COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Overview
The Compensation Committee (the Committee) is responsible for the general
compensation policies of the Company and, in particular, is responsible for
setting and administering the policies that govern executive compensation. The
Committee evaluates the performance of management and determines the
compensation levels for all executive officers.
The primary objectives of the Companys compensation policies and programs are
(i) to attract and retain key executives, (ii) to reward performance by the
executives and (iii) to align the financial interests of the Companys executive
officers directly with those of the Companys stockholders. The primary elements
of executive officer compensation are base salary, annual cash bonus and stock
option and restricted stock awards.
In reviewing the compensation of the Companys executive officers, the Committee
relies on comparisons of each element of an officers compensation, and each
officers total compensation package, against the compensation of individual
executive officers of other publicly traded office and industrial real estate
investment trusts. These comparisons are completed through an analysis of data
in various public filings, as well as through a review of the results of the
REIT Executive Compensation Survey sponsored by the National Association of Real
Estate Investment Trusts and other industry compensation surveys.
Salaries
Base salaries for the executive officers are reviewed annually and adjusted
based on the recommendations of the Companys Chief Executive Officer following
his review of the individuals performance with respect to Company and individual
performance objectives, increases in the individuals responsibilities, and
changes to base salaries of similar positions in comparable companies within the
industry.
The Committee takes the Chief Executive Officers recommendations into
consideration, and makes its own determination based in part on its own
evaluation of compensation paid by other real estate investment trusts, the
performance of the Company relative to its peers, and the individual performance
of the executive officer.
In 2004, the Committee did not adjust the salaries of any of the Companys Named
Executive Officers (as defined below), other than the Chief Executive Officer,
because the Committee determined that the estimated total compensation packages
for these officers for fiscal year 2004 was reasonable in light of the total
compensation packages of similarly situated executives within the industry. The
adjustment to the Chief Executive Officers base salary is discussed below in
this report.
Annual Bonuses
Annual cash bonuses are awarded on a discretionary basis and reflect both
Company and individual performance. In December prior to the start of the fiscal
year, the Committee sets a formula for determining the bonus pool for all
eligible employees, including our Named Executive Officers. The formula
incorporates quantitative measures of the Companys performance for the
applicable bonus year, including the proceeds from the Companys acquisition and
sales programs, the collection of rents owed to the Company, the amount of
financing obtained by the Company, the completion of development projects, the
amount of shares repurchased, and the growth in the Companys funds from
operations. At the close of the fiscal year, the Committee uses this formula to
calculate the size of the bonus pool based on actual
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performance of the Company. The Committee then determines the individual awards
to all eligible employees, including the Named Executive Officers, based on
criteria including individual performance, individual level of responsibility
comparisons to bonuses awarded at peer companies for similarly situated
employees and recommendations from management.
The bonuses awarded for 2004 to the Named Executive Officers reflect the
Companys achievements in its sales and acquisitions programs and financing goals
during the course of the year, individual performance and responsibility and
peer company comparisons, as well as the fact that no bonuses were paid to the
Named Executive Officers for fiscal year 2003.
Stock Option Awards
Stock options have historically been utilized by the Company to provide an
incentive to the executive officer and to align the interests of the executive
officer with those of the Companys stockholders, by providing him or her with a
financial interest in the Company. Options granted by the Committee under the
Companys 2003 Employee Stock Plan are generally made at fair market value on the
date of the grant, vest over four years and expire after ten years. In making
grants, the Committee has historically taken into account the executive officers
contributions to the Company, scope of responsibilities, base salary, the number
of options or shares previously granted and the level of option grants awarded
to executive officers employed by peer group companies.
In 2004, the Company did not grant any options to its employees, but instead
granted restricted stock awards, as described below. The Committee believes that
stock options are a less effective tool in retaining its employees than grants
of restrictive stock, because of the dividend paying nature of the Companys
Common Stock. The Committee believes that this view is shared by other real
estate investment trusts. Of the 35 office and industrial real estate investment
trusts for which the Committee analyzed equity compensation data, 23 of them did
not grant any options in 2003.
Restricted Stock Awards
The Company makes restricted stock awards to its executive officers as part of
their total compensation package in order to provide a retention incentive and
to align the interests of the executive officer with those of the Companys
stockholders, by providing him or her with a financial interest in the Company.
