UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
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Securities Exchange Act of 1934
(Amendment No. __)

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NATIONWIDE HEALTH PROPERTIES, INC.

 

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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

To Be Held May 4, 2010

 

To the Stockholders:

 

The annual meeting of stockholders of Nationwide Health Properties, Inc. will be held at the Conference Center at 610 Newport Center Drive, Newport Beach, California on May 4, 2010, at 1:00 p.m. local time. At the meeting, stockholders will act on the following matters:

 

(1) Election of three directors, each for a term of three years;

 

(2) Ratify the appointment of Ernst & Young LLP as independent accountants for 2010;

 

(3) Approve the amendment and restatement of the Nationwide Health Properties, Inc. 2005 Performance Incentive Plan; and

 

(4) Any other matters that may properly come before the meeting.

 

Stockholders of record at the close of business on March 17, 2010 are entitled to notice of and to vote at the meeting or any postponement or adjournment of the meeting.

 

We intend to take advantage of Securities and Exchange Commission rules that allow issuers to provide access to proxy materials over the Internet. Accordingly, we are mailing, on or about March 25, 2010, a Notice of Internet Availability of Proxy Materials to stockholders of record at the close of business on March 17, 2010.

 

By Order of the Board of Directors

 

Douglas M. Pasquale

Chairman of the Board, President and Chief Executive Officer

 

March 25, 2010

Newport Beach, California

 

TABLE OF CONTENTS

 

NATIONWIDE HEALTH PROPERTIES, INC.
610 Newport Center Drive, Suite 1150
Newport Beach, California 92660

 

PROXY STATEMENT

 

The Board of Directors (the “Board”) of Nationwide Health Properties, Inc. (the “Company”) is providing these materials for the solicitation of proxies for use at our annual meeting of stockholders to be held on May 4, 2010, beginning at 1:00 p.m., Pacific time, at the Conference Center, 610 Newport Center Drive, Newport Beach, California, and at any time and date to which the annual meeting may be properly adjourned or postponed. This proxy statement and the accompanying Notice of Annual Meeting of Stockholders describe the purposes of the annual meeting. Distribution of these proxy solicitation materials is scheduled to begin on or about March 25, 2010 to all stockholders entitled to notice of and to vote at the meeting.

 

What is the purpose of the annual meeting?

 

At the Company’s annual meeting, stockholders will act upon the matters outlined in the accompanying notice of meeting, including the election of directors, the ratification of Ernst & Young LLP as the Company’s independent accountants for the fiscal year ending December 31, 2010, and the approval of the amendment and restatement of the Nationwide Health Properties, Inc. 2005 Performance Incentive Plan. In addition, the Company’s management will report on the performance of the Company during 2009 and respond to questions from the stockholders.

 

What is the Notice of Internet Availability of Proxy Materials?

 

In accordance with the rules and regulations promulgated by the Securities and Exchange Commission, instead of mailing a printed copy of our proxy materials to each stockholder of record or beneficial owner, we are now furnishing proxy materials, which include our proxy statement and annual report, to our stockholders over the Internet. Because you received a Notice of Internet Availability of Proxy Materials, you will not receive a printed copy of the proxy materials, unless you have previously made a permanent election to receive these materials in hard copy. Instead, the Notice of Internet Availability of Proxy Materials will instruct you as to how you may access and review all the proxy materials. The Notice of Internet Availability of Proxy Materials also instructs you as to how you may submit your proxy on the Internet. If you received a Notice of Internet Availability of Proxy Materials and would like to receive a printed copy of our proxy materials, you should follow the instructions for requesting such materials included in the Notice of Internet Availability of Proxy Materials.

 

Who is entitled to vote?

 

Only stockholders of record at the close of business on the record date, March 17, 2010, are entitled to receive notice of the annual meeting and to vote the shares of common stock that they held on that date at the meeting, or at any time and date to which the annual meeting may be properly adjourned or postponed. Each outstanding share of common stock entitles its holder to cast one vote on each matter to be voted upon.

 

What constitutes a quorum?

 

The presence at the meeting, in person or by proxy, of the holders of a majority of the shares of common stock outstanding on the record date will constitute a quorum, permitting the meeting to conduct its business. As of the record date, 117,618,027 shares of common stock of the Company were outstanding. For purposes of determining the existence of a quorum, proxies received but marked as abstentions and broker non-votes will be included in the calculation of the number of shares considered to be present at the meeting.

How do I vote my shares?

 

By Telephone or the Internet — Stockholders can simplify their voting by voting their shares via telephone or the Internet. The telephone and Internet procedures are designed to authenticate a stockholder’s identity, allow stockholders to vote their shares and confirm that their instructions have been properly recorded.

 

The telephone and Internet voting facilities will close at 11:59 p.m., Eastern Standard Time, on May 3, 2010.

 

By Mail — Stockholders who request a paper proxy card by telephone, Internet or e-mail may elect to vote by mail and should complete, sign and date their proxy cards and mail them in the pre-addressed envelopes that accompany the delivery of paper proxy cards. Proxy cards submitted by mail must be received by the time of the meeting in order for your shares to be voted. Stockholders who hold shares beneficially in street name may vote by mail by requesting a paper proxy card according to the instructions contained in the Notice of Internet Availability of Proxy Materials received from your broker or other agent, and then completing, signing and dating the voting instruction card provided by the brokers or other agents and mailing it in the pre-addressed envelope provided.

