SCHEDULE 14A
(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Amendment No.      )

 

Filed by the Registrant þ

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

o  Preliminary Proxy Statement

o  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

þ  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

 

HEALTHCARE REALTY TRUST INCORPORATED

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

þ  No fee required.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3310 WEST END AVENUE
SUITE 700
NASHVILLE, TENNESSEE 37203

 

April 2, 2008

TO OUR SHAREHOLDERS:

 

You are cordially invited to attend the 2008 annual meeting of shareholders of Healthcare Realty Trust Incorporated, to be held on May 13, 2008, at 10:00 a.m. (local time) at the Company’s executive offices at 3310 West End Avenue, Suite 700, Nashville, Tennessee.

 

Please read the enclosed 2007 Annual Report to Shareholders and Proxy Statement for the 2008 annual meeting. Whether or not you plan to attend the meeting, please sign, date and return the enclosed proxy, which is being solicited by the Board of Directors, as soon as possible so that your vote will be recorded. If you attend the meeting, you may withdraw your proxy and vote your shares personally.

 

Sincerely,

 

David R. Emery
Chairman and Chief Executive Officer

 

 

IMPORTANT

 

COMPLETE, DATE, AND SIGN THE ENCLOSED PROXY

AND RETURN IT PROMPTLY.

 

3310 WEST END AVENUE
SUITE 700
NASHVILLE, TENNESSEE 37203

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

To Be Held May 13, 2008

 

TO OUR SHAREHOLDERS:

 

The annual meeting of shareholders of Healthcare Realty Trust Incorporated (the “Company”) will be held on Tuesday, May 13, 2008, at 10:00 a.m. (local time) at 3310 West End Avenue, Suite 700, Nashville, Tennessee, for the following purposes:

 

 

Holders of the Company’s Common Stock of record at the close of business on March 13, 2008 are entitled to vote at the meeting or at any adjournment of the meeting.

 

By order of the Board of Directors

 

David R. Emery
Chairman and Chief Executive Officer

 

Dated: April 2, 2008

 

 

IMPORTANT

 

 

TO ASSURE THE PRESENCE OF A QUORUM, WHETHER YOU PLAN TO ATTEND THE MEETING IN PERSON OR BY PROXY, PLEASE COMPLETE, DATE, SIGN AND MAIL THE ENCLOSED PROXY AS SOON AS POSSIBLE. IF YOU ATTEND THE MEETING AND WISH TO VOTE YOUR SHARES PERSONALLY, YOU MAY DO SO AT ANY TIME BEFORE THE PROXY IS EXERCISED.

 

 

3310 WEST END AVENUE
SUITE 700
NASHVILLE, TENNESSEE 37203

 

PROXY STATEMENT

 

This Proxy Statement contains information related to the annual meeting of shareholders to be held at 3310 West End Avenue, Suite 700, Nashville, Tennessee, on Tuesday, May 13, 2008, at 10:00 a.m. (local time) for the purposes set forth in the accompanying notice, and at any adjournment thereof. This Proxy Statement and the accompanying proxy are first being mailed or given to shareholders on or about April 2, 2008.

 

If the enclosed proxy is properly executed, returned and not revoked, it will be voted in accordance with the instructions, if any, given by the shareholder, and if no instructions are given, it will be voted (a) FOR the election as directors of the nominees described in this Proxy Statement, (b) FOR ratification of the appointment of the firm BDO Seidman, LLP as the independent registered public accounting firm for the Company and its subsidiaries and (c) FOR the recommendation of the Board of Directors on any other proposal that may properly come before the meeting. The Company’s Board of Directors selected the persons named as proxies in the enclosed proxy.

 

Shareholders who sign proxies have the right to revoke them at any time before they are voted by written request to the Company, and the giving of the proxy will not affect the right of a shareholder to attend the meeting and vote in person. If you wish to attend the meeting and need directions to 3310 West End Avenue, Suite 700, Nashville, Tennessee, please contact the Company at (615) 269-8175.

 

The close of business on March 13, 2008 has been fixed as the record date for the determination of shareholders entitled to vote at the meeting. As of the close of business on such date, the Company had 150,000,000 authorized shares of common stock, $.01 par value (the “Common Stock”), of which 50,732,642 shares were outstanding and entitled to vote. The Common Stock is the Company’s only outstanding class of voting stock.

 

Each share of Common Stock will have one vote on each matter to be voted upon at the meeting.

 

ELECTION OF DIRECTORS

 

The Board of Directors is divided into three classes having three-year terms that expire in successive years. The current three-year term of the Class 3 directors expires at the 2008 annual meeting. The Board of Directors proposes that the nominees described below, all of whom have been nominated by the Board of Directors upon the recommendation of the Company’s Corporate Governance Committee and are currently serving as Class 3 directors, be re-elected to Class 3 to serve until the annual meeting of shareholders in 2011 or until their successors have been elected and take office. Each nominee has consented to be a candidate and to serve, if elected.

 

According to Maryland law, directors are elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. The Company’s Articles of Incorporation do not provide for cumulative voting and, accordingly, each shareholder may cast one vote per share of Common Stock for each nominee.

 

Unless a proxy specifies otherwise, the persons named in the proxy will vote the shares covered thereby for the nominees designated by the Board of Directors listed below. Should any nominee become unavailable for election, shares covered by a proxy will be voted for a substitute nominee selected by the Board of Directors upon the recommendation of the Corporate Governance Committee of the Board.

