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Alexandria Real Estate Equities, Inc. | ||
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Strategic Long-Term Decisions Drove TSR Outperformance | |||||||||||
3 Months Ended | 1 Year Ended | 2 Years Ended | 3 Years Ended | ||||||||
3/31/15 | 12/31/14 | 12/31/14 | 12/31/14 | ||||||||
ARE: Alexandria Real Estate Equities, Inc. | ARE | 11.3% | ARE | 44.7% | S&P | 50.5% | S&P | 74.6% | |||
FTSE: FTSE NAREIT Equity Office Index | FTSE | 6.7% | Peers | 32.2% | Russell | 45.6% | Russell | 69.4% | |||
SNL: SNL US REIT Office Index of 22 Companies | SNL | 6.5% | SNL | 26.1% | ARE | 38.2% | G/L | 64.8% | |||
Peers: Our Peer Group of Eight Companies | Peers | 5.7% | FTSE | 25.9% | SNL | 34.3% | Peers | 56.3% | |||
G/L: Glass Lewis Peer Group of 15 Companies | G/L | 5.5% | G/L | 24.0% | G/L | 33.6% | SNL | 53.9% | |||
Russell: Russell 2000 Index | Russell | 4.3% | S&P | 13.7% | Peers | 33.0% | FTSE | 51.7% | |||
S&P: S&P 500 Index | S&P | 1.0% | Russell | 4.9% | FTSE | 32.9% | ARE | 43.1% | |||
Source: SNL Financial LC, Charlottesville, VA | ©2015 | www.snl.com |
High ARE Percentile Ranking | |||||||||||
3 Months Ended | 1 Year Ended | 2 Years Ended | 3 Years Ended | ||||||||
3/31/15 | 12/31/14 | 12/31/14 | 12/31/14 | ||||||||
ARE Percentile Rank, Within: | |||||||||||
FTSE NAREIT Equity Office Index | 100% | 100% | 75% | 25% | |||||||
Glass Lewis Peer Group | 95% | 100% | 55% | 45% | |||||||
SNL US REIT Office Index | 93% | 100% | 60% | 33% | |||||||
Source: SNL Financial LC, Charlottesville, VA | ©2015 | www.snl.com |
Glass Lewis Commentary | Facts | |||||||||||||||
“[T]he Company paid more than its peers while performing about the same.” | Our executive compensation was below or consistent with the average of other comparator groups as described below and, as shown above, our 2014 performance was extraordinary compared to peers and numerous other comparator groups. | |||||||||||||||
Our TSR in 2014 was 44.7%, which was: | ||||||||||||||||
• #1 in our peer group; | ||||||||||||||||
• #1 among the 15 companies included in the Glass Lewis peer group; | ||||||||||||||||
• #1 among the 22 companies included in the FTSE NAREIT Equity Office Index; | ||||||||||||||||
• #1 among the 22 companies included in the SNL US REIT Office Index; and | ||||||||||||||||
• higher than the total return of the S&P 500 Equity Index and the Russell 2000 Index. | ||||||||||||||||
Excerpt from Page 21 of our 2015 proxy statement: | ||||||||||||||||
“Under the long-term incentive plan, executives remain eligible to receive awards if the Company’s relative performance is below the 50th percentile of the designated peer group over the performance period. As such, NEOs are rewarded even if the Company underperforms the market.” | Before our relative TSR applies to an award, we must attain at least a threshold absolute increase in FFO per share over the applicable performance period. If that threshold increase in FFO per share is not attained, the entire award is forfeited. | |||||||||||||||
If threshold FFO per share growth is attained, then a part of the award is tentatively earned (anywhere from 50% to 150% of the target number of shares), and only then does relative TSR performance come into play to adjust the number of shares tentatively earned upward or downward by up to 50%. If our relative TSR is below the median of the FTSE NAREIT Equity Office Index, the number of shares tentatively earned is adjusted downward. | ||||||||||||||||
Excerpt from Page 37 of our 2015 proxy statement: | ||||||||||||||||
Glass Lewis Commentary | Facts | |||||||||||||||
“The Company has failed to provide a clear description of threshold, target and maximum goals under the LTI plan. We believe clearly defined performance targets are essential for shareholders to fully understand and evaluate the Company’s procedures for quantifying the performance into payouts for its executives.” | The specific FFO per share threshold, target and maximum are not disclosed because it would be competitively harmful to do so during the three-year performance period, which is common practice with multi-year performance awards. We will disclose the specific FFO per share metrics at the end of the three-year performance period. | |||||||||||||||
