Why CommonWealth REIT Shares Sank

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of office-based real estate investment trust CommonWealth REIT (NYSE: EQC  ) dipped as much as 11% after announcing its fourth-quarter earnings results and a share offering.

So what: For the quarter, normalized funds from operation were $0.82 compared to $0.76 in the year-ago period. However, the company reported a hefty loss of $1.96 because of a loss on asset impairment of $168.6 million during the quarter. Lease rates for its properties improved slightly to 90% from 89.6% in the comparable period last year. More damaging, CommonWealth REIT announced that it'd be commencing a public offering of 27 million shares of stock in order to pay down up to $450 million of its senior notes. Any proceeds not explicitly used to pay down debt could also be used for general corporate purposes.

Now what: REITs often provide substantial dividends, and they can be quite profitable given this low interest rate environment, but many are highly levered and they often issue shares in order to raise deployable cash. In this case, CommonWealth's 27 million share offering would increase its diluted outstanding share count by nearly 30%. Dilution is the name of the game today, and investors are clearly not happy. Given its steadily rising occupancy rate, it's a story I could possibly get behind, but I'd wait for a further pullback.

Craving more input? Start by adding CommonWealth REIT to your free and personalized Watchlist so you can keep up on the latest news with the company. 

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  • Report this Comment On February 25, 2013, at 8:57 PM, gratianus wrote:

    Sean: I don't think just looking at the latest quarter or even the 27 million shares provide sufficient understanding of CWH. As a long-term shareholder and with broad experience with REITs, I am hardpressed to think of any other management group that has so completely failed its shareholders. My complaints about the Portnoys could fill a book. Not only does CWH's structure, which favors accumulation of assets rather than their profitability and which benefits the management company hurt shareholders but the feckless management of the balance sheet has been deplorable.

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