Author Topic: EQC - Equity Commonwealth  (Read 27109 times)

thepupil

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EQC - Equity Commonwealth
« on: December 16, 2013, 09:14:53 PM »
Anyone else looking at CWH?

It is an externally managed REIT undergoing a proxy fight with Corvex (Icahn protege Keith Meister) and Related (big real estate company)

It's not overly complicated. At 1X book value, 10X last quarter's annualized normalized funds from operations (adding back litigation expense) and a substantial discount to Corvex/Related's estimate of NAV ($40 before a majorly diluted offering executed by the parasitic Portnoys, now about $32), I think the shares at 22.80 are quite compelling.

 There is no tenant that makes up more than 2%, lease roll over is fine, the activists are very likely to win (management is truly awful!) and get enough shareholders to remove the entire board and there is a lot of S,G,+A/ fee bloat that can be easily cut to increase FFO. The balance sheet is in fine shape. While the equity offering earlier this year destroyed a ton of value and has to be a case study in shareholder unfriendly behavior, it was used to pay down high cost debt and delevered the company, as did a recent offering of shares in an affiliate.

It isn't amazing real estate or anything but with the index at 16X FFO and a this at 12.7X on current operations and 10X when backing out non-ongoing expenses, there is a big gap to narrow here.

The assets are
Core + interest in SIR + non-core (recently put up for sale and written down substantially). The interest in SIR and non-core are more or less unencumbered and can be converted to cash to be redeployed elsewhere (share repo, acquisitions etc.). Obviously you want that to happen under the guidance of someone other than the Portnoys given their track record.

Last quarter, CWH did 0.45/share in funds from operations and 0.57 when adding back litigation expense. If we assume 2.28 normalized FFO per share and the activists can win and move toward an 80% FFO payout ratio and a 6% yield, you get to $30/share in a 12-24 months which is 33% plus dividends. Corvex/Related have offered to buy the company at $24.50, but a removal of the board changes in management and operations is preferable.

The exact path will not be that simple, because the Portnoys are still in control of the company and may still pull some rabbits out of their hat or destroy value further, but it looks like a 75 cent dollar with a clear catalyst on the horizon.

Corvex/Related Site
http://www.shareholdersforcommonwealth.com/

SEC filings w/ all the proxies
https://www.bamsec.com/companies/803649/commonwealth-reit

Original pre-dilutive offering presentation:
http://www.sec.gov/Archives/edgar/data/803649/000119312513075277/d491275dex993.htm

WSJ summary of where we are today:
http://blogs.wsj.com/moneybeat/2013/11/21/dealpolitik-commonwealth-reit-trustees-hold-on-to-their-offices-by-a-thread/



« Last Edit: February 19, 2015, 08:05:05 PM by thepupil »


thepupil

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Re: CWH - Commonwealth REIT
« Reply #1 on: December 17, 2013, 07:46:59 AM »
http://www.benzinga.com/analyst-ratings/analyst-color/13/12/4160930/update-stifel-upgrades-commonwealth-reit-on-review-of-ex

a bit surprised by the analyst's cap rates and valuations which suggests lower upside than my simplistic analyses, the activists own appraisals, etc.

But note the valuation sensitivity to cap rate 9.3% is 17.00/share while 7.8% is 25.00. A difference of 1.5% is the difference between down 25% and up 9%. As you go to lower cap rates and divvy yields the sensitivity in valuation only increases, which is how you can get to higher upside.

 Also those quoting higher upside are assuming that a public portfolio of 200+ buildings will trade at a slight premium to private market value (by trading on divvy yield to equity rather than NAV), which  in my opinion is reasonable, under current market conditions, which can change, of course.

Still at the current price, it looks like you are buying a levered portfolio of mediocre real estate at an 8+% cap rate where the liabilities costs much less than 8% so the yield on the equity is higher and much higher than on the REIT index (which is dominated by bigger, higher quality companies)

I debate with myself as to whether this is more of a relative value trade than being absolutely cheap, but I think that the chance of activists winning is very high and i'm comfy with the downside, but I can see the argument that the cap rate on the whole enterprise value would not be high enough (the company is not cheap enough).

Anyone else interested?

frommi

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Re: CWH - Commonwealth REIT
« Reply #2 on: December 17, 2013, 08:05:26 AM »
I prefer ARCP because it trades at nearly the same FFO with guidance for next year it is at an P/FFO of around 11. But the management is much better and is paid only with stocks and they are still buying more, so they seem to be very bullish. With 40% upside to a P/FFO multiple of 15 and a dividend yield of 7-8% this looks like a >15% CAGR in the next 4-5 years.