Restricted stock awards are generally subject to vesting, as determined by the
Committee. Grants made prior to 2004 generally vested based on continued service
over five years. The Committee extended this vesting period for awards in 2004
to seven years in order to provide retention value for a longer period of time
and to reduce the annual expense of the restricted stock to the Company. Award
recipients are entitled to all dividends issued in respect of the shares,
provided such dividends are subject to the same vesting schedule as the
underlying shares.
The Company issued an aggregate of 145,725 shares of restricted stock to its
employees on January 14, 2005, in recognition of services rendered in 2004, of
which 65,000 shares of restricted stock were granted to the Named Executive
Officers. The criteria used in determining the size of each Named Executive
Officers award of the total share pool included the Committees review of the
total compensation package offered to each such officer in 2004, past equity
awards to each Named Executive Officer, and equity awards made to officers in
comparable positions in peer group companies. The Committee believes that the
value of the individual restricted stock award to each of the Companys Named
Executive Officers was equal to or less than the average values of the 2003
restricted stock grants awarded to executives in comparable positions at peer
group real estate investment trusts. However, the Committee believes that the
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size of these awards is appropriate when viewed in light of the value of the
total compensation packages awarded to the Named Executive Officers.
Option Exchange Program
In September of 2004, the Board began to consider various strategic
alternatives, including the sale of the entire Company or of a significant
number of individual properties. The Board recognized at the time that were it
to undertake the sale of a substantial number of individual properties, it would
likely result in the payment of a large special dividend to stockholders. The
Board also recognized that after the payment of such a special dividend, the
Companys Common Stock price would likely decline by an amount comparable to the
per share amount of the special dividend and that such a decline in value could
decrease or eliminate the value of the outstanding employee options. In effect,
our employee-optionholders would have been penalized for the success of the
Company in recognizing the value of its assets, and the outstanding options
would cease to be effective employee retention tools.
In order to avoid the loss of the retention value of outstanding stock options
in the event that the Board did decide to sell a significant number of
individual properties (as opposed to selling the entire Company), the Committee
recommended allowing all Company employees, including the Named Executive
Officers, and directors the right to elect to exchange all or part of their
vested options for restricted stock awards. The Committee set an exchange ratio
based on the fair market value (the average of the high and low trading price)
of the Companys Common Stock on September 22, 2004, which value was $31.405 per
share. Surrendered options were valued based on the difference between the fair
market value of the Companys Common Stock on September 22, 2004 and the exercise
price per share of the surrendered option. Under the terms of the exchange
program, on September 27, 2004, each participant was issued that number of
shares of our Common Stock with a value equal to the aggregate value of those
vested options he or she surrendered for cancellation. The restricted stock
issued under this exchange program is subject to vesting at the rate of 20
percent per year over five years following the grant date.
The executive officers that elected to participate in the program, the number of
option shares each surrendered, and the number of shares of restricted stock
received in exchange, are set forth in the table below.
Number of Shares Number of Shares
of Common Stock of Restricted
Underlying Common Stock
Options Issued in Option
Executive Officer Surrendered Exchange
Peter Bedford 135,000 45,240
James Moore 7,500 1,152
Stephen Silla 15,000 4,257
Dennis Klimmek 7,500 1,152
CEO Compensation
With respect to setting the base salary of the Chief Executive Officer, the
Committee considers a number of factors, the most important of which are the
level of compensation paid to chief executive officers of other similarly
situated real estate investment trusts, the success of the Companys recent
acquisitions and sales, the return on development of new properties, and his
importance to the Companys efforts to raise capital in the public markets, as
and when needed. The Committee increased the base salary
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for Mr. Bedford, the Companys Chief Executive Officer, for 2004 to $300,000 per
year, which was 60% of the average salary reported in 2003 for chief executive
officers of peer group real estate investment trusts. While still significantly
below the base salary levels at other peer firms, the Committee decided that it
was necessary to increase Mr. Bedfords salary in order to recognize his
contributions to the business and also to better balance the internal parity of
the Chief Executive Officers compensation with the compensation of other
executive officers.
