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Alexandria Real Estate Equities, Inc. | ||
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Sincerely, |
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Steven R. Hash |
Lead Director and Chair of the Compensation Committee |
Alexandria Real Estate Equities, Inc. |
2017 Proxy Statement Supplemental Information | 1 | ![]() |
2017 Proxy Statement Supplemental Information | 2 | ![]() |
2017 Proxy Statement Supplemental Information | 3 | ![]() |
Alexandria’s Strong Three-Year Performance (1) | ||||
Total Stockholder Return (2) | ||||
![]() | High Percentile Rankings (3) | |||
ARE Peers | 88 | % | ||
Glass Lewis Peers (“GL Peers”) | 93 | % | ||
FTSE NAREIT Equity Office Index | 100 | % | ||
SNL US REIT Office Index | 100 | % | ||
Source: SNL Financial. |
High Percentile Ranking | Growth in NAV Per Share (5) | Growth in Common Stock Dividends Per Share | ||||
Growth in FFO Per Share (4) | ||||||
ARE Peers (6) | GL Peers (6) | |||||
71% | 85% | 59% | 24% | |||
Source: Information filed with the SEC at SEC.gov. |
ARE’s Pay Aligned with Strong Performance | ||
2016 Total Compensation Percentile Ranking within ARE’s Peers (7) | ||
75% | 75% | |
Average Non-CEO NEO | CEO |
(1) | For the three years ended December 31, 2016. Each percentage represents ARE’s position on a percentile basis and means that ARE performed better than that percentage of other companies (e.g., 100% represents the greatest relative performance). |
(2) | Assumes reinvestment of dividends. |
(3) | Due to the volume of companies contained in the S&P 500 and Russell 2000 indices, no percentile ranking was calculated for those indices. |
(4) | Represents funds from operations per share – diluted, as adjusted, for the three years ended December 31, 2016. For information on the Company’s funds from operations, including definitions and a reconciliation to the most directly comparable GAAP measure, see Item 6 and “Non-GAAP Measures” under Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. |
(5) | Based on average net asset value estimates as of December 31, 2016, from Bank of America Merrill Lynch, Barclays Capital Inc., Citigroup Global Markets Inc., Evercore ISI, Green Street Advisors, Inc., J.P. Morgan Securities LLC., and UBS Securities LLC. |
(6) | Excludes Hudson Pacific Properties (“HPP”). HPP’s total assets, revenues, and equity capitalization as of March 31, 2015, were less than 0.5x ours. For example, HPP’s total revenue was $62.8 million for the three months ended March 31, 2015, or 32% of our total revenue. HPP completed a significant acquisition in April 2015 that resulted in a significant increase in total assets, revenues, and equity capitalization. |
(7) | Represents 2016 total compensation for ARE and 2015 total compensation for ARE’s peer group, the most recently publicly available information at the time of printing our 2017 proxy statement. In addition, it assumes that compensation within 5% is consistent with ARE compensation. |
2017 Proxy Statement Supplemental Information | 4 | ![]() |
ARE Performance | Glass Lewis Presentation (3) | |
Shareholder Wealth and Business Performance | ||
![]() | ![]() | |
(1) Assumes reinvestment of dividends. | ||
(2) See footnote 4 on page 4. | ||
(3) The Glass Lewis Paper states: “Analysis for the year ended 12/31/16. Performance measures, except ROA and ROE, are based on the weighted average of annualized 1, 2, and 3 year data.” | ||
FFO per share growth vs. absolute FFO growth | ||
The Chair of our Compensation Committee met with Glass Lewis in early 2017 and discussed performance metrics relevant to real estate companies and REITs. While Glass Lewis understands the importance of FFO as a performance measure for real estate companies and REITs, it has not yet made the connection between absolute FFO and the measurement that those in the REIT industry (including investors) care most about, which is FFO per share. The Glass Lewis methodology considers only absolute FFO growth, which is not a relevant performance measurement for a REIT, and is flawed because it fails to consider the number of outstanding common shares. Additionally, Glass Lewis’ calculation of FFO is flawed and misleading because it does not adjust for real estate impairments and preferred stock redemption charges (write-off of original issuance costs required upon repurchase or redemption of preferred stock), adjustments that are widely accepted in the investment community. The impairments in 2016 related primarily to the Company’s decision in April 2016 to sell its real estate investments located in Asia. Our net assets located in Asia as of March 31, 2016, just