Class 3 Nominees

 

The nominees for election as Class 3 directors are:

 

 

Continuing Directors

 

The persons named below will continue to serve as directors until the annual meeting of shareholders in the year indicated and until their successors are elected and take office. Shareholders are not voting on the election of the Class 1 and Class 2 directors.

 

 

Except as indicated, each of the nominees and continuing directors has had the principal occupation indicated for more than five years.

 

The Board of Directors recommends that the shareholders vote FOR the
election of all of the proposed nominees to the Board of Directors.

 

CORPORATE GOVERNANCE

 

Committee Membership

 

The Board of Directors has an Executive Committee, Corporate Governance Committee, Audit Committee, and Compensation Committee. The Board of Directors has adopted written charters for each committee, except for the Executive Committee. The committee charters are posted on the Company’s website (www.healthcarerealty.com) and are available in print to any shareholder who requests a copy.

 

All committee members are non-employee, independent directors, except David R. Emery, the Chairman of the Board and Chief Executive Officer of the Company. The following table sets forth the current members of the committees:

 

 

 

 

Code of Ethics

 

The Company has adopted a Code of Business Conduct and Ethics (the “Code of Ethics”) that applies to all officers, directors, and employees of the Company, including its principal executive officer, principal financial officer, principal accounting officer, controller, or persons performing similar functions. The Code of Ethics is posted on the Company’s website (www.healthcarerealty.com) and is available in print free of charge to any shareholder who requests a copy. Interested parties may address a written request for a printed copy of the Code of Ethics to: Investor Relations, Healthcare Realty Trust Incorporated, 3310 West End Avenue, Suite 700, Nashville, Tennessee 37203. The Company intends to satisfy the disclosure requirement regarding any amendment to, or a waiver of, a provision of the Code of Ethics for the Company’s principal executive officer, principal financial officer, principal accounting officer, or controller, or persons performing similar functions by posting such information on its website.

 

Committee Duties

 

 

 

 

 

 

 

 

 

 

Meeting Attendance

 

The Board of Directors held a total of six meetings in 2007. Each director attended at least 75% of the meetings of the Board and committees of the Board on which such director served. The Company has not adopted a formal policy regarding director attendance at annual meetings of shareholders, but encourages each member of the Board of Directors to attend. Two members of the Board attended the 2007 annual meeting of shareholders.

Non-Management Executive Sessions; Lead Director

 

Periodically, and no less frequently than semi-annually, the non-management directors meet in executive session. The non-management directors have appointed Edwin B. Morris III as lead director to preside over the non-management executive sessions. During 2007, the non-management directors held four executive sessions. Shareholders and other parties interested in communicating with the non-management directors as a group may do so by contacting Mr. Morris in writing c/o Healthcare Realty Trust Incorporated, 3310 West End Avenue, Suite 700, Nashville, Tennessee 37203.

 

Director Education

 

The Corporate Governance Committee has adopted a set of guidelines that encourages all directors to pursue ongoing education and development studies on topics that they deem relevant given their individual backgrounds and committee assignments on the Board of Directors. Each director is expected to attend at least one ISS-accredited director education program during his or her three-year term as director. The Company pays for each director’s expenses incurred to attend accredited director education programs. Three directors attended ISS-accredited programs in 2007. All but one director attended an ISS-accredited program in the past three years.

 

Security Holder Communication with the Board of Directors

 

Shareholders and other parties interested in communicating directly with the Board of Directors or an individual director may do so by writing to Healthcare Realty Trust Incorporated, 3310 West End Avenue, Suite 700, Nashville, Tennessee 37203, Attention: Secretary. The Secretary of the Company will review all such correspondence and will regularly forward to the Board a summary of all such correspondence and copies of all correspondence that, in the opinion of the Secretary, deals with the functions of the Board or committees thereof or that she otherwise determines requires their attention. Directors may at any time review a log of all correspondence received by the Company that is addressed to members of the Board and request copies of any such correspondence.

 

Independence of Directors

 

The Board of Directors has adopted a set of Corporate Governance Principles (the “Principles”), addressing, among other things, standards for evaluating the independence of the Company’s directors. The full text of the Principles can be found in the Corporate Governance section of the Company’s website (www.healthcarerealty.com). A copy may also be obtained upon request from the Company’s Secretary.

 

Pursuant to the Principles, the Board undertook its annual review of director independence in January 2008. During this review, the Board considered transactions and relationships during the prior year between each director or any member of his or her immediate family and the Company and its subsidiaries, affiliates and equity investors. The Board also examined transactions and relationships between directors or their affiliates and members of the senior management or their affiliates. As provided in the Principles, the purpose of this review was to determine whether any such relationship or transaction was inconsistent with a determination that a director is independent.

 

To aid in making its annual review of director independence, the Board has adopted categorical standards for determining independence. A director is independent unless:

 

 

 

As a result of this review, the Board affirmatively determined that all of the directors are independent of the Company and its management under the standards adopted pursuant to the Principles with the exception of David R. Emery, who is employed by the Company as its Chief Executive Officer and is therefore not independent.

 

Director Nominee Evaluation Process

 

The Corporate Governance Committee is responsible for developing and implementing policies and practices relating to corporate governance. As part of its duties, the Committee develops and reviews background information on candidates for the Board and makes recommendations to the Board regarding such candidates. The Committee also prepares and supervises the Board’s annual review of director independence and the Board’s performance self-evaluation. A copy of the Corporate Governance Committee’s charter can be found in the Corporate Governance section of the Company’s website (www.healthcarerealty.com).

