specifically, the Property is a half block from Fenway,
approximately one half mile northeast of Boston's Longwood
Medical and Academic Area. The building was constructed in
1875 and underwent a complete renovation in 2000. It is situated
on approximately 2.6 acres with an average floorplate of 96,000
SF. There are 112 surface parking spaces with subway access to
the Green line available within a half block. The Property benefits
from a biomedical research concentration to the north and the
Longwood Medical and Academic Center to the south with the
nearby Beth Israel Deaconess Medical Center. |
 37
Valuation Summary
Neutral Case Study –
1735 Market Street (Philadelphia, PA)
Location
Property Description
Property Type:
Office -
CBD
Asset Class:
A
Estimated Occupancy:
98.2%
Net Rentable Square Feet:
1.2 million
Date Acquired:
6/1/98
Cost Basis:
$226 million
Cost Basis PSF:
$182.43
Mark-to-Market Assumptions
Rental Income:
$25.00 PSF
Recoveries:
$1.35 PSF
Vacancy & CL:
7.0%
Total Operating Expenses:
$11.50 PSF
NOI:
$16 million
Cap Rate:
6.75%
Stabilization Costs:
NA
Concluded Value:
$240 million
Concluded Value PSF:
$194.09
Commentary
Site
The Property, also known as One Mellon Bank, is a 55-story
office building located in the Downtown submarket of
Philadelphia. The building was constructed in 1990 on a one-acre
parcel of land and contains an additional 46,406 SF of storage
space. Typical floor size is 22,400 SF. Parking is provided by 180
underground spaces and nearby, 3rd party parking garages. The
building is located three blocks west of Philadelphia's City Hall, in
the heart of the financial district. Based on published information,
approximately 40 tenants occupy the building, many of them in
the financial sector including Barclay's, Deutsche Securities, and
BNY Mellon. |
 38
Valuation Summary
Dilutive Case Study –
One Franklin Plaza (Philadelphia, PA)
Property Type:
Office -
CBD
Asset Class:
A
Estimated Occupancy:
0.0%
Net Rentable Square Feet:
624,000
Date Acquired:
12/1/97
Cost Basis:
$76 million
Cost Basis PSF:
$120.99
Mark-to-Market Assumptions
Rental Income:
$20.50 PSF
Recoveries:
$0.81 PSF
Vacancy & CL:
12.0%
Total Operating Expenses:
$11.50 PSF
NOI:
$5 million
Cap Rate:
7.25%
Stabilization Costs:
$48 million
Concluded Value:
$15 million
Concluded Value PSF:
$23.96
The Property is a 24-story, Class A, office building located in the
Downtown submarket of Philadelphia. The building was
constructed in 1980 on a 0.91-acre parcel with typical floor plates
of 26,000 SF. There are approximately 187 on-site underground
parking spaces. GlaxoSmithKline is expected to vacate the
building in Q1 2013 in favor of a new campus in Navy Yard. In
early 2011, CWH said that it attempted to retain GSK by offering
a $110MM overhaul of the building, including new skin, floor-to-
ceiling glass, raised ceiling heights, and a state-of-the art HVAC
system. These improvements would have equated to a value
$176/SF, well in excess of the 1997 acquisition price. Notably,
neither CoStar nor Loopnet currently show any availability or
asking rates for the property despite the pending vacancy.