 

At the Annual Meeting — Shares held in your name as the stockholder of record may be voted by you in person at the annual meeting. Shares held beneficially in street name may be voted by you in person at the annual meeting only if you obtain a legal proxy from the broker or other agent that holds your shares giving you the right to vote the shares and bring such proxy to the annual meeting.

 

Can I change my vote?

 

Yes. Even after you have submitted your proxy, you may change your vote at any time before the proxy is exercised by filing with the Secretary of the Company, either a notice of revocation or a duly executed proxy bearing a later date. If you are a registered stockholder, or if you are a “street name” stockholder and obtain a proxy form from your broker or other institution holding your shares, the powers of the proxy holders will be suspended if you attend the meeting in person and so request, although attendance at the meeting will not by itself revoke a previously granted proxy.

 

What are the Board’s recommendations?

 

Unless you give other instructions on your proxy card, the persons named as proxy holders on the proxy card will vote in accordance with the recommendations of the Board. The Board’s recommendations are set forth, together with the description of all proposals, in this proxy statement. In summary, the Board unanimously recommends a vote FOR election of the nominated slate of directors (see page 6), FOR the ratification of the appointment of the independent accountants (see page 44) and FOR the approval of the amendment and restatement of the Nationwide Health Properties, Inc. 2005 Performance Incentive Plan (see page 45).

 

With respect to any other matter that properly comes before the meeting, the proxy holders will vote as recommended by the Board or, if no recommendation is given, in their own discretion.

 

What vote is required for the election of the directors?

 

The vote of a plurality of all the votes cast at a meeting at which a quorum is present is necessary for the election of a director. For purposes of the election of directors, abstentions and broker non-votes, if any, will not be counted as votes cast and will have no effect on the result of the vote, although they will be considered present for the purpose of determining the presence of a quorum.

 

What vote is required to ratify the appointment of independent accountants?

 

The affirmative vote of a majority of all the votes cast at a meeting at which a quorum is present is required to ratify the appointment of Ernst & Young LLP as the Company’s independent accountants for the fiscal year ending December 31, 2010. For purposes of the vote on this proposal, abstentions will not be counted as votes cast and will have no effect on the result of the vote, although they will be considered present for the purpose of determining the presence of a quorum.

What vote is required to approve the amendment and restatement of the performance incentive plan?

 

The affirmative vote of a majority of the votes cast on the proposal is required to approve the amendment and restatement of the Nationwide Health Properties, Inc. 2005 Performance Incentive Plan, provided that the total votes cast represents more than 50% in interest of all securities entitled to vote on the proposal. For purposes of the vote on this proposal, abstentions will have the same effect as votes against the proposal and broker non-votes will have the same effect as votes against the proposal, unless holders of more than 50% in interest of all securities entitled to vote on the proposal cast votes, in which event broker non-votes will not have any effect on the result of the vote. Both abstentions and broker non-votes will be considered present for the purpose of determining the presence of a quorum.

 

If I hold my shares in “street name,” how will they be voted?

 

If you hold your shares in “street name,” through a broker or other nominee, you may instruct your broker or nominee how to vote your shares. If you fail to instruct your broker or nominee, New York Stock Exchange rules will permit your broker or nominee to exercise voting discretion without receiving instructions from you, the beneficial owner, only with respect to certain routine matters (including Item 2). Thus, if you do not give your broker or nominee specific instructions, your shares may nevertheless be voted on that matter and will be counted for purposes of determining the outcome of such matter. If, however, your broker or nominee returns a properly completed proxy but fails to vote shares on a particular matter because it does not have discretionary power to vote (including Items 1 and 3), then those shares, while still considered as represented at the meeting for quorum purposes, will not be considered as voting for purposes of determining the outcome of that matter.

 

  What is the Company’s policy with respect to Board member attendance at annual meetings of stockholders?

 

Board members are encouraged to attend the Company’s annual meeting of stockholders. All of the Company’s ten Board members serving at the time attended the 2009 annual meeting of stockholders.

 

How may I obtain a separate set of proxy materials or request a single set for my household?

 

If you share an address with another stockholder, you may receive only one set of proxy materials (including our Notice of Internet Availability of Proxy Materials, annual report and proxy statement, as applicable) unless you have provided contrary instructions. If you wish to receive a separate set of proxy materials now, please request the additional copies by writing to us at the address below:

 

Nationwide Health Properties, Inc.

Attn: Investor Relations

610 Newport Center Drive, Suite 1150

Newport Beach, CA 92660

Telephone: (949) 718-4400

 

Similarly, if you share an address with another stockholder and have received multiple copies of our proxy materials, you may write us at the address above to request delivery of a single copy of these materials in the future.

 

Who are the largest owners of the Company’s stock?

 

The following table sets forth the only stockholders known to the Company to be the beneficial owners of more than 5% of the Company’s outstanding common stock at February 16, 2010:

 

 

 

How much stock do the Company’s directors and executive officers own?