 

Once the Corporate Governance Committee has identified a prospective nominee, the Committee reviews the information provided to the Committee with the recommendation of the prospective candidate, as well as the Committee’s own knowledge of the prospective candidate, which may be supplemented by inquiries to the person making the recommendation or others. The preliminary determination is based primarily on the need for additional Board members to fill vacancies or expand the size of the Board and the likelihood that the prospective nominee can satisfy the evaluation factors described below. The Committee then evaluates the prospective nominee against the following standards and qualifications:

 

 

The Committee also considers such other relevant factors as it deems appropriate, including the current composition of the Board, the need for Audit Committee expertise and the evaluations of other prospective nominees. In connection with this evaluation, the Committee determines whether to interview the prospective nominee, and if warranted, one or more members of the Committee, and others as appropriate, interview prospective nominees in person or by telephone. After completing this evaluation and interview, the Committee makes a recommendation to the full Board as to the persons who should be nominated by the Board, and the Board determines after considering the recommendation and report of the Committee.

Shareholder Recommendation or Nomination of Director Candidates

 

The Company has not received any shareholder recommendations of director candidates with regard to the election of directors covered by this Proxy Statement or otherwise. The Corporate Governance Committee has not specifically adopted a policy regarding the consideration of shareholder nominees for directors, but its general policy is to welcome and consider any recommendations for future nominees. The Corporate Governance Committee will consider for nomination as director of the Company any director candidate recommended or nominated by shareholders in accordance with the process outlined below.

 

Shareholders wishing to recommend candidates for consideration by the Corporate Governance Committee may do so by providing the candidate’s name, qualifications and other pertinent information in writing to the Corporate Governance Committee, c/o Secretary, Healthcare Realty Trust Incorporated, 3310 West End Avenue, Suite 700, Nashville, Tennessee 37203.

 

Such information should include:

 

 

The Bylaws of the Company provide that any shareholder who is entitled to vote for the election of directors at a meeting called for such purpose may nominate persons for election to the Board of Directors subject to the following notice requirements. This is the procedure to be followed for direct nominations, as opposed to recommendation of nominees for consideration by the Corporate Governance Committee. To be timely for the 2009 annual meeting, such notice must be received by the Company at its executive offices no earlier than November 3, 2008 nor later than December 3, 2008.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT

 

The following table sets forth as of January 31, 2008, the beneficial ownership of the Company’s equity securities in accordance with Rule 13d-3 under the Securities Exchange Act of 1934. This means that all Company securities over which the directors, nominees and executive officers directly or indirectly have or share voting or investment power are listed as beneficially owned.

 

 

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers, and persons who own more than 10% of the Company’s Common Stock, to file with the SEC initial reports of ownership and reports of changes in ownership of the Common Stock. These officers, directors and greater than 10% shareholders of the Company are required by SEC rules to furnish the Company with copies of all Section 16(a) reports they file. There are specific due dates for these reports and the Company is required to report in this Proxy Statement any failure to file reports as required during 2007.

 

During 2007, based upon a review of these filings and written representations from the Company’s directors and executive officers, the Company believes that all reports required to be filed with the SEC by Section 16(a) during the most recent fiscal year have been timely filed, except as set forth below.

 

On May 15, 2007, the Company made the following grants of restricted stock to its executive officers:

 

David R. Emery			12,711
Scott W. Holmes			6,249
John M. Bryant, Jr.			5,345
B. Douglas Whitman, II			5,027

 

These grants were due to be reported on Form 4 on May 17, 2007, but were inadvertently filed late on May 21, 2007.

 

On June 29, 2007, B. Douglas Whitman, II purchased 588 shares of Common Stock through the Company’s Employee Stock Purchase Plan. This acquisition was due to be reported on Form 4 on July 3, 2007, but was inadvertently filed late on July 10, 2007.

 

SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Audit Committee has appointed BDO Seidman, LLP, Certified Public Accountants, as the Company’s independent registered public accounting firm for the fiscal year 2008. Representatives of this firm are expected to be present at the meeting and will have an opportunity to make a statement if they desire and will be available to respond to appropriate questions.

 

The affirmative vote of a majority of the votes cast at the meeting is needed to ratify the appointment of BDO Seidman, LLP as the Company’s independent registered public accounting firm for the fiscal year 2008. If the appointment is not ratified, the matter will be referred to the Audit Committee for further review. Abstentions as to this proposal will have no effect on the outcome of the vote.

 

Audit and Non-Audit Fees

 

The following tables present fees for professional audit services rendered by BDO Seidman, LLP, the Company’s independent accounting firm, for the last two years.

 

 

 

 

All services provided by the Company’s independent registered public accounting firm were approved by the Audit Committee, which concluded that the provision of such services by BDO Seidman, LLP was compatible with the maintenance of such accounting firm’s independence in the conduct of its auditing functions.

 

For the purpose of insuring the continued independence of BDO Seidman, LLP, the Company determined that its independent registered public accounting firm will not provide consulting services to the Company. Additionally, the charter of the Audit Committee provides that the Audit Committee must pre-approve all services to be provided by the independent registered public accounting firm. Proposed services exceeding pre-approved cost levels or budgeted amounts also require specific pre-approval by the Audit Committee.

 

The Board recommends that the shareholders vote FOR ratification of the

appointment of BDO Seidman, LLP as the Company’s independent registered public accounting firm.

 

AUDIT COMMITTEE REPORT

 

The following Report of the Audit Committee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this Report by reference therein.