prior to recognition of impairments, was very small at less than 3% of our total assets. It is hard to imagine that the negative FFO growth results for Alexandria presented by Glass Lewis would translate into such strong three-year TSR performance for Alexandria. We have presented above, next to the Glass Lewis presentation, the calculation of our strong FFO per share growth using the methodology that is widely accepted in the real estate investment community. That growth and our strong TSR performance are the appropriate measures to be used in determining if our pay is aligned with our performance. As shown in the charts headed “ARE’s Pay Aligned with Strong Performance” above and below, pay and performance are well aligned. | ||
Return on assets and return on equity | ||
Not only is Glass Lewis’ use of absolute FFO not an accurate measurement of our performance, but Glass Lewis also calculates ROA and ROE based upon a numerator similar to net income. A more appropriate methodology for the numerator in ROA and ROE for real estate companies and REITs would be based upon funds from operations. |
ARE’s Pay Aligned with Strong Performance | Unbalanced Glass Lewis Peer Group Skews Analysis Toward Very Small Companies | ||||||||
Glass Lewis Analysis | Unbalanced Glass Lewis Peers (1) (15 Companies) | ||||||||
2016 Total Compensation Percentile Ranking within ARE’s Peers (2) | 3-Year Weighted-Average Compensation | ||||||||
75% | 75% | ![]() | 5 | Very Small Peers | > | 2 | Large Peers | ||
Average Non-CEO NEO | CEO | ||||||||
(1) Glass Lewis/Equilar identified 15 peer companies. Eight of these companies are within 0.5x to 2.0x of ARE’s revenues and market capitalization or are a direct competitor. Two companies were larger (>2.0x) and five companies were smaller (<0.5x), which resulted in a flawed analysis skewed toward very small companies. | |||||||||
(2) See footnote 7 on page 4. |
2017 Proxy Statement Supplemental Information | 5 | ![]() |
Less than 0.5x ARE revenues or market capitalization(1) and not a direct competitor of ARE | Five very small companies | ||||
Brandywine Realty Trust | Piedmont Office Realty Trust, Inc. | ||||
Corporate Office Properties Trust | Mack-Cali Realty Corporation | ||||
Columbia Property Trust, Inc. | |||||
Greater than 2.0x ARE revenues or market capitalization(1) and not a direct competitor of ARE | Two large companies | ||||
Digital Realty Trust, Inc. | Vornado Realty Trust | ||||
Within 0.5x to 2.0x ARE revenues and market capitalization(1) or a direct competitor of ARE | |||||
ARE Direct Competitor: Companies that own office/laboratory properties (2) | |||||
Boston Properties, Inc. | Kilroy Realty Corporation | ||||
ARE Indirect Competitor: Companies with which we compete for talent, acquisitions, and/or tenants (2) | |||||
Douglas Emmett, Inc. | Hudson Pacific Properties, Inc. | ||||
Highwoods Properties, Inc. | SL Green Realty Corp. | ||||
Other | |||||
KIMCO Realty Corp. | Liberty Property Trust | ||||
(1) Market capitalization as disclosed by Glass Lewis represents equity capitalization. | |||||
(2) Included in ARE’s peer group. |
2017 Proxy Statement Supplemental Information | 6 | ![]() |
Factual Errors in Glass Lewis’ Proxy Paper |
• | Page 3 of the Proxy Paper lists the same one-, three-, and five-year TSR figures for ARE, the S&P 500 Index and “peers” that were listed in the proxy paper that Glass Lewis issued for our 2016 Annual Meeting of Stockholders (“2016 annual meeting”). Despite the footnote that states the figures were as of “31-DEC-2016,” we believe the figures are as of December 31, 2015. Although Glass Lewis’ letter grade methodology is not public, this error alone may have been enough to cause our “D” letter grade score. |
• | Page 3 of the Proxy Paper incorrectly shows our market capitalization as of December 31, 2016, as $8,825 (MM USD). In fact, our market capitalization as of December 31, 2016, was $10 billion, as shown in the graph on page 9 of the Proxy Paper. The same error appears on page 9. |
• | Page 3 of the Proxy Paper incorrectly says “no” clawback provision, but as disclosed on pages 3, 25, 48, and 49 of our 2017 proxy statement, we do have a clawback policy. |
• | Page 8 of the Proxy Paper incorrectly shows the target and maximum number of shares subject to our CEO’s outperformance program award as 32,137 shares and 50,263 shares, respectively. The correct target number of shares granted pursuant to the outperformance grant was 23,063 and the maximum number of shares was 36,900, as we disclose in our 2017 proxy statement. That same error appears on page 12, which also incorrectly shows the target and maximum number of shares subject to our other NEOs’ outperformance program awards as 23,063 shares and 36,900 shares, respectively. The correct target number of shares granted pursuant to the outperformance grant was 6,063, and the maximum number of shares was 9,700, as we disclose in our 2017 proxy statement. |