 

The following table shows the amount of common stock of the Company beneficially owned (unless otherwise indicated) by the Company’s directors, the executive officers of the Company named in the Summary Compensation Table below and all current directors and executive officers of the Company as a group. Except as otherwise indicated, all information is as of March 15, 2010.

 

 

 

 

The number of shares shown in this column also includes the shares in the column entitled “Acquirable within 60 Days.”

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors, and the persons who own more than 10% of our common stock, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock of the Company. Executive Officers, directors and greater than 10% stockholders are required by regulations of the Securities and Exchange Commission to furnish the Company with copies of all Section 16(a) forms they file.

 

Based solely upon a review of the copies of Forms 3, 4 and 5 and the amendments thereto received by it for the year ended December 31, 2009, the Company believes that all of the Company’s directors and executive officers complied during 2009 with the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934, except for: (1) a late Form 4 filing for Mr. Bradley to report the exercise of employee stock options; (2) two late Form 4 filings for each of Messrs. Pasquale, Khoury and Bradley to report shares withheld to satisfy tax withholding obligations on vesting restricted stock; and (3) one late Form 4 filing for each of Messrs. Samuelson, Doyle, Andrews, Paulson, Russell, Miller, Banks and Gilchrist and Dr. Rush to report the grant of restricted stock units.

 

The Board is currently divided into three classes, each having three-year terms that expire in successive years. The current term of office of the directors in each class expire as follows:

 

 

 

Each of the nominees for election as a Class II director will be elected for a term of three years and until his respective successor is duly elected and qualified. Each of the nominees is described below under the caption “Directors Standing for Election.” Mr. Paulson was elected as a Class I director at the 2009 annual meeting. In February 2010, the Board decided to reduce the size of the Board from ten to nine directors to be effective at the conclusion of the 2010 annual meeting of stockholders. In order to make the three classes equal in size, the Board has nominated Mr. Paulson as a Class II director for election at the 2010 annual meeting.

 

Each of the nominees has consented to serve a three-year term. If any of them should become unavailable to serve as a director, the Board may designate a substitute nominee. In that case, the persons named as proxies will vote for the substitute nominee designated by the Board.

 

VOTE REQUIRED

 

A plurality of the votes cast at the meeting is required for the election of directors. A properly executed proxy marked “WITHHOLD AUTHORITY” with respect to the election of one or more directors will not be voted with respect to the director or directors indicated, although it will be counted for purposes of determining whether there is a quorum. Abstentions and broker non-votes, if any, will not be counted as votes cast and will have no effect on the result of the vote.

 

THE BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” APPROVAL
OF THE ELECTION OF EACH OF THE DIRECTOR NOMINEES LISTED BELOW.

 

Directors Standing for Election

 

Class II Directors

 

 

Mr. Banks, 73, is the retired Chairman and Chief Executive Officer of Beverly Enterprises, Inc., an operator of nursing facilities and rehabilitation clinics. He joined Beverly Enterprises, Inc. as President and Chief Operating Officer in October 1979; was elected President and Chief Executive Officer in May 1989, and was elected Chairman, President and Chief Executive Officer in March 1990; and served as Chairman from March 1990 until his retirement in December 2001. He was a Director of Beverly Enterprises, Inc. from September 1979 through December 2001. Mr. Banks has served as a director of Ralcorp Holdings, Inc. since 2001. The Board has determined that Mr. Banks should serve as a Director based on his extensive experience in the healthcare real estate industry.

 

 

Mr. Pasquale, 55, has served as Chairman of the Board since May 2009 and President and Chief Executive Officer since April 2004. Mr. Pasquale was Executive Vice President and Chief Operating Officer from November 2003 to April 2004 and a director since November 2003. Mr. Pasquale served as the Chairman and Chief Executive Officer of ARV Assisted Living, Inc. (“ARV”), an operator of assisted living facilities, from December 1999 to September 2003. From April 2003 to September 2003, Mr. Pasquale concurrently served as President and Chief Executive Officer of Atria Senior Living Group. From March 1999 to December 1999, Mr. Pasquale served as the President and Chief Executive Officer at ARV, and he served as the President and Chief Operating Officer at ARV from June 1998 to March 1999. Previously, Mr. Pasquale served as President and Chief Executive Officer of Richfield Hospitality Services, Inc. and Regal Hotels International-North America, a hotel ownership and hotel management company, from 1996 to 1998, and as its Chief Financial Officer from 1994 to 1996. Mr. Pasquale is a member of the Executive Board of the American Seniors Housing Association and is a director of Alexander & Baldwin, Inc. and Matson Navigation Company, Inc., a director of Terreno Realty Corporation and a member of the Board of Trustees of the Newport Harbor Nautical Museum. The Board has determined that Mr. Pasquale should serve as a Director based on this prior work experience having been the chief executive officer at three companies, as well as his service

as a director of publicly traded companies. His position as President and Chief Executive Officer of the Company provides him with unique knowledge of all aspects of the Company’s business and operations.