Location
Property Description
Commentary
Site |
 39
Related / Corvex Recommendations |
 40
Related/Corvex Recommendations
RMR Overview
RMR
was
founded
in
1986
and
now
has
approximately
$22
billion
of
gross
assets under management through publicly traded REITs and closed-end
funds
Headquartered in Newton, MA and founded by Barry Portnoy, who remains Chairman and
majority owner of RMR today and is a Managing Trustee of CWH
–
Adam Portnoy, son of Barry Portnoy, is President and Chief Executive Officer of
RMR, and President and a Managing Trustee of CWH
–
Barry Portnoy’s son-in-law is also an officer of RMR
–
All executive officers of CWH are also officers of RMR
CWH predecessor HRPT was listed on NYSE in 1986
–
HRPT has spun off four subsidiary companies since 1995: Hospitality Properties
Trust (HPT), Senior Housing Properties Trust (SNH), Government Properties
Income Trust (GOV), and Select Income REIT (SIR)
–
HRPT changed its name to Commonwealth REIT in July 2010
–
All HRPT successor companies remain externally managed by RMR
Each company generally has non-compete agreements and ROFR arrangements
with one another (based on their respective property types) through their various
management agreements with RMR
Other RMR entities include RMR Real Estate Income Fund (RIF), Five Star Quality
Care (FVE), and Travel Centers of America
|
 41
Related/Corvex Recommendations
How RMR is Paid
Business management agreement
–
Requires
CWH
to
pay
RMR
at
annual
rate
of
0.7%
of
the
historical
cost
basis
of
U.S.,
Canadian, and Puerto Rican investments for the first $250,000 of
such investments and
0.5% thereafter
1.0% fee level for investments outside the U.S., Canada, and Puerto Rico
–
Additionally, RMR is entitled to an incentive fee equal to 15% of the product of
(i) weighted average fully diluted shares outstanding and (ii) the excess
of FFO per share over FFO per share in the preceding fiscal year
No incentive paid in recent years given continued FFO per share declines
Property management agreement
–
Provides for fees equal to 3.0% of gross collected rents, and construction
supervision fees equal to 5.0% of construction costs
CWH is managed under two agreements with RMR, which generate steady fees
based on gross historical cost basis and gross rents
'07-'12
2007
2008
2009
2010
2011
2012
Cumulative
Business Management Fees
$31.0
$33.4
$33.6
$34.7
$39.2
$43.6
$215.6
Property Management Fees
28.7
29.8
29.0
$27.5
$30.3
$33.7
$179.0
RMR Management Fees
$59.7
$63.2
$62.6
$62.2
$69.5
$77.3
$394.6
% of Recent Market Cap
4.4%
4.7%
4.6%
4.6%
5.1%
5.7%
29.2%
% of Rental Income
7.1%
8.4%
7.4%
7.3%
7.6%
7.5% |
 42
Related / Corvex Recommendations
Recommendation #1: Internalize Manager
CWH should internalize management, resulting in immediate value creation
through cost savings and multiple expansion, and significant long term benefits
through improved capital allocation and alignment of management
incentives We believe majority of CWH’s valuation discount is due to
external management structure –
Despite challenges, asset fundamentals are solid in aggregate and operations have
material upside opportunities
–
As shown on next page, we believe fee savings alone could represent over 15%
upside to CWH stock, and multiple expansion could generate an additional
100%+ upside –
Internalization will also save CWH shareholders from paying 15% incentive fees
when FFO begins to grow again
RMR fees are primarily based on historical cost basis and distort management
incentives –
Management fees have grown despite track record of extended underperformance
–
CWH
continues
to
acquire
new
assets
and
issue
equity
rather
than
repurchasing
its
dislocated stock, despite re-affirming book value each time fees are paid out
to RMR Management fees are excessive and out of step with times
–
Extraction of nearly 30% of CWH’s market cap since 2007
Additionally, CWH assets have been used repeatedly to seed new platforms for RMR,
thereby generating new income streams for RMR without compensation for CWH
shareholders External management structure is indefensible, and terminable by independent
trustees |
 43
Related / Corvex Recommendations
Management Fee / Cap Rate Sensitivity
We estimate some portion of RMR fees could be immediately eliminated
through internalization, resulting in significant equity value creation for CWH
Value creation results from capitalization of fee savings and improvement in
overall cap rate Only property management fees are deducted from NOI;
however, business management fees in G&A impact equity multiples and
cash flow (analysis below capitalizes these savings as well)