• | Page 3 of the Proxy Paper incorrectly says the change in CEO pay was 1% for one year, 14% for three years, and 52% for five years. The increase in our CEO’s total compensation as reported in our Summary Compensation Table was 0.1% for one year, 3% for three years, and 23% for five years. |
• | Page 4 of the Proxy Paper incorrectly says the “GDFV Equity” for FY2016 CEO Compensation was $7,789,676. The actual grant date fair value of the equity awards granted to our CEO in 2016 was $7,438,836, as we disclose in our 2017 proxy statement. |
• | Page 1 of the Proxy Paper lists the same “index memberships” listed in the proxy paper that Glass Lewis issued for our 2016 annual meeting. As described in our 2017 proxy statement, we became part of the S&P 500 this year, a significant accomplishment. At the same time, we were added to the S&P GICS Office REITs Sub-Industry index. |
• | Page 7 of the Proxy Paper says “Insufficient disclosure of LTIP performance goals.” This does not acknowledge that our 2017 proxy statement provides the threshold, target, and maximum FFO per share growth goals for awards granted to Mr. Marcus in 2014, the performance period for which ended on December 31, 2016. Our 2017 proxy statement clearly provides multiple times that disclosure of the FFO per share goals prior to the end of the applicable three-year performance period would be competitively harmful, and states our commitment to disclose the specific FFO per share goals at the end of the performance period. |
• | Page 3 of the Proxy Paper says the “Glass Lewis Disclosure Rating” is “Fair”; in the proxy paper that Glass Lewis issued for our 2016 annual meeting, the “Glass Lewis Disclosure Rating” was “Good.” Our 2017 proxy statement provides all of the same disclosure as our 2016 proxy statement plus more, such as the threshold, target, and maximum FFO per share growth goals for awards granted to Mr. Marcus in 2014, the performance period for which ended on December 31, 2016. |
2017 Proxy Statement Supplemental Information | 7 | ![]() |
Misconceptions in Glass Lewis’ Proxy Paper |
Glass Lewis Statement: | “Legacy Change of Control Provisions “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.” |
This is the identical statement to those in the Glass Lewis reports for our 2015 Annual Meeting of Stockholders (“2015 annual meeting”) and our 2016 annual meeting. However, since our 2015 annual meeting, we amended the employment agreement of each of our four NEOs other than our CEO (our CEO’s employment agreement was amended before our 2015 annual meeting) to change from single-trigger to double-trigger vesting in all future equity awards granted to them. Thus, Glass Lewis’ two-year-old comment is no longer correct. We do not vaguely “intend” to not include single-trigger vesting in future awards; our NEOs have contractually committed to double-trigger vesting. | |
Glass Lewis Statement: | “This [single-trigger] provision may discourage potential buyers from making an offer for the Company both because the purchase price will be higher and because substantial numbers of employees may earn significant amounts of money and decide to leave their positions with the Company. In short, we believe that this sort of provision may lower the chances of a deal, lower the premium paid to shareholders in a takeover transaction or both.” |
This is the identical statement to those in the Glass Lewis reports for our 2015 annual meeting and our 2016 annual meeting. Legacy unvested NEO awards with single-trigger acceleration provisions represent a barely nominal (if even that) portion, approximately 0.15% of the Company’s outstanding equity market capitalization as of December 31, 2016. With an equity market capitalization of approximately $10 billion as of December 31, 2016, it is not credible, nor is it supported by any empirical evidence of which we are aware, to assert that the relative impact of the remaining single-trigger provisions would either “discourage” potential buyers or lower the premium one would be willing to pay. Additionally, our NEOs have contractually committed to double-trigger vesting. | |
Glass Lewis Statement: | “Performance Goals Not Disclosed for Long-Term Incentives “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. In this case, we acknowledge that the Company commits to disclose performance goals after the close of the relevant performance period, mitigating our concerns to some extent.” |