 

 

Mr. Paulson, 64, has been the Chief Executive Officer of Aerostar Capital LLC, a private equity investment firm since he founded it in June 1997. Prior to founding Aerostar Capital, Mr. Paulson retired from McKinsey & Company, Inc., an international management consulting firm. At McKinsey, Mr. Paulson served as the Los Angeles Office Manager, led the Global Aerospace and Defense Practice, and was twice elected to McKinsey’s Board of Directors. Mr. Paulson currently serves as a director of Ducommun Inc., Wesco Aircraft Hardware, Inc. and the Grand Teton Music Festival. From 2001 to 2007, Mr. Paulson served as a director of Firth Rixon Limited and its predecessor company, Forgings International Inc. On February 10, 2009, the Board elected Mr. Paulson to serve as Lead Independent Director of the Company, effective immediately prior to the annual meeting on May 5, 2009. The Board has determined that Mr. Paulson should serve as a Director based on his experience over more than 20 years consulting with CEO’s and boards on issues of strategy, several years of which were spent consulting with a major public healthcare provider and hospital operator. Mr. Paulson’s vast experience in consulting, as well as experience serving as a director on two other Fortune 500 companies listed on the NYSE has given him exposure to various industries and experience addressing issues of governance.

 

Directors Continuing in Office

 

Class III Directors

 

 

Mr. Andrews, 69, served as President and Chief Executive Officer of the Company from September 1989 until his retirement in April 2004. He had previously served as a Director of American Medical International, Inc., a hospital management company, and served as its Chief Financial Officer from 1970 to 1985 and its Chief Operating Officer in 1985 and 1986. Mr. Andrews is a director of Thomas Properties Group, Inc., a full-service real estate operating company. The Board has determined that Mr. Andrews should serve as a Director based on his significant real estate experience. Additionally, as a former President and Chief Executive Officer of the Company, Mr. Andrews has extensive knowledge of the Company’s operations as well as executive management and leadership skills.

 

 

Mr. Miller, 82, is the retired Chairman and Chief Executive Officer and current Director Emeritus of Avery Dennison Corporation, a manufacturer of self-adhesive materials, labels, and office products, where he held various executive positions since 1964. He is a member of the Board of Directors of the LA 84 Foundation, the Los Angeles Sports Council and the Southern California Committee for the Olympic Games. He is also a Trustee of Southern California Public Radio/KPCC and Trustee Emeritus of Johns Hopkins University and Occidental College. Mr. Miller served as Chairman of the Board of the Company from 1998 to 2009, when he was succeeded as Chairman by Mr. Pasquale. The Board has determined that Mr. Miller should serve as a Director based on this experience, as well as his leadership abilities, financial knowledge and business acumen.

 

 

Mr. Gilchrist, 64, serves as President of The Irvine Company’s Investment Properties Group. Mr. Gilchrist has served as chief executive and founder of several major public and private real estate investment trusts (“REITs”) and real estate operating companies with investments throughout the United States. In his current role, Mr. Gilchrist guides all aspects of The Irvine Company’s office, retail, resort and apartment properties in Southern California and Silicon Valley, including development, marketing and management. The Irvine Company is a 140-year old privately held company known throughout the world as a best-of-class master planner and long-term owner, investor and operator of a large and diversified real estate portfolio. Prior to joining The Irvine Company, Mr. Gilchrist served as President and Co-Chief Executive of Maguire Properties, Inc. in Los Angeles. At Maguire Properties, he oversaw significant growth in the company’s portfolio, both through acquisitions and development, and spearheaded the

REIT’s successful initial public offering in 2003. Before joining Maguire Properties, Mr. Gilchrist served as President and Chief Executive Officer of the privately held REIT, Commonwealth Atlantic Properties, where he managed the planning and entitlement of an 11 million square foot mixed-use project. Mr. Gilchrist currently serves as a director of BioMed Realty Trust, Inc. Mr. Gilchrist was also a co-founder and managing partner of CommonWealth Partners, LLC and advisor and venture partner with the California Public Employees’ Retirement System and senior partner of Maguire Thomas Partners, a national real estate developer and operator. The Board has determined that Mr. Gilchrist should serve as a Director primarily based on his extensive experience working with major public and private real estate companies, including a number of REITs.

 

Class I Directors

 

 

Mr. Doyle, 63, has been the Managing Partner of Kerlin Capital Group, LLC, a private investment bank based in Los Angeles, California, since he founded the firm in 1994. Mr. Doyle has been an investment banker for more than 30 years. Prior to founding Kerlin Capital Group, LLC, Mr. Doyle was a Managing Director and investment banker for four different firms: Smith Barney, Prudential Capital Funding, Bankers Trust Company and Lehman Brothers, where he was involved in capital raising transactions for ten different REITs. The Board has determined that Mr. Doyle should serve as a Director primarily based on his extensive experience in corporate finance and capital markets, particularly with respect to REITs.