 

The Audit Committee of the Board of Directors of the Company consists entirely of directors who meet the independence and experience requirements of the New York Stock Exchange. Audit Committee members may serve on the audit committees of no more than three public companies.

Pursuant to the Sarbanes-Oxley Act of 2002 and rules adopted by the SEC, the Company must disclose which members, if any, of the Audit Committee are “audit committee financial experts” (as defined in the SEC’s rules). The Company’s Board of Directors has determined that Bruce D. Sullivan, the chairman of the Audit Committee, meets the criteria to be an “audit committee financial expert.”          

 

 

The Company’s management has primary responsibility for preparing the Company’s Consolidated Financial Statements and implementing internal controls over financial reporting. The Company’s 2007 independent registered public accounting firm, BDO Seidman, LLP, is responsible for expressing an opinion on the Company’s Consolidated Financial Statements and on the effectiveness of its internal control over financial reporting.

 

The role and responsibilities of the Audit Committee are set forth in its charter, which has been approved by the Board and is available on the Company’s website.

 

As more fully described in its charter, the Audit Committee reviews the Company’s financial reporting process on behalf of the Board. Management has the primary responsibility for the Consolidated Financial Statements and the reporting process. The Company’s independent registered public accounting firm is responsible for performing an audit of the Company’s Consolidated Financial Statements in accordance with the standards of the Public Company Accounting Oversight Board (United States of America) and expressing an opinion on the conformity of the Consolidated Financial Statements to accounting principles generally accepted in the United States of America and on the effectiveness of internal control over financial reporting. The internal audit function is responsible to the Audit Committee and the Board for testing the integrity of the financial accounting and reporting control systems and such other matters as the Audit Committee and Board determine.

 

To fulfill its responsibilities, the Audit Committee has met and held discussions with management and the Company’s independent registered public accounting firm concerning the Consolidated Financial Statements for the fiscal year ended December 31, 2007 and the Company’s internal control over financial reporting. Management represented to the Audit Committee that the Company’s Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States of America, and the Audit Committee has reviewed and discussed the Consolidated Financial Statements with management and the independent registered public accounting firm. The Audit Committee discussed with the independent registered public accounting firm all communications required by generally accepted auditing standards.

 

In addition, the Audit Committee has discussed with the independent registered public accounting firm the auditors’ independence from the Company and its management, including the matters in the written disclosures required by the Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees.

 

Also, the Audit Committee reviewed major initiatives and programs aimed at strengthening the effectiveness of the Company’s internal control structure. The Audit Committee discussed with the internal audit function the Company’s internal controls and reporting procedures. As part of this process, the Audit Committee continued to monitor the scope and adequacy of the Company’s internal auditing program, reviewing staffing levels and steps taken to implement recommended improvements in internal procedures and controls.

 

Based on the Audit Committee’s review of the audited Consolidated Financial Statements and discussions with management and BDO Seidman, LLP, as described above and in reliance thereon, the Audit Committee recommended to the Company’s Board of Directors that the audited Consolidated Financial Statements for the fiscal year ended December 31, 2007 be included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.

 

Members of the Audit Committee:

 

Bruce D. Sullivan (Chairman)

Errol L. Biggs, Ph.D.

Batey M. Gresham, Jr.

 

COMPENSATION DISCUSSION AND ANALYSIS

 

The Compensation Committee, which is composed entirely of non-employee, independent directors, administers the Company’s executive compensation programs. In performing its duties, the Compensation Committee:

 

 

Comprehensive Compensation Policy

 

The Company’s principal measures of corporate success are growth in funds from operations (“FFO”) and funds available for distribution (“FAD”) and reducing the percentage of FFO and FAD used to pay dividends. The Compensation Committee believes that a number of performance criteria factor into these measures, including:

 

 

The Company’s long-term incentive compensation program is designed to link compensation to the Company’s overall performance in the above criteria. Since inception, the Company has used restricted stock grants as the primary means of delivering long-term incentive compensation to its officers. Officers share in the Company’s success through increasing stock ownership. The Company does not utilize stock options or similar rights in the compensation of its management group (the only Company stock options outstanding are in connection with employee elections to purchase under the Company’s 2000 Employee Stock Purchase Plan). The program does not consider individual performance in setting compensation, although the Compensation Committee could choose to reward outstanding individual performances. Awards under the Company’s incentive plans have reflected the Company’s evolving status into an operating entity with greater emphasis on managing and replacing a maturing portfolio by providing incentives to all of its officers who will direct their individual and collective efforts toward insuring the continued distribution of dividends to shareholders.

 

The Compensation Committee believes that the compensation of the Company’s officers, including the Named Executive Officers, should provide a competitive level (but less than top of the market) of total compensation necessary to attract and retain talented and experienced officers, and motivate them to contribute to the Company’s success. To date, the Compensation Committee believes that this approach has been successful in retaining officers.

 

The Company’s compensation program for its executive officers consists of three key elements:

 

 

 

The Compensation Committee believes that there are no material differences in the compensation policies and decisions relating the compensation of the Named Executive Officers, except for Mr. Emery’s participation in the Company’s Executive Retirement Plan, in which the other Named Executive Officers are not participants. The Executive Retirement Plan is discussed in greater detail on page 26 of this Proxy Statement. The Executive Retirement Plan was established early in the Company’s existence for the benefit of the founding officers. The Compensation Committee believes that this distinction is appropriate given the founder status of Mr. Emery.