4Q12
LQA
Business Management Fees
$11.6
$46.2
Property Management Fees
9.2
36.8
Total RMR Fees
$20.8
$83.1
Estimated Run-Rate Fee Savings
$20.0
Current Cap Rate (GAAP)
9.92%
CWH Equity Value Creation
$201.7
Equity Value Creation per Share
$2.41
Current CWH Price
$15.85
% Change from Fee Savings
15.2%
LQA GAAP NOI (before Fee Savings)
$487.3
Cap Rate
7.25%
Implied TEV
$6,721.9
Value Creation from Fee Savings
201.7
Value from Improved Cap Rate on Fees
74.2
TEV
$6,997.7
Net Debt & Preferred
3,585.8
Equity Value
$3,411.9
Implied CWH Share Price
$40.71
% Change
156.9%
% Change from Multiple Improvement
141.7%
Implied CWH Share Price
Management Fee Savings
$40.71
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
6.75%
$45.13
$46.01
$46.90
$47.78
$48.67
$49.55
7.00%
41.99
42.84
43.70
44.55
45.40
46.25
Cap
7.25%
39.07
39.89
40.71
41.54
42.36
43.18
Rate
7.50%
36.34
37.13
37.93
38.73
39.52
40.32
7.75%
33.79
34.56
35.33
36.10
36.87
37.64
8.00%
31.39
32.14
32.88
33.63
34.38
35.12
% Change to Current
Management Fee Savings
$0.00
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
6.75%
184.7%
190.3%
195.9%
201.5%
207.0%
212.6%
7.00%
164.9%
170.3%
175.7%
181.1%
186.4%
191.8%
Cap
7.25%
146.5%
151.7%
156.9%
162.1%
167.2%
172.4%
Rate
7.50%
129.3%
134.3%
139.3%
144.3%
149.3%
154.4%
7.75%
113.2%
118.0%
122.9%
127.7%
132.6%
137.4%
8.00%
98.1%
102.8%
107.5%
112.2%
116.9%
121.6% |
 44
Related / Corvex Recommendations
Recommendation #2: Replace Declaration and Bylaws
CWH should replace its existing Declaration of Trust and Bylaws with new
ones which conform to ISS and Glass Lewis best practices in order to restore
investor confidence in the corporate governance of the Company
Poorly
constructed
corporate
governance
documents
have
insulated
management
and
further
misaligned the interests of management and shareholders
Governance issues include:
–
Classified board
–
“Poison pill”
triggered by the acquisition of only 10% of CWH’s outstanding shares, with
a “slow hand”
provision
–
Ineffective independent trustees
ISS has taken notice, recommending against CWH’s incumbent board members last
year Existing documents and governance practices appear indefensible
|
 45
Related / Corvex Recommendations
Recommendation #3: Appoint Three Additional Trustees
CWH should appoint three new independent trustees to its Board as soon as
possible
to
assuage
governance
concerns,
give
CWH
shareholders
a
real
voice, and increase the proportion of truly independent Board trustees
“Independent”
Trustees appear conflicted by common sense definition
–
Association with multiple RMR entities for long periods of time
–
Over $2 billion of CWH related party transactions in the last 5 years
–
Insufficient checks against self dealing
Poor ISS and Glass Lewis corporate governance scores on key topics such as board
structure and shareholder rights
–
These
issues
have
emerged
under
the
supervision
of
current
Board
members
Extended track record of CWH underperformance suggests Independent Trustees are not
protecting shareholder interests
Management
and
Board
have
lost
the
credibility
of
the
investment
and
analyst
community
Status quo appears indefensible: new trustees are needed to restore the reputation
and direction of CWH
|
 46
Related / Corvex Recommendations
Recommendation #4: Cease All Related Party Asset Sales
CWH
should
cease
all
related
party
asset
sales
immediately
given
the
conflicts
of interest inherent in its externally managed structure and track record of
poor capital allocation decisions
Fair and transparent related party transactions are complicated under the best of
circumstances
–
We do not understand how CWH can properly execute related party asset sales given
the conflicts of interest between RMR and CWH shareholders, and the
Company’s apparent lack of “Independent”
Board members
–
The many challenges of fair and transparent related party deals stand in contrast
to CWH’s level of activity, with over $2 billion of deals we could
identify done in the last 5 years alone
We question whether historical related party asset sales have been in the best
interest of CWH shareholders
–
CWH’s assets have been used historically to seed new business platforms for
RMR –
These schemes generate new income streams for RMR (often at higher initial fee
levels), without appropriate compensation for CWH shareholders
CWH shareholders have no confidence in management’s ability to execute related
party transactions |
 47
Related / Corvex Recommendations
Recommendation #5: Improve Capital Allocation
Management’s
current
capital
allocation
strategy
could
be
described
as
‘buy
high,
sell
low.’