 

 

Mr. Russell, 64, has been the President of Russell Financial, Inc., a strategic and financial consulting firm serving businesses and high net worth individuals and families, since June 2001. Mr. Russell retired as the Chairman of Mellon West and the Vice Chairman of Mellon Financial Corporation, in which capacities he served from May 1996 until March 2001. From September 1991 through April 1996, Mr. Russell served in various positions at Mellon, including Vice Chairman and Chief Risk Officer of Mellon Bank Corporation and Chairman of Mellon Bank Corporation’s Credit Policy Committee. From 1983 to 1991, Mr. Russell served as President and Chief Operating Officer, and a director, of Glenfed/Glendale Federal Bank. Mr. Russell also serves on the Board of Directors of Sunstone Hotel Investors, Inc. From 2003 to 2008, Mr. Russell was a director of Countrywide Financial Corporation, where he was a member of the audit and ethics, credit, finance and special oversight committees. From 2002 to 2008, Mr. Russell was a director of Countrywide Bank (private) and from 2001 to 2007 he was a member of the UCLA Anderson Board of Visitors (non-profit). Mr. Russell has been a panelist at various conferences and seminars, addressing topics such as corporate governance and the role of the audit committee. Mr. Russell holds a B.A. degree in Economics from the University of Washington and an M.A. degree in Economics from Northwestern University. The Board has determined that Mr. Russell should serve as a Director primarily based on his expertise in the areas of risk management and financial analysis. As a leading executive with several large financial institutions, Mr. Russell has extensive experience in assessing risks and reserves for companies in a wide range of financial situations.

 

 

Dr. Rush, 69, is a 20-year veteran of medical office building acquisition and development. He is the Chairman of Pacific Medical Buildings LLC, a developer, owner and manager of medical office buildings in the western United States. Dr. Rush was a practicing board-certified radiologist for 25 years. He served as Chairman of Radiology at Alvarado Hospital, San Diego, California, founder of Mobile MRI Inc. and a member of the Physicians Advisory Board of National Medical Enterprises. He is currently active in numerous medically-related, bio-tech, pharmaceutical and real estate ventures. The Board has determined that Dr. Rush should serve as a Director primarily based on his experience as a practicing physician, and as a leading developer of medical office buildings.

How are directors compensated?

 

Director Compensation Table — Calendar 2009

 

The following table presents information regarding the compensation paid during 2009 to members of our Board who are not also our employees (referred to herein as “Non-Employee Directors”). The compensation paid to Douglas M. Pasquale, a director who is also our Chief Executive Officer is presented below in the “Summary Compensation Table — Calendar 2009” and the related explanatory tables. Mr. Pasquale is not entitled to receive additional compensation for his service as a director.

 

 

 

Director Compensation

 

Compensation for Non-Employee Directors during 2009 generally consisted of an annual retainer, fees for attending meetings, and an annual equity award. Each Non-Employee Director who was a Director prior to 2005 also participates in the Company’s Retirement Plan for Directors.

 

Annual Retainer and Meeting Fees

 

The following table sets forth the schedule of meeting fees and annual retainers for each Non-Employee Director in effect during 2009:

 

 

All Non-Employee Directors are reimbursed for out-of-pocket expenses they incur serving as directors.

 

Annual Equity Awards

 

Under our Non-Employee Director compensation policy as in effect in 2009, our Non-Employee Directors were granted an annual award of 3,000 shares of restricted stock units under the Company’s 2005 Performance Incentive Plan in January 2009. Subject to each Non-Employee Director’s continued service as a director, each award vests as to one-third of the total shares of restricted stock units subject to the award on each of the first, second and third anniversaries of the grant date. Pursuant to the terms of the 2005 Performance Incentive Plan, restricted stock units granted to our Non-Employee Directors may vest on an accelerated basis in connection with a change in control of the Company. Prior to the time they become vested, shares of restricted stock units generally may not be transferred, sold or otherwise disposed of.

 

Upon the termination of a Non-Employee Director’s services as a director, any then-unvested shares of restricted stock units will be forfeited to the Company. Non-Employee Directors are not entitled to any payment with respect to restricted stock units that are forfeited to the Company.

 

Non-Employee Directors are entitled to cash dividends on unvested shares of restricted stock units at the same rate that the Company pays dividends on all of its common stock. No future dividends will be paid on shares of restricted stock units that are forfeited to the Company; however, Non-Employee Directors will be entitled to retain any dividends paid on shares of restricted stock units prior to forfeiture.

 

Each Non-Employee Director’s restricted stock unit award was granted under, and is subject to the terms of, the 2005 Performance Incentive Plan. The Compensation Committee administers the plan as to Non-Employee Director awards and has the authority to interpret and make all required determinations under the plan, subject to Board oversight and plan limits. This authority includes making required proportionate adjustments to outstanding restricted stock unit awards to reflect any impact resulting from various corporate events such as reorganizations, mergers and stock splits.

 

Retirement Plan for Directors

 

Each Non-Employee Director who was a Director prior to 2005 participates in the Company’s Retirement Plan for Directors, which was frozen as of December 31, 2005. No new years of service and no new directors will be added to the plan after that date. Under the terms of the plan, Non-Employee Directors whose services as a director

terminate for any reason (in accordance with the requirements for a “separation from service” under Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”)), are entitled to receive an annual retirement benefit from the Company equal to the aggregate annual retainer in effect at the time of the Non-Employee Director’s termination of services as a director. Increases in the annual retainer that take effect after a Non-Employee Director’s termination of services as a director will automatically increase the annual retirement benefit. The annual retirement benefit will be paid for a period equal to the number of years (as of December 31, 2005) that the Non-Employee Director served as a director. Upon the death of a Non-Employee Director, any remaining benefits under the plan will be paid to the Non-Employee Director’s designated beneficiary in accordance with the same payment schedule described above until receipt of the maximum benefit to which the Non-Employee Director would have been entitled had the Non-Employee Director survived. In 2008 the Company adopted a technical amendment to the Retirement Plan for Directors for purposes of complying with Section 409A of the Internal Revenue Code.