 

Compensation Methodology

 

Compensation Committee’s Governance.  The Compensation Committee approves salaries and makes other compensation decisions for the Company’s Named Executive Officers and its directors. Salaries and other compensation decisions for all other officers and employees are made by management within the parameters of the Company’s compensation policies and plans.

 

The Compensation Committee meets four times a year in conjunction with the quarterly meetings of the full Board of Directors and more often if necessary. Prior to each regular meeting, members of the Company’s management send materials to each of the Compensation Committee members, including minutes of the previous meeting, an agenda and recommendations for the upcoming meeting, and other materials relevant to the agenda items. During 2007, the Company’s Chief Executive Officer, Chief Financial Officer, General Counsel, and outside legal counsel also attended the Compensation Committee meetings. These officers provide information and discuss performance measures with the Compensation Committee relating to officer compensation. After every quarterly meeting, the Compensation Committee holds an executive session consisting only of the committee members and frequently holds executive sessions with the Chief Executive Officer.

 

In 2006, management began a practice of using comprehensive executive compensation worksheets (commonly referred to as “tally sheets”) that set forth the Company’s total compensation obligations to its Named Executive Officers under various scenarios. The tally sheets for each Named Executive Officer are distributed to the members of the Compensation Committee for discussion and are used in the preparation of the compensation tables in this Proxy Statement. The overall purpose of these tally sheets is to bring together, in one place, all of the elements of actual and potential future compensation of the Named Executive Officers, including information about wealth accumulation.

 

In its most recent review of the tally sheets, the Compensation Committee determined that annual compensation amounts for the Named Executive Officers remained consistent with the Compensation Committee’s expectations, taking into account the scheduled market-based and cost-of-living adjustments to annual base compensation, as further discussed below.

 

The Compensation Committee reviews and approves, in advance, employment, severance or similar arrangements or payments to be made to any Named Executive Officer. The Compensation Committee annually reviews all of the perquisites paid to the Named Executive Officers, as well as their compliance with the Company’s policies regarding perquisites.

 

Compensation Consultant.  The Compensation Committee retains Ernst & Young LLP, Atlanta, Georgia (“Ernst & Young”) as a compensation consultant, who advises it regarding market trends and practices in executive compensation and with respect to specific compensation decisions. The consultant also provides, at the Compensation Committee’s request, a market survey containing data on the levels of compensation at comparable real estate companies. The consultant may also attend Compensation Committee meetings at the Committee’s request. Ernst & Young participated by telephone in one of the Compensation Committee’s six meetings in 2007. In May, 2006, the Compensation Committee engaged Ernst & Young to provide the following consulting services:

 

 

 

During 2007, Ernst & Young provided the Compensation Committee with an overview of compensation trends in the industry. Ernst & Young also reviewed draft forms of the Long-Term Incentive Program on behalf of the Compensation Committee prior to the adoption of the program.

 

When making compensation decisions, the Compensation Committee reviews the compensation of executive officers of other companies considered to be peer companies, a practice often referred to as “benchmarking.” The 2006 Ernst & Young study was the first comprehensive market study of Named Executive Officer compensation performed for the Company since 2003. In performing its services, Ernst & Young interacted collaboratively with the Compensation Committee and the Company’s Executive Officers. Ernst & Young performed its services as follows:

 

 

Arden Realty, Inc. BRE Properties, Inc. Camden Property Trust CarrAmerica Realty Corporation CenterPoint Properties Trust Colonial Properties Trust Cousins Properties Incorporated First Industrial Realty Trust, Inc. Health Care Property Investors, Inc.		Health Care REIT, Inc. Highwoods Properties, Inc. LTC Properties, Inc. Mack Cali Realty Corporation Nationwide Health Properties, Inc. Omega Healthcare Investors, Inc. Shurgard Storage Centers, Inc. Ventas, Inc.

 

 

The Compensation Committee’s policy is to meet annually with the compensation consultant to discuss executive compensation trends. Historically, Ernst & Young has also provided services related to the compensation of the Company’s Board of Directors, but it did not provide such services during 2007.

 

Ernst & Young received total compensation of $6,150 for its services in 2007.

 

Components of Compensation

 

Annual Base Compensation.  Annual base compensation is determined by a market-based formula based upon the total cash compensation (including bonuses) paid by comparable companies for similar positions. The

Compensation Committee reviewed the Ernst & Young market compensation salary survey performed in 2006 as described above and found that annual cash compensation paid to the Named Executive Officers has been substantially less than cash compensation paid for similar positions within the peer group of companies surveyed.

 

In December 2006, based on the findings of Ernst & Young, the Compensation Committee determined annual base compensation for its Named Executive Officers for 2007 equal to the median (50th percentile) total cash compensation (including annual incentive bonuses) of comparable positions in the Ernst & Young peer group survey, and added a tenure adjustment to the median amount based on the officer’s length of service. The tenure adjustment is calculated as 1/20th of the difference between the median total cash compensation and the 75th percentile total cash compensation for the position for each year of the officer’s service to the Company. The Compensation Committee used the Ernst & Young 2006 peer group survey as a benchmark for annual base compensation for the Named Executive Officers for 2007 and 2008 and intends to do the same in 2009. Of the increase in annual base compensation for 2007 over 2006, twenty-five percent was paid to each Named Executive Officer in cash and seventy-five percent was paid in the form of a restricted stock grant having an eight-year vesting period. These restricted stock grants, in lieu of cash, allowed the Company to amortize the restricted stock value in accordance with accounting principles generally accepted in the United States versus recording the full amount to compensation expense in 2007.