In determining the portion of the bonus pool to be paid to the Chief Executive
Officer for 2004, the Committee evaluated his contribution with respect to the
various factors used to determine the total pool amount, the level of bonuses
paid to chief executive officers of other similarly situated real estate
investment trusts, and the overall performance of the Company against its peer
group. The Committee awarded Mr. Bedford a bonus in 2004 of $200,000, which was
63.7% of the average bonus reported in 2003 for chief executive officers of peer
group real estate investment trusts.
The Committee also awarded Mr. Bedford 25,000 shares of restricted Common Stock,
issued January 15, 2005, for 2004 performance (excluding shares received
pursuant to the option exchange program). These shares are subject to vesting
over a seven year period, based on continued service with the Company. The
Committee believes this award is reasonable and not excessive, in light of the
total compensation package offered to Mr. Bedford in 2004, past equity awards to
Mr. Bedford, and equity awards made to chief executive officers of peer group
companies.
The Committee deems Mr. Bedfords total compensation to be reasonable and not
excessive. The aggregate estimated value of his base salary, bonus and
restricted stock awards for 2004 (excluding shares of restricted stock received
pursuant to the option exchange program) is approximately 82% of the average
value of the total compensation reported in 2003 for chief executive officers of
peer group real estate investment trusts. In 2004, Mr. Bedfords cash
compensation (salary and bonus) was 1.5 times the average cash compensation of
the other Named Executive Officers of the Company and his total compensation was
2.2 times the average total compensation of the other Named Executive Officers
of the Company. In 2004, Mr. Bedfords cash compensation (salary and bonus) was
14.0 times the cash compensation of the lowest paid full time employee of the
Company and his total compensation was 31.9 times the total compensation of the
lowest paid full time employee of the Company.
Section 162(m)
The Company intends that compensation paid to its executive officers will be
deductible under Section 162(m) of the Internal Revenue Code.
Respectfully submitted,
THE COMPENSATION COMMITTEE
Anthony M. Frank (Chairman)
Peter Linneman
Bowen McCoy
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INFORMATION ABOUT THE EXECUTIVE OFFICERS
Executive Officers of the Company
The following persons serve as executive officers of the Company:
Name and Title Age Business Experience
Peter B. Bedford 67 Mr. Bedford has been the Companys
Chief Executive Chairman of the Board since May 1992 and
Officer Chief Executive Officer since November
1992. Mr. Bedford has been engaged in the
commercial real estate business,
primarily in the Western United States,
for over 40 years and has been
responsible for the acquisition,
ownership, development and management of
an aggregate of over 26 million square
feet of industrial, office and retail
properties, as well as land, in 14
states. Mr. Bedford serves on the board
of directors of Bixby Ranch Company, a
real estate investment company, and First
American Title Guarantee Co., a title
insurance company. Mr. Bedford is the
recipient of numerous awards recognizing
his contributions to the real estate
industry and serves as a governor of the
Urban Land Foundation. His previous
experience also includes serving on the
board of directors of the Bank of America
from 1986 to 1999 and on the board of
Kaiser Aluminum & Chemical Company from
1980 to 1986. He has served as Vice
Chairman of the National Realty Committee
and of the Hoover Institution and as
Chairman of the Real Estate Advisory
Board of the Wharton School of Business.
Mr. Bedford received his B.A. in
Economics from Stanford University.
James R. Moore 64 Mr. Moore has been the Companys President
President since March 13, 2003 and Chief Operating
Officer since January 1998. From January
1998 to March 2003, Mr. Moore was
Executive Vice President of
Property/Asset Management. From June 1997
to January 1998, Mr. Moore was Senior
Vice President of Property/Asset
Management. From September 1995 to June
1997, Mr. Moore was Vice President of
Property/Asset Management. From 1983 to
1994, he was Managing Director of the San
Francisco office of Cushman and
Wakefield, an international commercial
real estate services firm. Mr. Moore was
also a branch manager and commercial real
estate broker at Cushman and Wakefield.
He served on the board of trustees of The
Lindsay Museum from 1984 to 1999. Mr.
Moore has the CCIM designation and has
lectured at the University of San
Francisco and San Francisco State
University. He served as an officer in
the United States Marine Corps and
received a B.A. in History from the
University of California at Berkeley, an
M.B.A. from the University of San
Francisco and a Doctorate in Business
Administration from Golden Gate
University.