 

The following table presents information regarding the present value of accumulated benefits that may become payable to the Non-Employee Directors under the Retirement Plan for Directors as of December 31, 2009:

 

 

 

 

How often did the Board meet during 2009?

 

The Board met four times during 2009. Each Director attended more than 75% of the total number of meetings of the Board and Committees on which he served.

 

What is the Board’s Leadership Structure and Why is it Appropriate for the Company?

 

Since May 2009, Mr. Pasquale has served as both Chairman of the Board and Chief Executive Officer of the Company. Before that, Mr. Miller served as Chairman of the Board and Mr. Pasquale served as Chief Executive Officer and a director. When the Board decided that Mr. Pasquale should serve in the combined role of Chairman and Chief Executive Officer, the Board also appointed one of the independent directors to serve as a Lead Independent Director. The Board selected Mr. Paulson to fulfill this role. The Board concluded that this structure is appropriate for the Company at this time because it has the advantage of a Chairman who is very familiar with all of the strategic challenges and opportunities facing the Company, properly positions the Chief Executive Officer relative to the leaders of peer competitors, can draw on the Chief Executive Officer’s experience in the management of the Company to guide the Board, yet retains needed independence through the active role and experience of the Lead Independent Director.

The presence of a strong Lead Independent Director provides additional assurance as to the independence of the Board’s oversight of management. The Lead Independent Director has the authority to call meetings of the independent directors. If requested by major stockholders or other external constituencies, the Lead Independent Director can be available for consultation and direct communications, as appropriate. The principal duties of the Lead Independent Director currently include:

 

 

What Committees has the Board established?

 

The Company’s Board composition and Committees are as follows:

 

BOARD COMPOSITION

 

 

 

 

How may I view committee charters?

 

Each of the Company’s Committees has a written charter which is available on the Company’s website at www.nhp-reit.com. In addition, stockholders may request free printed copies of the Committee Charters from:

 

Nationwide Health Properties, Inc.

Attn: Investor Relations

610 Newport Center Drive, Suite 1150

Newport Beach, CA 92660

 

Audit Committee.  The Audit Committee assists the Board in its oversight of the integrity of the Company’s financial statements, accounting and financial reporting processes and audits of the Company’s financial statements, systems of internal accounting and financial controls; independence, qualifications and performance of the independent auditors; performance of the internal audit function and compliance with the Company’s Business Code of Conduct & Ethics and applicable legal and regulatory requirements. The Audit Committee has responsibility to review the guidelines and policies governing the process by which the Company assesses and manages its exposure to risk. The Audit Committee also reviews and investigates any matters relating to the integrity of management, including conflicts of interest, compliance processes, and any reports from counsel regarding any material violations or breaches of fiduciary duties. Our common stock is listed on the New York Stock Exchange and is governed by its listing standards. All members of the Audit Committee meet the independence standards of the New York Stock Exchange and are independent within the meaning of SEC regulations. The Audit Committee met four times in 2009.

 

Compensation Committee.  The Compensation Committee of the Board is comprised of four members of the Board, each of whom the Board has determined, in accordance with its categorical standards, is independent under the rules of the New York Stock Exchange. The Compensation Committee is responsible for establishing and governing the compensation and benefit practices of the Company. The Compensation Committee establishes the general compensation policies of the Company, reviews and approves compensation of the executive officers of the Company and oversees all of the Company’s employee benefit plans. The Compensation Committee met four times in 2009.

 

The Board has adopted a charter setting forth the purpose of and other matters pertaining to the Compensation Committee. Pursuant to its charter, the Compensation Committee has the authority to review and determine the compensation paid to our senior executive officers. The Compensation Committee generally determines each officer’s compensation following an annual review of the officer’s performance relative to the Company’s goals and objectives. The Compensation Committee also reviews and determines the compensation paid to our Non-Employee Directors. Pursuant to its charter, the Compensation Committee can delegate any of its responsibilities to subcommittees or outside advisors as the Compensation Committee may deem appropriate.

 

Except as described below, our executive officers, including the Named Officers, do not currently have any role in determining or recommending the form or amount of compensation paid to our Named Officers and our other senior executive officers. However, our Chief Executive Officer recommends to the Compensation Committee salary, annual bonus and long-term compensation levels for senior officers, including the other Named Officers.

 

Pursuant to its charter, the Compensation Committee is authorized to retain and terminate any compensation consultant engaged to assist in the evaluation of the compensation of our senior executive officers (including all of the Named Officers). In 2004, the Compensation Committee retained FPL Associates, L.P. (“FPL”), as an independent compensation consultant, to assist the Compensation Committee in designing a long-term incentive program and in determining the appropriate compensation levels for senior executive officers for 2004 through 2006. FPL did not provide any consulting services during 2006. Since 2007, the Compensation Committee has retained Frederic W. Cook & Company, Inc. (“FW Cook & Co.”), a nationally recognized independent compensation consultant, to review and identify our appropriate peer group companies, to obtain and evaluate current executive compensation data for these peer group companies, to make recommendations to the Compensation Committee regarding the base salary and bonus levels of Named Officers in light of the compensation data for our peer group companies and to assist it in designing a new long-term incentive program and determining the appropriate compensation levels for our senior executive officers.