 

In addition to the tenure-based salary adjustment discussed in the preceding paragraph, for 2008, annual base compensation for the Named Executive Officers has increased over the 2007 amounts by a 3% cost of living adjustment. Fifty percent of the difference between the annual base compensation for 2008, as compared with annual base compensation for 2006, will be paid in the form of a restricted stock grant and the remaining fifty percent of the difference will be paid in cash. For 2009, annual base compensation for the Named Executive Officers is expected to increase over the 2008 amounts by a cost of living adjustment. Twenty-five percent of the difference between the annual base compensation for 2009, as compared with annual base compensation for 2006, will be paid in the form of a restricted stock grant and the remaining seventy-five percent of the difference will be paid in cash. It is expected that the peer group survey will be performed again in 2009, the median and 75th percentile comparables will be re-calculated and each officer’s base compensation for 2010 will be adjusted based on the new information using the same methodology. For 2008, the base compensation of the Company’s Named Executive Officers have been set as follows:

 

 

 

 

While the Compensation Committee recognizes that determining base salaries based solely on market competitiveness data does not directly tie this component to the achievement of the Company’s overall measures of business success, it believes that having a cash compensation system which is completely market driven reduces the acrimony and politicization of the compensation process. The Company’s officer group is small enough that they should be totally focused on the Company’s performance. Officers who are not so focused are mentored or, if necessary, terminated. Moreover, the Compensation Committee views cash compensation as one element of overall compensation and not necessarily as the principal instrument to provide incentive to the officers.

Bonuses.  While the Company has not typically awarded cash bonuses to Named Executive Officers, it may do so at its discretion. The Compensation Committee believes that annual cash bonuses may not provide effective incentives to employees to further the Company’s long-term goals. As a result, the Company included bonus levels in peer companies in its base salary formula.

 

Stock Ownership.  The Compensation Committee believes that it is in the Company’s best interest to encourage all employees, especially the Named Executive Officers, to increase their equity position in the Company to promote share ownership and further align officer and shareholder interests. The Company, however, does not have any policies requiring minimum stock ownership of its Named Executive Officers or directors.

 

Awards under the Company’s incentive plans have reflected the Company’s evolving status into an operating entity with greater emphasis on managing and replacing a maturing portfolio by providing incentives to all of its officers who will direct their individual and collective efforts toward insuring the continued successful delivery of dividends to shareholders. The Compensation Committee also believes that by increasing and broadening the officers’ ownership stake in the Company, future awards under its incentive plans should be an effective tool in retaining this broader group of officers. The Compensation Committee periodically reviews the Company’s stock plans and retains the authority to make changes to those plans as deemed necessary. During 2007, the Company had three stock programs whereby its officers might be granted restricted shares of stock. The Company’s Long-Term Incentive Program, adopted on December 10, 2007, is comprised of two distinct features: the Salary Deferral Plan and the Performance Award Program. A third program, the Optional Restricted Stock Vesting Deferral Plan (the “Optional Deferral Plan”), allows an officer to further defer receipt of restricted shares awarded under the Salary Deferral Plan, the Performance Award Program, or any predecessor plans.

 

Salary Deferral Plan.  Under the Salary Deferral Plan, officers may elect to defer up to 40% of their base salary in the form of restricted shares of stock. The number of shares can be increased by a multiple of the deferred amount depending on the length of the vesting period selected by the officer. This program is designed to provide the Company’s officers with an incentive to remain with the Company long-term.

 

Performance Award Program.  The Long-Term Incentive Program was adopted under the 2007 Employees Stock Incentive Plan (the “2007 Incentive Plan”) and provides the Compensation Committee a framework for providing certain incentive grants under the 2007 Incentive Plan. Pursuant to the performance award provisions of the Long-Term Incentive Program, all officers, including the Named Executive Officers, can receive restricted shares of stock based upon an analysis of the Company’s performance under a set of criteria. The Company designates an amount each year to a memorandum account for each officer equal to 25% of the officer’s base salary, as defined in the 2007 Incentive Plan, for the current year. Restricted shares are issued from the available balance in the memorandum account based on the performance of the Company. If the Compensation Committee determines that the Company has not sufficiently performed against the measurement criteria, no shares are granted to the employees and the memorandum account balance continues to build up until when, or if, such performance measures are met. The Compensation Committee may grant performance awards in excess of the memorandum account when exceptional performance is demonstrated. No awards have been granted from the memorandum account balances since 2004.

 

The measurement criteria does not include the setting of performance targets in advance. Rather, the criteria provides a set of guidelines through which the Compensation Committee uses its discretion to review the performance of the Company and the efforts of the Named Executive Officers in past periods. The Compensation Committee believes that this system allows it the benefit of taking into account all relevant information, including market forces and events outside the control of the Named Executive Officers.

 

Awards may be granted to each officer upon the Compensation Committee’s determination and in its discretion and are subject to such vesting periods and requirements as the Compensation Committee determines. Management of the Company may annually propose performance awards under the Long-Term Incentive Program to the Compensation Committee.

 

If management proposes performance awards under the Long-Term Incentive Program, the proposal is required to include: the aggregate size and amount of the awards; a schedule of officers that are proposed to participate and the allocation of awards by officer; and an analysis of the Company’s performance for the previous

year. The measurement of the Company’s performance is based on performance for the twelve month period ended September 30 and must include an analysis of the following criteria:

 

 

FFO, FAD and NOI are non-GAAP measures used by the Company as supplemental measures of performance because they provide an understanding of the operating performance of the Company’s properties without giving effect to certain significant non-cash items, primarily depreciation and amortization expense.