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Stephen M. Silla 53 Mr. Silla has served as the Companys
Executive Vice Executive Vice President and Chief
President Operating Officer since January 24, 2005
and Chief and Senior Vice President of Acquisitions
Operating Officer since September 2002. From December 1998
through August 2002, he served as a Vice
President of Bedford Acquisitions, Inc.,
a company wholly owned by Peter Bedford.
From 1992 to 1998, Mr. Silla served as
Vice President and General Manager for
Kemper Real Estate Management Company and
ZKS Real Estate Partners, both of which
were affiliates of Zurich/Kemper Life
Insurance, where he was responsible for
development, leasing and sales of all of
Zurich/Kempers real estate in Hawaii.
From 1986 to 1992, Mr. Silla was Vice
President and Regional Manager of Bedford
Properties Holdings, Ltd., a company
wholly owned by Mr. Bedford, in Southern
California and Hawaii. From 1990 to 1991,
he served on the board of directors of
the Rancho California Water District. He
received a B.S. in Engineering from the
University of California at Davis and an
M.B.A. from St. Marys College.
Dennis Klimmek 60 Mr. Klimmek has served as the Companys
Executive Vice Executive Vice President since March 13,
President, 2003, and Secretary and General Counsel
General Counsel since September 2002. From September 2002
and to March 2003, Mr. Klimmek served as the
Secretary Companys Senior Vice President. From
October 1997 through August 2002, he
served in various capacities, including
as Vice President, Secretary and General
Counsel, at Bedford Acquisitions, Inc., a
company wholly owned by Peter Bedford.
From 1992 to 1997, Mr. Klimmek served as
Vice President and General Counsel of
Kemper Real Estate Management Company and
its affiliated real estate companies,
which included real estate development,
management and home building companies.
From 1986 to 1992, he was Vice President
and General Counsel of Bedford Properties
Holdings, Ltd., a company wholly owned by
Mr. Bedford. Mr. Klimmek has been a
member of the California Bar since 1974.
He received a B.S. in Business
Administration from Pepperdine
University, a M.S. in Engineering from
the University of Southern California and
a J.D. from Loyola University.
Hanh Kihara 57 Ms. Kihara has been the Companys Senior
Senior Vice Vice President and Chief Financial
President and Officer since January 1999. From May 1993
Chief Financial to December 1998, Ms. Kihara served as
Officer the Companys Vice President and
Controller. From 1990 to 1993, she was
Controller and Assistant Controller of
Bedford Properties Holdings, Ltd., a
company wholly owned by Mr. Bedford. From
1986 to 1990, Ms. Kihara was a Manager at
Armstrong, Gilmour & Associates, a
certified public accounting firm. Ms.
Kihara has been a Certified Public
Accountant since 1989. Ms. Kihara
received a B.S. in Administration and
Accounting from California State
University of Hayward.
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Anne L. Hoffman 52 Ms. Hoffman has been the Companys Chief
Senior Vice Development and Marketing Officer since
President and January 2005, Senior Vice President of
Chief Development Development from March 1998 to January
and 2005, and an employee of the Company
Marketing Officer since September 2002. From March 1998
through August 2002, she was a Vice
President and an employee of Bedford
Acquisitions, Inc., a company wholly
owned by Peter Bedford. Ms. Hoffman has
personally managed the development of
over two million square feet of suburban
office, R&D, warehouse and service
buildings. In the four years immediately
prior to joining the Company, Ms. Hoffman
was the principal of a real estate
consulting practice providing a variety
of services to corporate and developer
clients. From 1992 to 1994 Ms. Hoffman
was Vice President of Sales and Marketing
for HQ Network System, the franchise
organization for HQ Business Centers.
From 1984 to 1991 Ms. Hoffman was a
Partner and Project Manager for the
Philadelphia based Rouse & Associates.
Rod Diehl 40 Mr. Diehl has served as the Companys
Senior Vice Senior Vice President of Acquisitions
President of since January 24, 2005, Vice President
Acquisitions and Regional Manager since June 1997 and
has been employed by the Company since
February 1996. He has worked for the past
15 years in the commercial real estate
industry, focusing on asset management
and leasing, primarily in the San
Francisco Bay Area. From October 1993 to
January 1996, Mr. Diehl worked for Koll
Management Services first as an Account
Executive for Kolls Corporate Advisory
group and later as manager of a portfolio
of retail properties. From December 1988
to September 1993, he worked for Cushman
& Wakefield as a research analyst, a
broker and as an asset manager. Mr. Diehl
is a licensed real estate broker in the
State of California and is a member of
BOMA and NAIOP. He received a B.A. in
Economics from the University of
California at Davis and an M.B.A. from
St. Marys College.