Neither FW Cook & Co., nor any of its affiliates has provided any additional services to the Company or its affiliates during the Company’s last completed fiscal year.

 

Corporate Governance and Nominating Committee.  The Corporate Governance and Nominating Committee assists the Board in identifying qualified individuals to become directors, determining the composition of the Board and its Committees, facilitating the evaluation of the Board’s overall effectiveness and considering corporate governance matters, including monitoring the implementation and maintenance of the Company’s Corporate Governance Principles. All members of the Corporate Governance and Nominating Committee are independent within the rules prescribed by the New York Stock Exchange. The Corporate Governance and Nominating Committee met three times in 2009.

 

The Corporate Governance and Nominating Committee, with the approval of the full Board, has established the following minimum criteria for evaluating prospective board candidates:

 

 

The Corporate Governance and Nominating Committee will also consider the following factors in connection with its evaluation of each prospective nominee:

 

 

The Corporate Governance and Nominating Committee will consider suggestions of nominees from stockholders. Stockholders may recommend individuals for consideration by submitting the materials set forth below to the Company addressed to the Chairman of the Corporate Governance and Nominating Committee at the Company’s address. To be timely, the written materials must be submitted within the time permitted for submission of a stockholder proposal for inclusion in the Company’s proxy statement for the subject annual meeting. The written materials must include (1) all information relating to the individual recommended that is required to be disclosed pursuant to Regulation 14A under the Securities Exchange Act of 1934 (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (2) the name(s) and address(es) of the stockholders making the nomination and the amount of the Company’s securities which are owned beneficially and of record by such stockholder(s); (3) appropriate biographical information (including age, a business and residence address) and a statement as to the individual’s qualifications, with a focus on the criteria described above; and (4) the class, series and number of shares of Company stock that are beneficially owned by such individual and the date such shares were acquired and the investment intent of such acquisition. The Corporate Governance and Nominating Committee will evaluate a prospective nominee suggested by any stockholder in the same manner and against the same criteria as any other prospective nominee identified by the Corporate Governance and Nominating Committee from any other source.

The nomination of existing directors is not automatic, but is based on continuing qualification under the criteria set forth above. For incumbent directors standing for re-election, the Corporate Governance and Nominating Committee will consider the incumbent director’s performance during his or her term, including the number of meetings attended, level of participation, and overall contribution to the Company. In 2007, the Board adopted a policy that a director may not stand for reelection after he or she has reached the age of 75. However, the Board may, in its discretion make an exception to the policy if the Board unanimously determines that it is in the best interests of the Company for such director to continue to serve on the Board past age 75 and that such director would be able to carry out his duties as a director.

 

The number of officers or employees of the Company serving at any time on the Board will be limited such that, at all times, a majority of the directors is “independent” under applicable SEC and New York Stock Exchange rules.

 

After reviewing appropriate biographical information and qualifications, qualified candidates will be interviewed by members of the Corporate Governance and Nominating Committee, the Lead Independent Director and the Chairman and Chief Executive Officer.

 

As required by the Corporate Governance and Nominating Committee Charter, the Company has adopted a set of Corporate Governance Principles. In addition, the Company has adopted a code of business conduct and ethics for directors, officers (including the Company’s principal executive officer, principal financial officer and chief investment officer) and employees, known as the Business Code of Conduct & Ethics. As mentioned above, the Corporate Governance and Nominating Committee Charter and the accompanying Corporate Governance Principles are available on the Company’s website at www.nhp-reit.com, as is the Company’s Business Code of Conduct & Ethics. In addition, stockholders may request free printed copies of the Corporate Governance and Nominating Committee Charter, Corporate Governance Principles and the Business Code of Conduct & Ethics from:

 

Nationwide Health Properties, Inc.

Attn: Investor Relations

610 Newport Center Drive, Suite 1150

Newport Beach, CA 92660

 

The Corporate Governance and Nominating Committee reviews the background and qualifications of individuals being considered as director candidates. The committee also considers diversity in the selection of candidates. For this purpose, the Corporate Governance and Nominating Committee considers a candidate’s expertise and business experience, as well as the candidate’s potential to diversify the board in terms of experience in relevant industries, diverse operational and functional skills, a variety of healthcare qualifications, other board experiences, age group representation, governance and board experience, and other important qualifications. The Committee reviews annually with the Board the composition of the Board as a whole and recommends, if necessary, measures to be taken so that the Board reflects the appropriate balance of knowledge, experience, skills, expertise and diversity required for the Board as a whole and contains at least the minimum number of independent directors required by the NYSE.