Current strategy: sell challenged suburban properties at a discount and use
proceeds to acquire fully occupied, premium CBD properties (i.e. buy high,
sell low) –
Proposed equity offering serves as example of poor capital allocation decisions,
with management planning to sell equity at 57% discount to book value to buy
back investment grade debt trading above par
New strategy: stabilize challenged properties, and use excess cash flow and asset
sale proceeds to repurchase undervalued CWH stock
–
No justification for asset acquisitions (or new construction) given superior
returns and low risk of share repurchases
Results in significant value creation for CWH shareholders (see next page)
–
Stop all acquisition and development activity until CWH stock price exceeds
NAV –
No more dilutive equity offerings
–
Establish
an
ongoing
commitment
to
buy
back
stock
when
it
trades
below
book
value
Additionally, Company should establish and maintain an appropriate leverage target
or leverage range |
 48
Related / Corvex Recommendations
Share Repurchase Analysis
CWH can close the disconnect between its stock price and NAV by using excess
cash flow and asset sale proceeds to buy back stock
2012
2013E
2014E
CAD
$131.4
Stabilized Cash NOI (after Asset Sales)
$527.0
Cap Rate
7.50%
Run-Rate
Target
Savings
TEV
$7,026.7
Business Mgmt. Fees
$46.2
$35.0
$11.2
CWH Net Debt
2,930.8
Property Mgmt Fees
36.8
25.8
11.0
Preferred
655.0
Incremental CAD
$83.1
$60.8
$22.3
$22.3
$22.3
Equity Value
$3,440.8
CWH Share Price
$53.95
Adjusted CAD
$153.6
$153.6
$161.3
% Change to Current
240.4%
Memo: Shares Outstanding
63.8
Current Quarterly Dividend
$0.25
$0.25
Avg. Shares Outstanding
78.3
68.3
Implied CWH Share Price
Annual Dividends Paid
$78.3
$68.3
Asset Sales
$53.95
$0.0
$75.0
$150.0
$225.0
$300.0
2013E
2014E
7.00%
$55.44
$58.51
$62.22
$66.79
$72.56
CAD after Dividends
$75.3
$93.0
Cap
7.25%
51.92
54.65
57.95
62.00
67.11
Asset Sales
150.0
150.0
Rate
7.50%
48.64
51.05
53.95
57.53
62.03
Divested NOI
(5.6)
(16.9)
7.75%
45.56
47.68
50.22
53.35
57.29
Share Repurchases
$219.7
$226.1
8.00%
42.68
44.52
46.73
49.44
52.85
Buyback Price Assumed
$20.00
$25.00
% Premium to Current Price
26.2%
57.7%
% Change to Current
Asset Sales
Shares Repurchased
11.0
9.0
$0.0
$75.0
$150.0
$225.0
$300.0
% of Shares Outstanding (Current)
13.1%
10.8%
7.00%
249.8%
269.2%
292.6%
321.4%
357.8%
Cap
7.25%
227.6%
244.8%
265.6%
291.2%
323.4%
Beginning Shares
83.8
72.8
Rate
7.50%
206.9%
222.1%
240.4%
263.0%
291.4%
Ending Shares
72.8
63.8
7.75%
187.5%
200.8%
216.9%
236.6%
261.4%
Avg. Shares Outstanding
78.3
68.3
8.00%
169.3%
180.9%
194.8%
211.9%
233.4% |
 49
Related / Corvex Recommendations
Action by Written Consent
If
CWH
disagrees
with
our
proposal
or
fails
to
respond
within
30
days,
we
plan
to seek to remove the Board and replace it with 5 independent trustees
Removing the Board would require action by written consent
–
