G&A is a big drain on REITs

Most expenses that appear on the income statement have some sort of return associated with them.

  • Interest expense is related to debt which was used to buy income generating properties
  • Capex, is used to maintain buildings that produce revenues
  • Investment in new properties brings in incremental income

Even when poorly executed these expenses are not fully bad.  Perhaps management overpaid for a new property or was inefficient with maintenance capex.  Its only a real loss equal to the magnitude of overpaying.  The majority of the expenditure is still revenue producing.

G&A is different

All of the money paid to CEOs is eliminated from shareholders pockets.  It does not provide any incremental revenue, nor does it preserve existing revenues.  It is a total loss.

An extra $1mm going to management is a much bigger problem than an extra $1mm spent just about anywhere else.

For this reason, we are extremely cautious around REITs that overpay their executives.

Safehold pays roughly 40% of its revenues in G&A.  Kilroy Realty paid John Kilroy $43.6mm in 2018, nearly double the compensation of the 2nd highest paid REIT CEO (Prologis).  It does not really matter whether the compensation is in cash, stock, restricted stock, options, LTIP, or whatever other buckets executives like to hide their salaries in.  Shareholders will never see that capital again.

We watch diligently to ensure that the CEOs of the companies in 2CHYP are good stewards of shareholder capital.  There are a couple on the watchlist.  Arthur Coppola of Macerich got $12.9mm in 2018 and Ed Aldag of MPW received total compensation of $13.2mm.

Coppola’s was likely related to severance as he is no longer the CEO, so that should be one time in nature.  We will be watching MPW closely and if this is the start of a trend we may decide to take our profits.

On the flip side, Kenny Gunderman, CEO of UNIT, has shown strong alignment with shareholders by voluntarily declining half of his incentive compensation as a show of solidarity given how poor shareholder returns have been lately.

Gladstone Commercial’s external manager has historically foregone portions of its compensation to provide dividend coverage.

SLG and RLJ are shrinking their asset pools which tends to lower executive compensation in the long run.  We see this as a sign of good stewardship.

G&A is just one of many factors that goes into fundamental analysis, but it is highly impactful and often overlooked.

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2CHYP Performance: inception through end of July 2019

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