CommonWealth REIT Earnings Call Insights: Litigation Details and Cap Rate Range

CommonWealth REIT (NYSE:CWH) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Litigation Details

Joshua Attie – Citicorp: John, can you tell us exactly how much legal and consulting fees were included in G&A in the quarter, just to help us think about the underlying G&A run rate going forward?

Adam D. Portnoy – Managing Trustee and President: Josh, this is Adam. I’ll take that question. I think it’s just about $9 million. It’s probably somewhere between $8 million and $9 million with just legal and consulting fees. But I think in answering that question, I want you to keep in mind that CommonWealth did not start this litigation, it was started when Corvex and Related brought litigation, stopped the CommonWealth equity offering during the first quarter, that litigation respond copycat litigation from others repeating various false charges made by Corvex and Related. So, we now have cases pending in three different courts and an arbitration proceeding. Also, I think you should keep in mind that few years ago the shareholder of CommonWealth adopted an amendment to our Declaration of Trust, which make shareholders to assert false claims against the company liable to indemnify the company for the expenses, CommonWealth encourage defending these claims, including legal fees. We believe the litigation stop the equity offering in the alleged consent solicitation undertaken by Corvex and Related were improper. And when we win, we expect Corvex and Related may be required to indemnify CommonWealth for some of these costs. We’re asserted a counterclaim in the pending arbitration for that reimbursement based upon our declaration and our bylaws. The bottom line is we did not start this litigation. In the present circumstances, we intend to defend us against the false charges, which are being made against us and against the improper consent solicitation by Corvex and Related.

Joshua Attie – Citicorp: But just to help us think about earnings going forward is the $8 million to $9 million is that something we should expect every quarter, when we think about your FFO going forward or are most of the cost behind you, what’s the right way for us to think about that?

Adam D. Portnoy – Managing Trustee and President: Josh, that’s a really difficult question to answer. It all depends on the volume of activity related to the various cases that are currently in play…

Joshua Attie – Citicorp: Is it fair to say that there will be some element of that cost going forward for at least the next several quarters?

John C. Popeo – Treasurer and CFO: I think that’s a fair statement.

Adam D. Portnoy – Managing Trustee and President: Again, Josh, not to change what John said, but it all depends on where this goes. Yes, through the third quarter there will be some legal expenses because we’re already in August and I can tell you that things is still going forward through July, but it all depends on what happens.

Joshua Attie – Citicorp: Second question separately. Your interest and service come down as a result of their equity issuance. As you think about that longer-term, is there a strategic reason for you to continue owning the stock of that company? How do you think about your long-term ownership?

Adam D. Portnoy – Managing Trustee and President: Josh, today we’re currently under a lock-up that expires sometime late in the third quarter, so we can’t even do anything with the shares even if we want to do today, but I can tell you we have no current plans to dispose of those shares as of today.

Michael Bilerman – Citi: Adam, it’s Michael Bilerman. And I echo Josh’s comment in terms of getting the additional detail on the assets in there. I had a question and this is not in regards to litigation or the consensus litigation or the purported offer. There was a comment that you had made in the New York Times article back in late July. And you had said that at the end, you said everything we’ve always done has been in the best interest of shareholders. When we come into work every day our focus is on the common shareholders and executing our business plan. I’m trying to reconcile that comment, and the way that you talk about that relative to your share ownership, you currently own 40,000 shares, your father owns just under 240,000 shares, so it’s combined 0.25%, which is probably the lowest insider ownership out of any of the companies we follow. And I’m just trying to figure out the alignment of interest that on one hand where you say you can work for common shareholder, wouldn’t you want to be a much more material shareholder in sort of saying that – and a lot of that stock had been either through the DRIP plan, either through to the comp plan, through Board fees, so it wasn’t even like it was bought. I am just trying to really understand the comment relative to the ownership?

Adam D. Portnoy – Managing Trustee and President: Well, couple of things in response to that. One I standby all the comments that I said in that article, the second thing I’d point out is that many of our competing REITS, they were formed largely through up REIT structures where existing owners or families that owned real estate then took their business public. So, when they took it public, they owned a large percentage of the Company prior to it going public and then it got diluted down through the offering itself. As you may know, CommonWealth was not formed that way and so there was no large number of properties that were held privately, which were then taking to public for say through an offering. So we were formed a little differently than many other companies, and so that’s the only other thing I would add. They may be part of the reasons for the discrepancy between shareholdership in some of our competitors and us.