In the meantime, to help stockholders evaluate the rigor of the FFO per share goal, we disclosed in our 2015 proxy statement that the Compensation Committee established the target based upon the level of FFO per share growth that would have been approximately or greater than the 75th percentile of companies in the FTSE NAREIT Equity Office Index in six out of nine periods containing three consecutive calendar years from 2003 to 2013. Clearly, then, the goals are rigorous. | ||||||||||||||||
“Shareholders should be concerned that the Company provides immediate vesting of certain equity awards upon a change in control of the Company. . . . However, we acknowledge that the Company does not intend to include such provisions in future agreements.” | We amended our CEO’s employment agreement to change from single trigger to double trigger in all future equity awards granted to him and we amended our Amended and Restated 1997 Stock Incentive and Award Plan to change from single trigger to double trigger for all other employees without existing contractual commitments. |
Glass Lewis Commentary | Facts | |||||||||||||||
“Shareholders need to be satisfied that the peer group is appropriate and not cherry-picked for the purposes of justifying or inflating pay. In general, we believe a peer group should range from 0.5 to 2 times the market capitalization of the Company. In this case, Glass Lewis has identified 4 peers with more than twice the Company’s revenue, which represents approximately 50.0% of the peer group.” | The Compensation Committee gathers and reviews information about the compensation programs and processes of the companies in our peer group as an informal “market check” of compensation practices, salary levels, and target incentive levels. In reviewing this information, the Compensation Committee considers whether its compensation decisions are consistent with market practices. The Compensation Committee evaluates compensation primarily on the corporate objectives discussed in our 2015 proxy statement with a comparison to peers being just one of the factors considered. | |||||||||||||||
In selecting our peer group, the Compensation Committee focused first on our direct competitors, which are the REITs that own office/laboratory properties. Because we only have five direct competitors in our complex real estate niche, the Compensation Committee next added REITs with which we compete for talent, acquisitions, and tenants, and whose total assets, total revenues, and equity capitalizations are no greater than 2.5 times ours. The current peer group consists of the following companies: | ||||||||||||||||
Excerpt from Page 27 of our 2015 proxy statement: | ||||||||||||||||
All but one of the companies in our peer group are also in the Glass Lewis peer group. Further, five of the companies in the Glass Lewis peer group are below the bottom end of the market capitalization range (<0.5x) proposed by Glass Lewis and only one company (BXP) in the Glass Lewis peer group is above the top end of the proposed range (>2x). BXP is a direct competitor that owns office/laboratory properties. | ||||||||||||||||
Glass Lewis Peer Group | ||||||||||||||||
ARE Direct Competitors(1) | Other Companies | Small Peers Incorrectly Included | ||||||||||||||
BMR | DEI | DRE | BDN | 1/3 of Peer Companies < 0.5x | ||||||||||||
BXP | DLR | HHC | CLI | |||||||||||||
HIW | SLG | LPT | PDM | |||||||||||||
KRC | PSB | |||||||||||||||
OFC | ||||||||||||||||
(1) Also included in ARE peer group |
Glass Lewis Commentary | Facts | |||||||||||||||
“[T]he sustained misalignment, the increase in aggregate NEO compensation and our persistent reservations with the compensation program for the other NEOs warrant serious concerns.” | The average compensation for our named executive officers (excluding our CEO) is approximately $3 million, which is in line with our peer companies and the Glass Lewis peer group as shown below, particularly in a year where we significantly outperformed both peer groups. | |||||||||||||||
Average NEO Compensation (1) Below or Consistent with Peer Groups | ||||||||||||||||
Alexandria Real Estate Equities, Inc. | $ | 3,000,000 | ||||||||||||||
Glass Lewis(2) Peer Group | $ | 3,100,000 | ||||||||||||||
ARE Peer Group | $ | 4,000,000 | ||||||||||||||
(1) Excludes CEO compensation | ||||||||||||||||
(2) Glass Lewis selected peer companies >0.5x and <2.0x of Alexandria’s market capitalization but incorrectly included five companies, or 1/3 of the peer group, <0.5x of Alexandria’s market capitalization. Amounts included in chart exclude the five companies Glass Lewis erroneously included in their peer group. | ||||||||||||||||
