It'd Be Funny, If it Wasn't Serious
I need to stop reading public non-traded REITs' 10-Ks.  They're not good for my mental health, but reading them is like watching Kate Gosselin on Dancing With The Stars, so bad, yet you can't look away, or stop from snickering.   Healthcare Trust of America's (HTA) 2009 10-K has plenty of gems, and it may take more than this post to point some of them out.  The latest outrageous example of egregiousness is the compensation of HTA's Chief Executive Officer / President / Chairman of the Board.  This executive saw his total compensation jump from $504,753 in 2008 to $2,834,688 in 2009, the same year in which cash distributions as percentage of operating cash flow dropped to 25.5% from 66.3%.   I know HTA carried a large cash balance in 2009 as it dealt with large inflows of investor equity, and I know HTA did not acquire significant properites until late in the fourth quarter, and I have not done an analysis on the extent to which new investors may have increased the distribution pool, but a $2.3 million, or 5.6 times increase in total comp is troubling.

It is important to note that while an increase in investor equity would cause the amount of cash required to pay distributions to increase, it would not have an impact on operating cash flow.  HTA's operating cash flow increased $324,000, or 1.6% in 2009.  The properties bought late in 2009 likely did not show up in cash flow, but the properties acquired in 2008 should have, as they had a full year on the books.  Is that minuscule rise in operating cash flow worth $2.3 million?

I list below a large portion of the compensation discussion that is taken directly from HTA's 10-K:

Base Salary. Base salary provides the fixed portion of compensation for our named executive officers and is intended to reward core competence in their role relative to skill, experience and contributions to us. In connection with entering into the employment agreements, the compensation committee approved the following initial annual base salaries: Mr. Peters, $500,000; Mr. Engstrom, $275,000; and Ms. Pruitt, $180,000.  The compensation committee approved an increase to Mr. Peters’ 2008 base salary in order to more
closely align his base salary with our peers. However, due to the compensation committee’s focus on  performance-based compensation, Mr. Peters’ base salary approximates the lower end of the scale of base salaries provided by our peer companies. To emphasize performance-based compensation, the compensation committee designed Mr. Peters’ compensation package so that the majority of his cash-based compensation may be earned through an annual bonus after the compensation committee’s assessment of his performance during the year.

As discussed above, the initial base salaries for Ms. Pruitt and Mr. Engstrom were negotiated in connection with their joining our company. Also as discussed above, a key priority for us is to attract, retain and motivate a top quality management team. In order to attract a high caliber management team, the compensation packages offered must be competitive within the market, as well as reflective of the executive’s level of skill and expected contributions. These were the guiding principles followed by Mr. Peters and the compensation committee in negotiating the compensation packages with Ms. Pruitt and Mr. Engstrom.

Annual Bonus. Annual bonuses reward and recognize contributions to our financial goals and achievement of individual objectives. In 2009, we did not have a formal bonus program. Each of the named executive officers is eligible to earn an annual performance bonus in an amount determined at the sole discretion of the compensation committee for each year. Pursuant to the terms of their employment agreements, Mr. Peters’ initial maximum bonus is 200% of base salary. Mr. Engstrom’s and Ms. Pruitt’s initial target bonus is 100% and 60%, respectively, of base salary.

The compensation committee, together with Mr. Peters, developed a broad list of goals and objectives for 2009. The compensation committee awarded Mr. Peters the maximum bonus payable to him under his employment agreement based on its assessment of his performance during fiscal year 2009. In reviewing his performance, the compensation committee concluded that Mr. Peters accomplished, and in many cases, exceeded such goals and objectives, which included:

•  effectively leading the expansion of the company, including growing our portfolio through the acquisition of quality, performing assets;  
• successfully negotiating substantial and creative value-added transaction terms and conditions;    
• coordinating successful and competitive refinancing transactions during a time of significant dislocations in the credit markets;
  leading our successful transition to self-management;
• recruiting and effectively supervising our employees;  
• implementing effective risk management at all key levels of the company;
• maintaining a strong and solid balance sheet; 
• coordinating the engagement of new, competitively-priced and performance-driven property management companies for our portfolio; 
• leading the extension of our initial offering for up to 180 days, successfully transitioning the dealer manager for our initial offering to RCS and spearheading the registration of the follow-on offering; 
• establishing and enhancing our relationships with commercial and investment banks; 
• maintaining and actively enhancing our “stockholder first,” performance- driven philosophy; 
• effectively establishing our independent brand name as an asset to our company; and, 
• facilitating an open and effective dialogue with our board.

