It’s the start of June—one of three best months to be alive—and yet, I’m stuck reading through the shenanigans that CEO Nicholas Schorsch is pulling at American Realty.
I’m still sorting through it all, but my initial impression is this: it appears that he can receive $92 million over the next five years simply for delivering 7% total returns and beat a group of selected peers by six percentage points annually over that time frame. As a reference point, the REIT pays out a $0.0833 monthly dividend, which is a dividend yield of 8.05% based on current prices. In other words, if the price of the stock remains static and the dividend payout remains the same, the first leg of that performance hurdle would be automatically met right now.
Really, the scary thing is that, Schorsch was unrepentant when reached for comment by the Wall Street Journal. Describing his $10 million base pay (not even speaking about the low hurdle performance bonuses), he offered this:
“It’s not like I’m making $10 million for showing up, staying at the office until 11 a.m., drinking a few cups of coffee and then playing golf the rest of the day.”
Someone who is incapable of experiencing shame is not someone to whom you want to give your money. If someone acts embarrassed when it is discovered that they have engaged in wrongdoing, they are still redeemable. Moral pressure and social expectations apply to them, and the memory of losing that respect can stick with them and lead to reformed behavior. But when someone is truly apathetic to what you think about them when they are rewarding themselves in an outlandish way, then the only restraint on their animal spirits is an outside force: a large activist shareholder stepping in and forcefully saying, “Knock it out!” But if you are dealing with someone incapable of imposing any restraint upon himself, you are going to get into trouble, then shareholders are at risk of losing significant value because there is no real self-policing mechanism at work.
And it’s not like you’re getting super high-quality assets in return either: Schorsch recently took on over 500 different Red Lobster locations as tenants. In other words, American Realty investors have to deal with an executive that treats shareholder equity as a giant piggy bank to shake at will while part of the cash flow generated for shareholders is going to hinge on Red Lobster paying its rent.
Not exactly a stock you’d buy if you followed the Warren Buffett advice of pretending you get a punchcard that only lets you make twenty investments over the course of a lifetime, eh?
To be fair, because this is real life and not an Aesop fable, there is a rationale for why American Realty could prove a workable investment over the next 5-10 years. First, even though I think the social fabric of America will not be torn the day Red Lobster goes under, there is no indication that the restaurant chain won’t be able to pay its rent in the near future. And secondly, Red Lobster is only a small part of American Realty’s overall assets. Thirdly, Schorsch has proven himself to be a good manager, and so it is hard to predict the results of what happens when a good manager receives outrageous compensation. And fourthly, this mini-scandal has allowed American Realty to trade in line with its 2011 valuation, suggesting the possibility that its discounted trading to cash flow per share generation is proof of investor overreaction and an opportunity for better-than-expected returns going forward. Those are the nuances that we have to fairly take into account.
It’s just…there are so many easier ways to make money. I can’t see, even in a realistic best case scenario, how American Realty could outproduce a basket of stocks that include Visa, Nestle, Johnson & Johnson, and Colgate-Palmolive over the next 15-25 years. Given that, why embrace the significant downside and the questionable morality that makes you wonder if the businessman at the top is fleecing you with dubious assertions of his economic worth to the company? If you stick with good brands led by management teams that are not outrageously diluting shareholders, you avoid the heartache.
Personally, I give American Realty the Hester Prenn treatment—in my files, the Scarlet Letter for American Realty simply says, “Don’t go there.” It’s so easy to capture the potential upside of American Realty without taking on its potential downside. This is basic risk management.