Krista Rowland 39 Ms. Rowland has been the Companys Vice
Vice President President and Controller since January
and 1999. From May 1996 to December 1998, she
Controller served as the Companys Assistant
Controller. From 1992 to 1996, Ms.
Rowland served as Portfolio Accounting
Manager of Kemper Real Estate Management
Company of Lafayette, California. From
1990 to 1992, Ms. Rowland was a Senior
Accountant for Armstrong, Gilmour &
Associates, a certified public accounting
firm. Ms. Rowland received a B.S.B.A in
Accounting from the University of North
Florida in Jacksonville and has been a
Certified Public Accountant in the State
of California since 1992.
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Andy Albrecht 39 Mr. Albrecht has been the Companys Vice
Vice President President and Regional Manager for the
and Northwest Region since January 2003. He
Regional Manager joined the Company in August 2000 as Vice
of the President and Area Manager. Prior to
Northwest Region joining the Company, Mr. Albrecht was
employed by Orca Enterprises, LLC in real
estate development and management in the
Puget Sound area from 1999 to 2000. From
1998 to 1999, Mr. Albrecht was Real
Estate Manager for Paccar Automotive,
Inc., where his duties included property
transactions, leasing and project
management in the western United States.
From 1989 to 1998, Mr. Albrecht was
Property Manager and Leasing Agent for
Morris Piha Management Group, Inc. Mr.
Albrecht received a B.A. in Political
Science from the University of
Washington.
Henry Baldenegro 58 Mr. Baldenegro has been the Companys Vice
Vice President President and Regional Manager of the
and Southwest Region since January 2002. Mr.
Regional Manager Baldenegro joined the Company in May of
of the 1996 as Area Manager of the Southwest
Southwest Region Region. During this period, Mr.
Baldenegro has been responsible for the
asset management of a portfolio in excess
of 1.5 million square feet of suburban
office, R&D, warehouse and service
buildings. In the five and one-half years
immediately prior to joining the Company,
Mr. Baldenegro was Property Manager for a
joint venture of the Company and Kemper
Insurance. Prior to the joint venture,
Mr. Baldenegro spent 10 years as Senior
Marketing Consultant with Grubb & Ellis,
a real estate brokerage company, and 10
years with the Xerox Corporation as a
Sales Executive.
Linda Mott 42 Ms. Mott has been the Companys Vice
Vice President President and Regional Manager since
and January 2004, Vice President and Area
Regional Manager Manager since January 2003 and Area
of the Manager since January 2002. She joined
Denver Region the Company in July 2000 as a Property
Manager. In the two years immediately
prior to joining the Company, Ms. Mott
was an asset manager for BetaWest, Inc.,
a real estate asset management firm. From
1989 to 1998, she was a property manager
for BetaWest, Inc. She earned her B.S. in
Business Administration at The University
of Colorado at Denver and has the CCIM
designation. She is a member of NAIOP and
has an RPA designation from the Building
Owners and Managers Institute.
Mark Yorita 48 Mr. Yorita has been the Companys Vice
Vice President President and Regional Manager for
and Southern California since June 1997 and
Regional Manager Regional Manager for Southern California
of the since May 1994. From August 1992 to April
Southern 1994, he served as senior project manager
California Region for Kemper Real Estate Management
Company. From May 1988 to July 1992, he
served as senior development and property
manager for Bedford Properties Holdings,
Ltd., a company wholly-owned by Mr.
Bedford. Mr. Yorita has worked in the
real estate industry since 1986. Prior to
that he worked in various capacities in
the construction industry for Standard
Oil of Ohio and Fluor Corporation. Mr.
Yorita received an M.B.A. from the
University of California at Berkeley and
a B.S. in Engineering from University of
Hawaii.
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Changes in Management
On March 9, 2004, the Company announced that Mr. Moore, the Companys President
and former Chief Operating Officer, plans to retire in July 2005. Effective as
of January 31, 2005, Mr. Silla has assumed the position of Chief Operating
Officer. Mr. Diehl has assumed Mr. Sillas property acquisition responsibilities.
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