Declaration of Trust authorizes removal of Board at any time without cause by a
2/3 vote –
We believe a 2/3 vote is achievable, as we believe shareholders will
overwhelmingly support our recommendations to CWH
If
all
of
the
Trustees
are
removed,
according
to
the
Declaration
of
Trust
the
officers
of
CWH
must promptly call a special meeting where successor Trustees would be appointed by
a majority vote
New independent board would then pursue the same strategies we have recommended
on the previous pages |
 50
Conclusion
153%+ upside to Related/Corvex estimate of $40 NAV per share
247%+ upside to Related/Corvex target stock price of $55+ at 12/31/14
Externally managed structure skews incentives, reduces CWH cash flow through
excessive fees, destroys investor confidence, and impairs valuation multiple
(off depressed earnings) –
However, diversified asset base with highly saleable properties
We believe CWH must take immediate steps to close the massive discount between its
public market value and underlying intrinsic value
–
Internalize management structure
–
Replace its existing Charter and Bylaws and appoint three independent
trustees –
Use excess cash flow and proceeds from asset sales to buy back stock or delever
until the Company’s stock price exceeds its NAV
If CWH is unable or unwilling to manage the business in ways which maximize
long- term
shareholder
value,
the
board
should
be
removed
and
replaced
with
leaders
who
can and will make the necessary changes
CWH represents a collection of hard assets which are massively undervalued
today due to the Company’s externally advised management structure and
track record of underperformance
|
 Appendix |
 Appendix
Arizona Center (Phoenix, AZ)
Property Type:
Office -
CBD
Asset Class:
A
Estimated Occupancy:
93.0%
Net Rentable Square Feet:
1.1 million
Date Acquired:
3/9/11
Cost Basis:
$137 million
Cost Basis PSF:
$129.34
Mark-to-Market Assumptions
Rental Income:
$20.26 PSF
Recoveries:
$1.94 PSF
Vacancy & CL:
10.0%
Total Operating Expenses:
$8.97 PSF
NOI:
$12 million
Cap Rate:
8.00%
Stabilization Costs:
NA
Concluded Value:
$148 million
Concluded Value PSF:
$140.05
The Property, is located at the northeast corner of 3rd and Van
Buren streets in Phoenix, AZ, and is situated on 16.1 acres. The
property includes roughly 2,500 parking spaces, open space,
retail shops and restaurants, a movie theater, a garden office
building and two office towers. The Property also includes three
undeveloped pads of roughly 1.0 acre at the southwest corner of
Fillmore & 5th St., 1.1 acres between the parking deck & Two
Arizona Center, and 1.3 acres at NWC Van Buren & 5th St. The
two office towers include the 20-story Arizona Center Two which
is 100% leased by Arizona Public Services for the next 33 years
and Arizona Center One, a 19-story tower which is 88% leased to
several tenants including the Snell & Wilmer law firm (206,421 SF
leased to 2022) and Pinnacle West Capital (8,779 SF).
