Perry Capital Joins the Battle at CommonWealth REIT

Last month the management of CommonWealth REIT (NYSE:CWH) launched an offering of common stock with the intent to use the proceeds to pay down debt. A number of investors, including Keith Meister’s Corvex Capital, campaigned against the move and have recently announced plans to replace the company’s Board of Directors. Richard Perry’s Perry Capital had not owned any shares of CommonWealth at the end of December (see which stocks Perry reported owning), but a recent 13D filed with the SEC has disclosed that the fund now owns 6.5 million shares of the stock. The filing states that Perry supports the efforts of Corvex and other activists to improve CommonWealth’s corporate governance but does not make any specific mention of the Board campaign (it’s possible the fund was not aware of this move while it was preparing the filing).

CommonWealth is a real estate investment trust which invests in office and industrial buildings. Real estate investment trusts are a special class of companies which receive preferential tax status conditional on distributing a large share of their taxable income to shareholders; this often leads to high dividend yields, making them popular picks among income investors. CommonWealth, for example, has made quarterly dividend payments of 25 cents per share the last two quarters (after paying 50 cents per share for the previous 9) and if we annualize that we get a yield of 4.5% at current prices.

When analyzing REITs, it’s more useful to evaluate their “funds from operations” as a financial metric than net income. This is because real estate does not really depreciate as many assets do- in fact, in many circumstances the value of real estate appreciates over time. CommonWealth reported about $280 million in funds from operations available to common shareholders for 2012, up from about $260 million for 2011. Similar numbers apply for the company’s “normalized funds from operations.” We would note that the current market cap for the stock is $2.5 billion, so the ratio of market value to funds from operations is somewhat low. While using value analysis to evaluate REITs can be dicey, income investors should be able to take some comfort that the stock price makes sense.

During the fourth quarter of 2012, Luxor Capital initiated a position of 6.3 million shares in CommonWealth; that fund is managed by Christian Leone (find Luxor’s favorite stocks). J. Alan Reid, Jr.’s Forward Management was another major holder of the stock (check out Reid’s stock picks).