So why take the stock with problems when you can get it without the troubles? (The only positive thing is the P/NAV but that shouldn`t really matter as long as the business is running normal.)

thepupil

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Re: CWH - Commonwealth REIT
« Reply #3 on: December 17, 2013, 08:27:23 AM »
Thanks for the feedback! I've looked at ARCP but could never quite fully understand all the moving parts with the recent mergers and capital markets transactions.

I won't argue with you on management. CWH's management took 30% of the market cap in fees over 5 years!!! CWH's assets are simpler to understand in my opinion and ARCP is more of a "issue equity at a high price, buy assets at a lower price private/public multiple arb play" right? Am i wrong to characterize it that way?

I'm more comfortable with paying the same multiple and at a discount to NAV for what I think is an easier to analyze company, but ARCP definitely looks interesting. I don't mind the management problems because I think they will get kicked out, but there is a risk that they won't. 

Different strokes, different folks. Without a sudden violent rise in long term rates or a drastic selloff in REITs, I think we'll both make good money.

bmichaud

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Re: CWH - Commonwealth REIT
« Reply #4 on: December 17, 2013, 08:31:24 AM »
Quote
I've looked at ARCP but could never quite fully understand all the moving parts with the recent mergers and capital markets transactions.


This is exactly why the ARCP opportunity exists! It's very confusing and there is a decent amount of debt outstanding. But....

Management is very high quality (and buying a lot of shares themselves) and they are maniacally focused on high quality tenants in buildings that can be easily converted to another business (i.e. they avoid buildings such as Circuit City and Best Buy b/c they are difficult to repurpose).

thepupil

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Re: CWH - Commonwealth REIT
« Reply #5 on: December 17, 2013, 09:40:41 AM »
Quote
I've looked at ARCP but could never quite fully understand all the moving parts with the recent mergers and capital markets transactions.


This is exactly why the ARCP opportunity exists! It's very confusing and there is a decent amount of debt outstanding. But....

Management is very high quality (and buying a lot of shares themselves) and they are maniacally focused on high quality tenants in buildings that can be easily converted to another business (i.e. they avoid buildings such as Circuit City and Best Buy b/c they are difficult to repurpose).

I don't disagree with you. I just couldn't figure it all out the first time around. Will have another look.

CorpRaider

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Re: CWH - Commonwealth REIT
« Reply #6 on: December 17, 2013, 02:44:11 PM »
I looked at it a little pupil.  Management are scumbags for sure.  My recollection is i liked it at the price before the pop on the activists and was supposed to go back and look at it if it sold off down to that level after the hot money lost interest, but of course my ADD took over.  I am apt to let perfect be the enemy of good though.  hah!
« Last Edit: December 17, 2013, 02:45:45 PM by CorpRaider »

thepupil

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Re: CWH - Commonwealth REIT
« Reply #7 on: January 06, 2014, 07:26:33 AM »
Commonwealth's management has taken significant changes and invited the activist (Keith Meister) to the board in a desperate attempt to save themselves. Overall, too little, too late and i hope they get thrown out completely, but there is some progress being made here.


http://seekingalpha.com/pr/8564131-CommonWealth-REIT-Adds-Independent-Trustees-Ann-Logan-and-Ronald-Artinian-to-the-Board

http://seekingalpha.com/pr/8530351-Corvex-And-Related-Comment-On-Commonwealth-REITs-Recent-Misleading-Actions

http://seekingalpha.com/pr/8526451-CommonWealth-REIT-Implements-Governance-Changes-and-Simplifies-Path-for-Shareholder-Action-at-2014-Annual-Meeting

Myth465

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Re: CWH - Commonwealth REIT
« Reply #8 on: January 07, 2014, 02:54:05 PM »
Seems like an interesting idea. May buy leaps after the take over.
Amazing how much value an entrenched management can destroy. This was a still prior to the equity offering.

If I were the team looking to take over, I would rinse and repeat this at the other reits managed by RMR.
« Last Edit: January 07, 2014, 03:07:40 PM by Myth465 »

thepupil

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Re: CWH - Commonwealth REIT
« Reply #9 on: January 30, 2014, 06:59:15 AM »
http://www.shareholdersforcommonwealth.com/presentations/
http://finance.yahoo.com/news/corvex-related-release-detailed-presentation-143000905.html

Ballots are in the mail and the market is starting to get a little more excited (either pricing in a greater probability of win or a higher NAV) with the stock up a bit.