Undervalued REIT, CWH

CommonWealth REIT LogoLast night, CommonWealth REIT (CWH) cut its dividend from $2/share to $1/share. The stock price went down from $14.77 to $14.57. Let’s examine the company more closely.

 

 

Company Info:

  • Name:  CommonWealth REIT
  • Symbol:  CWH
  • Price: $14.57 
  • Market Cap: 1.22 Billion
  • Sector: Office REIT. Owns and leases $6 Billion worth of property mostly in U.S. 

Thesis:

CommonWealth REIT (CWH) is significantly undervalued based on the value of its property. It is worth somewhere between $33 – $44/share. However, RMR, the company that manages CWH, is not creating shareholder value.

Valuation:

  •  Liquid Assets:   $917 Million  (Cash and Equity Investments (SIR, GOV, AIC))
  • Other Assets (Excluding Liquid): $6.4 Billion
  • Total Liabilities $3.75 Billion
  • Preferred Stock Outstanding $779 Million 
  • Total Value of Company (including Depreciation of Real Estate):  $2.8 Billion ($33/share+)
  • Total Value of Company (excluding Depreciation of Real Estate): $3.7 Billion+ ($44/share) 

The company is valued somewhere between $33 – $45/share. It has a 100%+ to 200%+ upside.

Stock Overhang:

Management:  Company has no employees. RMR manages full operations. RMR incentive is to maximize management fees at the expense of shareholders. Evidence of this and possible conflict of interest:

  • Company is spinning off the good assets (GOV, SIR) as a way to increase management fee. Managing the spinoffs (more management fee) and using the proceeds from the spinoffs to buy more real estate (more management fee) instead of increasing share holder value.
  • RMR manages CWH, SIR, GOV, HPT, RIF, SNH, TRV. Senior Management and Board of Trustees overlap in all of these companies.
  • Family Business. Father (Barry Portnoy) and Son (Adam Portnoy) own RMR and are on Senior Management/Board of Trustees at companies. Brother-In-Law/Son-In-Law an officer at RMR
  • RMR managed companies and RMR are in business together. They all have invested in an insurance company AIC. Conflict of interest!
  • Company is thinking of spinning of small Australian real estate assets which have been performing well just like they did with GOV, SIR.
  • Company is selling shares at these low rates instead of shedding assets and increasing shareholder value

Economy: Obviously, the high unemployment rate is decreasing the occupancy rate. It is down below 85% on remaining assets. 

Best way to Invest

I do not trust management. So, buying shares it out of the question. As I had mentioned the best way to play this is to buy April 2013 $15 options. They are priced around $.40, since it is a dividend paying stock.

Disclosure: I own shares and options of CWH.

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