Location
Property Description
Commentary
Site
Note: Acquisition data and SF sourced from
LoopNet, CoStar, RealCapitalAnalytics and
SNL Financial. |
 Appendix
1225
17
Street
(Denver,
CO)
Property Type:
Office -
CBD
Asset Class:
A-
Estimated Occupancy:
83.8%
Net Rentable Square Feet:
672,465
Date Acquired:
6/24/09
Cost Basis:
$134 million
Cost Basis PSF:
$199.64
Mark-to-Market Assumptions
Rental Income:
$25.00 PSF
Recoveries:
$1.49 PSF
Vacancy & CL:
14.0%
Total Operating Expenses:
$9.00 PSF
NOI:
$9 million
Cap Rate:
6.25%
Stabilization Costs:
$11 million
Concluded Value:
$140 million
Concluded Value PSF:
$207.82
The Property
is
a
32
story,
Class-A-
office
building
located
in
the
downtown submarket of Denver. The building was constructed in
1982 and is situated on a 2.45 acre parcel of land with a
landscaped plaza on both the north and south sides of the
property.
Location
Property Description
Commentary
Site
Note: Acquisition data and SF sourced from
LoopNet, CoStar, RealCapitalAnalytics and
SNL Financial.
th |
 Appendix
6600 North Military Trail (Boca Raton, FL)
Property Type:
Office -
Suburban
Asset Class:
A
Estimated Occupancy:
100.0%
Net Rentable Square Feet:
625,000
Date Acquired:
1/31/11
Cost Basis:
$171 million
Cost Basis PSF:
$273.60
Mark-to-Market Assumptions
Rental Income:
$23.00 PSF
Recoveries:
$0.00 PSF
Vacancy & CL:
5.0%
Total Operating Expenses:
$0.10 PSF
NOI:
$14 million
Cap Rate:
7.75%
Stabilization Costs:
NA
Concluded Value:
$175 million
Concluded Value PSF:
$280.65
The Property is a 5-story, Class-A office building located in Boca
Raton, FL, two miles west of I-95 off the Yamato Rd. exit. Parking
is available on-site by an unknown number of surface and
covered parking stalls. The building is situated on 4.5 acres. It
was constructed in 2008 and is 100% occupied by Office Depot.
Office Depot‘s lease terms have been reported to include 15
years with multiple extension options.
Location
Property Description
Commentary
Site
Note: Acquisition data and SF sourced from
LoopNet, CoStar, RealCapitalAnalytics and
SNL Financial. |
 Appendix
600 West Chicago (Chicago, IL)
Property Type:
Office -
CBD
Asset Class:
A
Estimated Occupancy:
98.6%
Net Rentable Square Feet:
1.6 million
Date Acquired:
8/10/11
Cost Basis:
$390 million
Cost Basis PSF:
$248.19
Mark-to-Market
Assumptions
Rental Income:
$20.00 PSF
Recoveries:
$8.10 PSF
Vacancy & CL:
5.0%
Total Operating Expenses:
$9.00 PSF
NOI:
$28 million
Cap Rate:
7.00%
Stabilization Costs:
NA
Concluded Value:
$406 million
Concluded Value PSF:
$258.57
The Property, also known as the Montgomery Ward Building, is
located in Chicago's River North neighborhood along the Chicago
River. The Property is an eight story building that was originally
built as part of Montgomery Ward's office and warehouse
headquarters in 1908. In 2001, the Property and several adjacent
buildings that were also part of the Montgomery Ward Complex
were converted into office, retail, and condominium uses. The
majority of the building is office, but several restaurants and a
gym occupy the lower level. The Property offers complimentary
shuttle service, but suffers from a lack of public transportation.
Major tenants include Groupon, Wrigley, Infinium Capital
Management and Level 3 Communications.