“Mr. Shigenaga received a sizable base salary increase simply based on internal and external benchmarking.” | In the five years before the 2014 increase (2009-2013), Mr. Shigenaga received only cost of living adjustments for an aggregate increase of only $32,000 from 2009 to 2013. | |||||||||||||||
Mr. Shigenaga has served as an effective and responsive organizational leader in all of our financial matters, risk management, and internal controls for over 10 years since 2004. Mr. Shigenaga oversees our financial functions, including financial plans and policies, accounting practices and procedures, and our relationship with the financial community. Mr. Shigenaga also directs the controller, treasury, and tax functions. Mr. Shigenaga has served as CFO in a highly distinguished manner. Both senior management and our Board of Directors have consistently given him outstanding reviews. Additionally, Mr. Shigenaga has developed unique skills in the real estate and life science industries which to our knowledge is unique among CFOs. | ||||||||||||||||
Mr. Shigenaga had the lowest base salary of all of our named executive officers in 2013, a result that was not commensurate with his leadership role. | ||||||||||||||||
CFO Salary In-Line or Below Peer Group Average | ||||||||||||||||
CFO of Alexandria Real Estate Equities, Inc. | $ | 425,000 | ||||||||||||||
Glass Lewis (1) Peer Group | $ | 432,000 | ||||||||||||||
ARE Peer Group | $ | 483,000 | ||||||||||||||
(1) Glass Lewis selected peer companies >0.5x and <2.0x of Alexandria’s market capitalization but incorrectly included five companies, or 1/3 of the peer group, <0.5x of Alexandria’s market capitalization. Amounts included in chart exclude the five companies Glass Lewis erroneously included in their peer group. | ||||||||||||||||
“In our view, the continued use of wholly discretionary and time-vesting arrangements for four [sic] of the five [sic] NEOs warrants serious shareholder concern. . . . Under the STIP, the Company has provided a fair amount of information about the achievements subjectively considered in determining the other NEOs annual bonuses, no target or maximums for these executives are disclosed and, while not necessarily problematic, their cash payouts for the fiscal year in review also increased by between $50,000 and $225,000 as compared with the 2013 bonuses.” | As explained in our 2015 proxy statement, our Compensation Committee considered a more formulaic approach for 2014, but decided the existing method allowed it to take a holistic approach based on a wide range of factors relating to both company and individual performance. Richard Klein, the Chair of our Compensation Committee, specifically discussed this issue with several of our largest stockholders during our extensive 2015 stockholder outreach campaign, and they did not express concerns with the existing approach. The view of the stockholders with whom we spoke was that they did not want to micromanage our business and that ultimately our Board and Compensation Committee should structure the executive compensation programs in a manner believed to be in the best interests of the Company | |||||||||||||||
For 2014, our Compensation Committee decided that the existing system for other named executive officers was working. As disclosed in our 2015 proxy statement, our named executive officers’ tenure ranges from 12 to 21 years and these individuals possess a unique skill set in the business of owning and operating real estate for the broad, diverse and highly technical life science industry, and therefore have been and will continue to be critical to our long-term success, including achievement of each of our key objectives: profitability, growth in FFO per share and NAV, and creation of long-term stockholder value. The unique technical skills amassed by our management team are easily transferable to a variety of direct competitors, non-competitive real estate companies, investment banks and fund managers. | ||||||||||||||||
Far from neglecting company performance in establishing compensation, although not based on a rigid formula, the Compensation Committee varies each named executive officer’s total annual compensation with our performance for the year in question. |
Sincerely, |
Richard H. Klein |
Chairman of the Compensation Committee |