In addition to the annual bonus available under his employment agreement, after an extensive review of the peer group information and Mr. Peters’ performance in 2009, the compensation committee also awarded Mr. Peters an extraordinary bonus of $200,000. The extraordinary bonus recognizes and rewards Mr. Peters for (i) his expanded role and extraordinary efforts in providing demonstrated and effective leadership to our company, and (ii) positioning the company for continued success during recent unprecedented, difficult economic times, and in the future.

I like that extraordinary bonus of $200,000.  I wonder whether it was for ""facilitating an open and effective dialogue with the board," or "leading the extension of the Company's initial offering for up to 180 days."  How is the nearly six times jump in CEO pay putting "stockholder first," unless that stockholder is the CEO.  To me, the bonus targets are too subjective and several sound like normal tasks that are part of any CEO/President/Chairman job duties, and not factors that should be included in a bonus determination.   I examined a few other REITs' executive compensation plans, and all were quantitative in the metrics that their executives needed to achieve, not subjective goals like HTA.

As you read further, the data gets more interesting.  The increase in CEO's total compensation is disturbing, but his termination clause is hard to believe.  I list the description of HTA's senior executive termination clauses listed in the 10-K below:

Termination without Cause; Resignation for Good Reason. If we terminate the executive’s employment without Cause, or he or she resigns for Good Reason (as such terms are defined in the employment agreement), the executive will be entitled to the following benefits:

 • in the case of Mr. Peters, a lump sum severance payment equal to (a) the sum of (1) three times his then-current base salary plus (2) an amount equal to the average of the annual bonuses earned prior to the termination date (if termination occurs in the first year, the bonus will be calculated at $1,000,000), multiplied by (b) (1) if the date of termination occurs during the initial term, the greater of one, or the number of full calendar months remaining in the initial term, divided by 12, or (2) if the date of
termination occurs during a renewal term after December 31, 2013, 1; provided that in no event may the severance benefit be less than $3,000,000; 
• in the case of Mr. Engstrom and Ms. Pruitt, a lump sum severance payment equal to two times his or her then-current base salary;
• continued health care coverage under COBRA for 18 months, in the case of Mr. Peters, or six months, in the case of Mr. Engstrom and Ms. Pruitt, with all premiums paid by us; and
• immediate vesting of Mr. Peters’ shares of restricted stock and restricted cash award(s) and Mr. Engstrom’s and Ms. Pruitt’s restricted stock units.

“Cause,” as defined in the employment agreements, generally means: (i) the executive’s conviction of or entering into a plea of guilty or no contest to a felony or a crime involving moral turpitude or the intentional commission of any other act or omission involving dishonesty or fraud that is materially injurious to us; (ii) the executive’s substantial and repeated failure to perform his or her duties; (iii) with respect to Ms. Pruitt and Mr. Engstrom, gross negligence or willful misconduct in the performance of the executive’s duties which materially injures us or our reputation; or (iv) with respect to Ms. Pruitt and Mr. Engstrom, the executive’s willful breach of the material covenants of his or her employment agreement.

“Good Reason,” as defined in Mr. Peters’ employment agreement generally means, in the absence of his written consent: (i) a material diminution in his authority, duties or responsibilities; (ii) a material diminution in the his base salary; (iii) relocation more than 35 miles from Scottsdale, Arizona; or (iv) a material diminution in the authority, duties, or responsibilities of the supervisor to whom he is required to report, including a requirement that he report to a corporate officer or employee instead of reporting directly to the Board. “Good Reason” as defined in Ms. Pruitt’s and Mr. Engstrom’s employment agreements, generally means, in the absence of a written consent of the executive: (i) except for executive nonperformance, a material diminution in the executive’s authority, duties or responsibilities (provided that this provision will not apply if executive’s then-current base salary is kept in place) or (ii) except in connection with a material decrease in our business, a diminution in the executive’s base salary in excess of 30%.

I like the "Good Reason" clause that states that if HTA's offices are moved more than thirty-five miles from Scottsdale it is reason enough to trigger the CEO's termination clause.   HTA's 10-K states that the termination amount at the end of 2009 for the CEO / President/ Chairman of the board would have been $11,037,118.   If moving the office more than thirty-five miles is worth $11million, what's it worth if the printer runs out of toner?  $500,000?  What a crazy clause.  This REIT's board needs to get its act together and straighten out this compensation.  If the CEO saw a nearly six times leap in salary for lackluster financial performance, it's hard to imagine what's he going to want in compensation if performance improves for real.