Location
Property Description
Commentary
Site
Note: Acquisition data and SF sourced from
LoopNet, CoStar, RealCapitalAnalytics and
SNL Financial. |
 Appendix
233 North Michigan Avenue (Chicago, IL)
Property Type:
Office -
CBD
Asset Class:
B+
Estimated Occupancy:
73.8%
Net Rentable Square Feet:
980,362
Date Acquired:
5/15/11
Cost Basis:
$162 million
Cost Basis PSF:
$165.45
Mark-to-Market
Assumptions
Rental Income:
$17.00 PSF
Recoveries:
$9.00 PSF
Vacancy & CL:
13.0%
Total Operating Expenses:
$10.00 PSF
NOI:
$14 million
Cap Rate:
7.75%
Stabilization Costs:
$4 million
Concluded Value:
$170 million
Concluded Value PSF:
$173.54
The Property is a 32 story building located in the East Loop
submarket of the Chicago CBD. The building was constructed in
1972 and renovated in 1998. The Property is located on 1.35
acres of land. The Property is part of the planned Illinois Center
development, which includes numerous amenities including
indoor access to restaurants, hotels, and the Chicago Transit
Authority.
Location
Property Description
Commentary
Site
Note: Acquisition data and SF sourced from
LoopNet, CoStar, RealCapitalAnalytics and
SNL Financial. |
 Appendix
111 Monument Circle (Indianapolis, IN)
Property Type:
Office -
Suburban
Asset Class:
A
Estimated Occupancy:
93.7%
Net Rentable Square Feet:
1.1 million
Date Acquired:
10/1/12
Cost Basis:
$196 million
Cost Basis PSF:
$184.73
Mark-to-Market Assumptions
Rental Income:
$24.26 PSF
Recoveries:
$1.90 PSF
Vacancy & CL:
7.0%
Total Operating Expenses:
$10.00 PSF
NOI:
$16 million
Cap Rate:
8.00%
Stabilization Costs:
NA
Concluded Value:
$196 million
Concluded Value PSF:
$184.73
The Property, also known as Chase Tower, consists of two office
buildings that share the same address on the historic Monument
Circle in downtown Indianapolis, IN. The tower consists of
901,831 SF and the companion building is the Circle building
consisting
of
156,487
SF.
Chase
Tower
is
a
48-
story,
Class-A
office
building
built
in
1989,
on
2.3
acres.
The
building
serves
as
a regional headquarters for JP Morgan Chase, which is one of
several credit tenants in the building including Merrill Lynch
(BofA), Morgan Stanley, and Ernst & Young. Two major tenants,
JP Morgan Chase (204,000 SF) and the law firm Woodard,
Emhart, et al. (45,000 SF) executed renewals in 2012.
Location
Property Description
Commentary
Site
Note: Acquisition data and SF sourced from
LoopNet, CoStar, RealCapitalAnalytics and
SNL Financial. |
 Appendix
701 Poydras Street (New Orleans, LA)
Property Type:
Office -
CBD
Asset Class:
A
Estimated Occupancy:
98.0%
Net Rentable Square Feet:
1.3 million
Date Acquired:
8/15/11
Cost Basis:
$102 million
Cost Basis PSF:
$81.15
Mark-to-Market Assumptions
Rental Income:
$17.62 PSF
Recoveries:
$0.80 PSF
Vacancy & CL:
12.0%
Total Operating Expenses:
$8.00 PSF
NOI:
$10 million
Cap Rate:
9.50%
Stabilization Costs:
NA
Concluded Value:
$110 million
Concluded Value PSF:
$87.43
The Property, also known as One Shell Square, is a 51-story,
Class-A office building located at the corner of Poydras St. and
St. Charles Street. Reported occupancy for the property is 98%
with Shell Oil’s gulf coast headquarters occupying 50% of the
building through December 2016. The building is situated on
three acres and was constructed in 1972 by Hines.