 

 

In determining whether to grant performance awards under the Long-Term Incentive Program, the Compensation Committee will consider management’s proposals and analysis and any and all other information that the Committee deems relevant to its determination. The Compensation Committee has the sole discretion to accept, reject or modify management’s proposed awards. The Compensation Committee also has the discretion to designate an aggregate amount of awards for a group of officers other than the Named Executive Officers, to be allocated to individual officers at the discretion of the Chief Executive Officer.

 

As of January 31, 2008, no performance awards had been granted under the Long-Term Incentive Program. The aggregate balances of the memorandum accounts totaled $3,697,556 at December 31, 2007, of which $1,326,845 was attributable to the Named Executive Officers. The Company’s previous long-term incentive plan was superseded by the Long-Term Incentive Program. The memorandum account balances that existed in the previous plan were credited to the officers’ memorandum accounts under the Long-Term Incentive Program, which is included in the memorandum account balances at December 31, 2007 described above.

 

Optional Deferral Plan.  Under the Optional Deferral Plan, certain officers approved by the Compensation Committee may elect to extend the vesting period of certain restricted shares prior to the original vesting date. This incentive, which helps secure the officer’s allegiance to the Company, is also provided because the vesting period subjects the shares and the restriction multiple to the risk of forfeiture in the event an officer voluntarily terminates employment or who is terminated for cause from employment with the Company. Accordingly, if an officer voluntarily leaves or is terminated for cause, that officer would lose all such shares that had not yet vested.

 

In addition to the three stock programs mentioned above, all employees meeting minimum service requirements, including the Company’s officers, are eligible to purchase shares pursuant to the Company’s 2000 Employee Stock Purchase Plan (the “Purchase Plan”). As further discussed under the heading “Grants of Plan-Based Awards” in the section entitled “EXECUTIVE COMPENSATION” beginning on page 23 of this Proxy Statement, each participant is granted an option on January 1 of each year to purchase up to $25,000 of the Company’s Common Stock under the Purchase Plan.

Termination and Change-in-Control Arrangements

 

Under the terms of the Company’s compensation plans and its employment agreements with the Named Executive Officers, the Named Executive Officers are entitled to payments and benefits upon the occurrence of specified events including termination of employment and upon a change-in-control of the Company. The specific terms of these arrangements are discussed in this Proxy Statement beginning on page 27 under the heading “Termination and Change in Control Arrangements with Named Executive Officers” under the section entitled “POST-EMPLOYMENT COMPENSATION.” In the case of the employment agreements, the terms of these arrangements were agreed to after the course of arms-length negotiations with each Named Executive Officer. In considering the aggregate potential obligations of the Company in the context of the desirability to maintain the employment of these individuals, the Compensation Committee believes that these arrangements are appropriate under the Company’s current circumstances.

 

Perquisites

 

The Compensation Committee’s policy on the provision of executive perquisites with respect to the Named Executive Officers is to allow each of them to receive perquisites up to an amount equal to 10% of their annual base compensation. If the executive receives benefits that would otherwise be considered perquisites in excess of this amount (generally calculated based on the associated tax value), he is required to reimburse the Company the amount of such excess.

 

The Company provides its executive officers with perquisites that it believes are reasonable, competitive and consistent with the Company’s overall executive compensation program. The Company believes that such perquisites help the Company to retain its executive personnel and allows them to operate more effectively. These perquisites include:

 

Use of the Company’s aircraft for personal travel.  The Compensation Committee believes that allowing the Company’s Named Executive Officers to use Company aircraft for personal travel provides the officers with significant convenience, safety, and security at a relatively low incremental cost to the Company.

 

Supplemental life and disability insurance.  The Company also offers to its Named Executive Officers an opportunity to purchase supplemental term life insurance and supplemental disability insurance at the Company’s expense, subject to cost reimbursement pursuant to the perquisite policy discussed above.

 

Internal Revenue Code Section 162(m)

 

Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public companies for compensation over $1 million paid to a corporation’s chief executive officer and the four other most highly compensated executive officers. Qualifying performance-based compensation will not be subject to the deduction limit if certain requirements are met. Restricted stock issued under the 1993 and 2003 Employees Restricted Stock Incentive Plan and 2007 Incentive Plan and associated dividends are not subject to the performance-based compensation deduction under Section 162(m). Consequently, compensation expense in the amount of $5,608,063 in 2007 was not deductible. As a qualifying REIT, the Company does not pay federal income tax; therefore, the unavailability of the Section 162(m) compensation deduction to these amounts did not result in any increase in the Company’s federal income tax obligations. The Compensation Committee has not adopted a policy requiring all compensation to be deductible.

 

Retirement Benefits

 

The Company has an Executive Retirement Plan under which certain officers designated by the Compensation Committee may receive a specified percentage of the officer’s final average earnings. See the section entitled “POST-EMPLOYMENT COMPENSATION” beginning on page 26 of this Proxy Statement for details of the Executive Retirement Plan.

 

All Named Executive Officers are eligible to participate in the Company’s 401(k) plan, pursuant to which each participant may contribute up to the annual maximum allowed under IRS regulations ($15,500 for 2007 and 2008). All eligible participants over the age of 50 may also contribute an additional $5,000 per year to the plan. The

Company provides a matching contribution for the first three percent of base salary contributed in the plan, up to a maximum of $2,800 per year per person.