In our prior discussions with Glass Lewis, we were told that Glass Lewis recognized that disclosing long-term goals may be commercially sensitive but that Glass Lewis relies on a company to disclose the rationale for any such exclusions in the proxy statement. We responded to that feedback last year by specifically stating in our 2017 proxy statement multiple times that it would be competitively harmful to disclose the FFO per share goals during the performance period and stating our commitment to disclose the specific FFO per share goals at the end of the three-year performance period. | |
We understand that stockholders are interested in specific goals so they can assess the rigor of those goals. To address that concern, when this program was initially implemented under Mr. Marcus’s employment agreement, we disclosed that the Compensation Committee established the target goals 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 consecutive historical three-year periods. We made this disclosure, which is well beyond typical best practice disclosure, in an effort to provide additional information and transparency so that stockholders could assess rigor without our risking competitive harm. We have also clearly and fully disclosed the threshold, target, and maximum TSR goals in our prior proxy statements during the performance period. Disclosure of stock price metrics does not result in risk of competitive harm, as opposed to our three-year FFO per share growth, an operational projection that remains proprietary with the Company until the end of the three-year performance period. | |
In our 2017 proxy statement, we clearly and fully disclosed the threshold, target, and maximum FFO per share growth goals for awards granted to Mr. Marcus in 2014, the three-year performance period for which ended on December 31, 2016. Glass Lewis failed to acknowledge this disclosure in its report, instead continuing to refer only to our “commitment” to disclose the performance goals. |
2017 Proxy Statement Supplemental Information | 8 | ![]() |
Misconceptions in Glass Lewis’ Proxy Paper (continued) |
Glass Lewis Statement: | “Incentive Limits on Short-Term Awards for Other NEOs “The Company has not disclosed individual award limits under its short-term incentive plan for NEOs other than the CEO. We believe this runs contrary to best practices and shareholder interests, as management may receive excessive compensation that is not strictly tied to Company performance. Shareholders should urge the Company to set and disclose individual caps on its short-term incentive plan so as to provide an assurance that executive pay will always be constrained by stated limits.” |
This statement was not included in Glass Lewis’ report for our 2015 annual meeting or 2016 annual meeting even though the structure of our annual cash incentive program was the same in prior years. Although we have not received this request from our stockholders, our Compensation Committee will discuss this feedback. | |
Glass Lewis Statement: | “No Performance-Based Short-Term Incentive Awards for Other NEOs “The compensation committee determines annual cash bonuses for NEOs other than the CEO on a largely discretionary basis. We believe shareholders benefit when incentive awards are determined on the basis of metrics with pre-established goals and are thus demonstrably linked to the performance of the company, aligning the interests of management with those of shareholders. In this case, shareholders should be seriously concerned with the Company’s failure to implement a formula-based short-term incentive plan with objective metrics and goals.” |
Our 2017 proxy statement provides detailed descriptions of the performance goals that were established for each of the NEOs in early 2016. As disclosed there (page 27), the Compensation Committee does not apply specific weighting to such goals, and final cash incentive bonus amounts are determined based on a holistic assessment of results achieved. The Compensation Committee believes this approach reflects an appropriate balance between applying objective criteria to determine NEO bonuses and a desire to keep management focused on strategic decisions that are in the long-term best interests of the Company and our stockholders. The success of this program is borne out not only by our outstanding operating and TSR results, but also by the exceptional tenure of our senior management group. Our five NEOs’ tenure with Alexandria ranges from 16 to 23 years. |
2017 Proxy Statement Supplemental Information | 9 | ![]() |
2017 Proxy Statement Supplemental Information | 10 | ![]() |