Location
Property Description
Commentary
Site
Note: Acquisition data and SF sourced from
LoopNet, CoStar, RealCapitalAnalytics and
SNL Financial. |
 Appendix
901 –
1001 Lakeside Avenue (Cleveland, OH)
Property Type:
Office -
CBD
Asset Class:
A
Estimated Occupancy:
90.4%
Net Rentable Square Feet:
820,795
Date Acquired:
2/12/08
Cost Basis:
$123 million
Cost Basis PSF:
$149.85
Mark-to-Market Assumptions
Rental Income:
$21.00 PSF
Recoveries:
$1.00 PSF
Vacancy & CL:
10.0%
Total Operating Expenses:
$8.00 PSF
NOI:
$10 million
Cap Rate:
8.25%
Stabilization Costs:
NA
Concluded Value:
$118 million
Concluded Value PSF:
$144.24
The Property consists of two office buildings located in downtown
Cleveland, OH. The buildings were constructed in 1980 and
1990, and are situated on a 3.32 acre site. Building #1 (230,000
SF) is 100% occupied by Jones Day a global law firm with over
2,400 attorneys. Building #2 (590,795 SF) is 86.6% occupied with
major tenants including Kaiser Permanente of Ohio (66,482 SF),
Towers Watson & Company (44,444 SF) and U.S. General
Services administration (31,409 SF).
Location
Property Description
Commentary
Site
Note: Acquisition data and SF sourced from
LoopNet, CoStar, RealCapitalAnalytics and
SNL Financial. |
 Appendix
Bridgepoint Square (Austin, TX)
Property Type:
Office -
Suburban
Asset Class:
A
Estimated Occupancy:
95.0%
Net Rentable Square Feet:
439,656
Date Acquired:
12/5/97
Cost Basis:
$78 million
Cost Basis PSF:
$177.41
Mark-to-Market Assumptions
Rental Income:
$16.00 PSF
Recoveries:
$0.00 PSF
Vacancy & CL:
5.0%
Total Operating Expenses:
$1.05 PSF
NOI:
$6 million
Cap Rate:
7.00%
Stabilization Costs:
NA
Concluded Value:
$89 million
Concluded Value PSF:
$202.20
The Property, also known as Bridgepoint Square, consists of a
portfolio of five buildings as part of a campus-like business park.
Bridgepoint Square consists of 5-story, Class A constructed
suburban office buildings located on the north side of Lake
Austin. Each building has between 75,000 to 110,000 SF for a
total of 439,656 SF. The assets are located in the Northwest
submarket of Austin, TX, approximately 20 minutes drive from
downtown Austin and were either built or renovated in 1996-
1997. Based on published information, all of the buildings are
multi-tenanted with local or regional firms. The average tenant
size is typically 5,000 to 15,000 SF indicating industry
diversification, but also inferior corporate credit.
Location
Site
Note: Acquisition data and SF sourced from
LoopNet, CoStar, RealCapitalAnalytics and
SNL Financial.
Property Description
Commentary |
 Appendix
333 108 Avenue NE (Bellevue, WA)
Property Type:
Office -
CBD
Asset Class:
A
Estimated Occupancy:
100.0%
Net Rentable Square Feet:
414,964
Date Acquired:
11/12/09
Cost Basis:
$165 million
Cost Basis PSF:
$397.62
Mark-to-Market Assumptions
Rental Income:
$34.00 PSF
Recoveries:
$2.41 PSF
Vacancy & CL:
5.0%
Total Operating Expenses:
$10.00 PSF
NOI:
$10 million
Cap Rate:
6.00%
Stabilization Costs:
NA
Concluded Value:
$171 million
Concluded Value PSF:
$411.83
The Property consists of a 20-story, Class A office tower located
in the Bellevue CBD, an affluent market just east of downtown
Seattle. The building was constructed in 2008, and is situated on
a 1.3 acre site. Current occupancy at the property is reported to
be
100%
with
a
majority
of
the
space
(355K
SF
-
85%
of
NRA)
occupied by Expedia Inc. The Expedia lease term was reported
to be 10 years, with multiple extension options. With the
occupation of the tower, Expedia consolidated space occupied in
three different buildings within the Bellevue market. According to
published sources the company has already outgrown its
headquarters.
Location
Property Description
Commentary
Site
Note: Acquisition data and SF sourced from
LoopNet, CoStar, RealCapitalAnalytics and
SNL Financial.
th |