Michael Bilerman – Citi: That’s I think is a fair point, but it hasn’t stopped others from buying and accumulating large sums of stock, and certainly at the RMR entity, which is we don’t have much purview into in terms of the profitability or the earnings for the (indiscernible) capital there that some of that could have been rotated back into the underlying companies, which – you look at the ownership of each of the RMR entities, it’s all around the same sort of level in terms of percentage of ownership. So, I’m just trying to get a better understanding whether there is a change in the way you are thinking about ownership and trying to align yourself from (indiscernible) more common shareholders from an ownership?

Adam D. Portnoy – Managing Trustee and President: Is there a change. There has been no change. I mean, I standby the comments we said in that newspaper – that I made in that newspaper article and I think the large reason that there is a big difference in the share ownership is principally how we reform versus others then I think I will just leave it there.

Cap Rate Range

Rich Moore – RBC: Rough cap rate, I mean, you made about – not want to give us exact numbers at the moment but on the 67.5 million that you guys have under contract our rough cap rate range on that would be probably what?

Adam D. Portnoy – Managing Trustee and President: It is probably the right way to look at it, Rich, because it is really – many of those buildings are perhaps vacant and our negative cash flow. So, it is not really – it is really unfortunately as we say in the prepared remarks they are not really representative of the portfolio. These are really the weakest properties in the portfolio many of which had negative cash flow. And so cap rate is not something – I think the more relative metric might be just price per foot.

Rich Moore – RBC: Do you have a number of that. And I assume that cap rate would just be very low so price per foot would be probably low as well.

Adam D. Portnoy – Managing Trustee and President: If there is cash flow at the property, yes it is very low because it is probably just barely breaking even. If it is a property cash flowing in those groups, but the price per feet, you can do the math very simply it is about $35 a foot.

Rich Moore – RBC: And then none of those I assume and are included in the exhibits you gave us at the back which I like as well, thank you for doing. None of the asset held for sale I assume are back in there?

Adam D. Portnoy – Managing Trustee and President: That’s correct. We only include the wholly-owned from continuing operations. That’s correct, so none of the assets held for sale in that list.

Rich Moore – RBC: Then you have – you sold six this quarter by my calculation, and then you have 49 in the contract, 21 to go. And then we talked about this before a bit, is there another way behind this? I mean, you had indicated a couple quarters ago that there would be other ways behind this. And it looks like you’ve made excellent progress on the first wave, it’s just about wrapped up. I mean, are we teeing up a second wave here or are we done with the dispositions for a while?

Adam D. Portnoy – Managing Trustee and President: I don’t think a final decision has been made, but we are seriously considering, I guess, you could call the second wave. I think when we talked about in the past, we said we wanted to see how this first wave of dispositions went. I think it’s gone reasonably well, and I think that’s leading us to have some serious discussions internally whether or not there will be second wave. No final decision has been made, but I can tell you that we are seriously thinking about it…

Rich Moore – RBC: Then when you think about CapEx, TI’s, and leasing commissions et cetera for the – going forward, was there a lot of TI type dollars, leasing commission dollars, sales commission dollars associated with what you’ve been working on this first 100 or so properties that you’ve been working to get rid of and then we see a lessening of that, or is that really would happen? I mean, would you see the same sort of level of TI’s going forward?

Adam D. Portnoy – Managing Trustee and President: It’s a good question, Rich. What’s happening in the TI’s and LC’s is few quarters ago I characterized that portfolio sort of broke it out between non-core and core and we’ve talked about in the non-core we might do some really aggressive leasing to get leased up. What we’ve ended up doing over the first six months of this year is actually a little bit less of that aggressive leasing in that non-core portfolio and been more focused on the core portfolio. So, I think vast majority of the numbers you are seeing run through our recent commitments is really what you would consider the core portfolio, and less of what we might have – we have past described as the non-core portfolio. So, I know a few quarters ago we talked about how we might get very aggressive on leasing and some of that. We have ended up not being as aggressive as I think we originally intended to be and being more focused on making sure that we kept the core portfolio well leased. In that non-core portfolio decided that in some cases when we were looking at leases that really just did not make economic sense for the building, more going to add value to the building, more going to enable us to get maybe a higher price if we sold it, we decided not to move forward with the lease. So that’s really what’s going on with those numbers.

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