 

Compensation of Non-Employee Directors

 

Compensation of non-employee directors is set by the Compensation Committee, based upon periodic peer reviews prepared by the Company, the findings of which are confirmed by Ernst & Young LLP and approved by the Committee.

 

Cash Compensation.  Each non-employee director receives an annual retainer and meeting fee, respectively, with chairpersons of Committees receiving additional annual retainers. See the section entitled “DIRECTOR COMPENSATION” beginning on page 30 of this Proxy Statement for a complete discussion of the cash compensation given to non-employee directors.

 

Stock Awards.  The Company awards non-employee directors an annual grant of 2,000 restricted shares of Company Common Stock. See the section entitled “DIRECTOR COMPENSATION” beginning on page 30 of this Proxy Statement for a complete discussion of the terms of the restricted shares granted to non-employee directors.

 

Retirement.  The Company has a retirement plan for outside directors under which eligible directors may receive upon normal retirement an annual payment for a period equal to the number of years of service as a director but not exceeding 15 years. See the section entitled “DIRECTOR COMPENSATION” beginning on page 30 of this Proxy Statement for a complete discussion of the retirement compensation given to non-employee directors.

 

COMPENSATION COMMITTEE REPORT

 

The following Report of the Compensation Committee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this Report by reference therein.

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this Proxy Statement with Company management and based on such review and discussions, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

Members of the Compensation Committee:

 

Edwin B. Morris III (Chairman)

Charles Raymond Fernandez, M.D.

John Knox Singleton

 

EXECUTIVE COMPENSATION

 

The following Summary Compensation Table reflects the total compensation of the Company’s Named Executive Officers for the two years ending December 31, 2007.

 

Summary Compensation Table

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grants of Plan-Based Awards

 

The Company has one plan under which performance-based awards may be made to its officers. All of the Company’s officers, including the Named Executive Officers, are eligible to receive performance-based compensation under the 2007 Incentive Plan, under which shares of Common Stock can be issued based upon the Company’s performance. The 2007 Incentive Plan is comprised of two distinct programs, the Salary Deferral Plan and the Long-Term Incentive Program both of which are discussed beginning on page 16 of this Proxy Statement. The 2007 Incentive Plan superseded the 2003 Plan. However, the memorandum account balances under the 2003 Plan were carried forward to the 2007 Incentive Plan.

 

The following table supplements the Summary Compensation Table by providing more detailed disclosure of equity compensation received by the Named Executive Officers during 2007 and the total memorandum account balances as of December 31, 2007.

 

 

 

 

 

 

 

 

 

Pursuant to the Salary Deferral Plan, officers may elect to defer receipt of cash up to 40% of their base salary in the form of shares of restricted stock. The officer must elect his or her participation level and vesting period for the coming year by the end of the current fiscal year. The restricted shares, granted on January 1 of each year, are priced on the closing market price of the Company’s Common Stock on the last trading day of the year preceding the year in which the shares are issued. Pursuant to the Salary Deferral Plan, the number of shares can be increased by a multiple of the deferred amount depending on the length of the vesting period selected by the officer. Each officer who makes this election will be awarded additional shares at no additional cost to the officer according to the following multiple-based formula:

 

Duration of Restriction Period		Restriction Multiple
3 years			1.3
5 years			1.5
8 years			2.0

 

This program is designed to provide the Company’s officers with an incentive to remain with the Company long-term. The vesting period subjects the shares obtained by the cash deferral and the restriction multiple to the risk of forfeiture in the event an officer voluntarily terminates employment or who is terminated for cause from employment with the Company. Accordingly, if an officer voluntarily leaves or is terminated for cause, that officer would lose all such shares that had not yet vested.

 

Certain officers approved by the Compensation Committee are eligible to receive non-performance equity awards under the Company’s Optional Deferral Plan. Under the Optional Deferral Plan certain officers may elect to extend the vesting period of certain restricted shares prior to their original vesting date. An officer who elects to extend the vesting date of his shares will receive additional shares at no additional cost to the officer according to the following multiple-based formula:

 

Duration of Extended Period		Extension Multiple
3 years			1.3
5 years			1.5
8 years			2.0

 

This incentive, which helps secure the officer’s allegiance to the Company, is also provided because the vesting period subjects the shares and the restriction multiple to the risk of forfeiture in the event an officer voluntarily terminates employment or who is terminated for cause from employment with the Company. Accordingly, if an officer voluntarily leaves or is terminated for cause, that officer would lose all such shares that had not yet vested.

In addition, eligible employees, are granted an option to purchase shares pursuant to the Purchase Plan. Each participant is granted an option on January 1 of each year to purchase up to $25,000 of the Company’s Common Stock. The number of shares is determined by dividing $25,000 by the closing market price of the Company’s Common Stock on December 31 of the preceding year. Participants may purchase shares at a price equal to the lesser of (i) 85% of the grant price or (ii) 85% of the closing market price of the Company’s Common Stock on the purchase date. No option can be exercised for more than $25,000 worth of Common Stock for the life of the option. Each option expires 27 months after it is granted.

 

Outstanding Equity Awards at Fiscal Year-End

 

The following table discloses the number of securities underlying options and the number and market-based value of restricted shares outstanding that have not vested as of December 31, 2007.

 

 

 

 

Option Exercises and Stock Vested for 2007

 

The following table shows the amounts received by the Named Executive Officers upon the exercise of options or the vesting of restricted stock during the most recent fiscal year.