By Steven Syre, Columnist
Tuesday, January 10, 2006
What do you give the chief executive who has everything?
Heritage Property Investment Trust of Boston, a leader
on this nagging business question, may have finally painted
itself into a corner with pay packages awarded to chief
executive Thomas Prendergast.
Prendergast was already established as a lavishly
compensated executive when the modest-size real estate
investment trust he leads ran into a problem last fall. His
cash compensation, benefits, and stock awards have averaged
just under $9 million annually over the previous three
years. Of course, there were stock options too.
Heritage gave Prendergast 530,000 options over the past
three reported years, but that wasn't all. It promised to
pay his taxes on the profits when he exercised those
options, an unusual added benefit. The real problem:
Heritage had failed to account properly for the perk and was
forced to restate past earnings reports last fall.
Investors who were already grumbling about Prendergast's
compensation hit the roof.
Analyst David Fick of Stifel Nicolaus & Co. asked
Prendergast on an Oct. 21 conference call whether he would
be willing to waive the benefit. ''You are already the
highest paid CEO in the sector and make more than double
what any of your [peers] make," he said.
Another analyst, Louis Taylor of
Deutsche Bank Securities, scoffed at Prendergast's vow
to do the right thing. ''How can you say integrity and
character are fundamental values when this company seems to
be run with the shareholders as really an afterthought?" he
asked on the same call.
The issue was settled for good last week, when Prendergast
agreed to surrender the perk, for a price. Heritage will
write him a check for $6.4 million, roughly what the tax
benefit is worth based on the trust's current stock price.
Real estate investment trusts generate plenty of fat
executive paychecks, but Heritage still stands out among its
peers. A report published last month by
Wachovia Securities rated REITs on executive pay in
relation to shareholder returns and found Heritage to be
among the industry's five worst.
I reviewed CEO compensation at five REITs larger than
Heritage but in the same specific business: managing
portfolios of shopping centers. Prendergast easily topped
The future may pose more challenges. Analyst Jeffrey
Donnelly of Wachovia, in a separate report in October, said
coming consolidation and increased competition would favor
highly capitalized national developers and owners of
blue-chip local portfolios. ''Heritage does not fit either
profile," Donnelly wrote.
Before it went public in 2002, Heritage was a private real
estate investment trust owned principally by the New England
Teamsters & Trucking Industry Pension Fund. The pension
fund remains the largest Heritage stockholder today, with a
41 percent stake.
Prendergast was chief of the predecessor organization going
back to 1980. At one time his brother-in-law, former
Teamsters international president William McCarthy, was
chairman of the New England Teamsters pension fund.
Prendergast's brother, Robert Prendergast, is chief
operating officer of Heritage today.
Heritage explains Prendergast's compensation package,
dominated by big equity awards, in the context of that long
history. ''Unlike his peers, historically, our CEO had zero
stock ownership in a company he had built over 30 years,"
said Robert Watson, chairman of Heritage's compensation
Watson said the stock, a one-time award approved in 2002 to
be rationed out over five years, was meant to align
management interests with those of stockholders. He said
Prendergast's compensation, excluding the stock award, was
average compared with peers.
Add the numbers up and Prendergast will probably make more
than $50 million in total compensation over Heritage's first
five years as a public REIT. So exactly who made out when
Heritage decided to go public in the first place?
Steven Syre is a Globe
columnist. He can be reached at