 

The Committee evaluates its performance on an annual basis. In conducting this review, the Committee evaluates whether the Committee’s charter appropriately addresses the matters that are or should be within its scope and recommends such changes as it deems necessary or appropriate. The Committee delivers to the Board a report, which may be oral, setting forth the results of its evaluation, including any recommended amendments to the charter and any recommended changes to the Corporation’s or the Board’s policies or procedures.

 

Investment and Enterprise Risk Management Committee.  The Investment and Enterprise Risk Management Committee has the power to recommend and/or approve the Company’s investments and reviews the Company’s risk management policies. The Investment and Enterprise Risk Management Committee has authority to approve investments at pre-established investment levels, while investments in excess of such limits require Board approval. Additionally, the Investment and Enterprise Risk Management Committee oversees the Company’s portfolio management program, including the growth, performance and strength of the Company’s existing assets and tenants. The Investment and Enterprise Risk Management Committee met four times in 2009.

What is the Board’s Role in Risk Oversight?

 

The Board is responsible for overseeing risk management for the Company. In doing so, the Board and its committees determine the magnitude and potential impact of various risks; identify any factors that may moderate the risk; direct the implementation of control systems to manage and monitor the risk; and periodically evaluate the effectiveness of those control systems. The Board has delegated some of its responsibility for risk oversight to its committees, primarily the Investment and Enterprise Risk Management Committee and the Audit Committee. In addition, the Corporate Governance and Nominating Committee and the Compensation Committee assist in risk oversight to the extent that they identify any risks in their areas of responsibility.

 

The Investment and Enterprise Risk Management Committee is responsible for ensuring that enterprise risk management assessments and risk profiles that identify the most significant financial and market risks to the Company are periodically completed by the Company. The Investment and Enterprise Risk Management Committee periodically reviews risk assessments to determine the material financial and market risks to which the Company may be exposed and to consider the strategy for mitigating those risks; monitors the implementation of risk management strategy; reviews management responses to significant risks; and keeps abreast of changes to the Company’s risk management and control systems.

 

The Audit Committee has responsibility to review the guidelines and policies governing the process by which the Company assesses and manages its exposure to risk. The Audit Committee’s role in risk oversight also relates to the integrity of the Company’s financial statements; the Company’s compliance with legal and regulatory requirements and the Company’s Code of Business Conduct & Ethics; the qualifications and independence of the Company’s auditors; and the performance of the Company’s independent auditors and the Company’s internal audit function. The Audit Committee meets periodically with the Compliance Officer for the Business Code of Conduct & Ethics to discuss compliance with that code, and considers any waiver requests; meets periodically with the Company’s Related Person Transactions Coordinator to discuss compliance with the Company’s Policy and Procedure with respect to Related Person Transactions and considers approval of proposed transactions under that policy; and reviews and investigates any matters relating to the integrity of management, including conflicts of interest, compliance processes, and any reports from counsel regarding any material violations or breaches of fiduciary duties.

 

All of the committees report to the Board on their activities on a regular basis. The Chairman of the Board, Mr. Pasquale, is not a member of any of the Board’s committees. All of the committees are comprised exclusively of non-employee directors. In his role as Lead Independent Director, Mr. Paulson plays a role in risk oversight by coordinating the activities of the independent directors and promoting their overall effectiveness.

 

How may I communicate with NHP’s directors?

 

You may submit an e-mail to NHP’s Board at CorporateGovernance@nhp-reit.com. These communications may be submitted on a confidential or anonymous basis if you so desire and (1) will be forwarded by NHP’s Compliance Officer to the appropriate directors for their review; (2) will be reviewed and addressed by the Audit Committee; and (3) will be reported to the Board on a quarterly basis. The Company’s Lead Independent Director, Mr. Robert D. Paulson, presides at the executive sessions of non-management directors.

 

The Board has adopted a Business Code of Conduct & Ethics, which applies to all employees, including our Chief Executive Officer, Chief Financial and Portfolio Officer, Chief Investment Officer, Vice Presidents and Directors. The Business Code of Conduct & Ethics is posted on our website at www.nhp-reit.com. The Business Code of Conduct & Ethics describes the Company’s policies and standards for protecting the Company’s integrity and provides guidance to the Company’s employees, officers and directors in recognizing and properly resolving any ethical and legal issues that may be encountered while conducting the Company’s business. The Company’s Business Code of Conduct & Ethics provides that no director or officer of the Company shall act on behalf of the Company as a principal in any transaction with a supplier, competitor or customer in which an affiliate of such director or officer is a principal, officer or representative in such transaction, without prior approval of the Audit

Committee. It is the policy of the Audit Committee to review the terms and substance of any potential related party transaction generally and for purposes of determining whether a waiver to the Business Code of Conduct & Ethics should be granted. There have been no waivers of the Business Code of Conduct & Ethics.

 

In August 2008, Dr. Jeffrey Rush was appointed as a Director of the Company. Dr. Rush is the Chairman of Pacific Medical Buildings LLC (“PMB”), a company with which we entered into an agreement in February 2008 to acquire up to 18 medical office buildings for $747.6 million. In April 2008, we formed NHP/PMB L.P. (“NHP/PMB”), a limited partnership, to acquire properties from entities affiliated with PMB.

 

Effective as of February 1, 2010, NHP/PMB acquired a medical office building from an affiliate of PMB for an aggregate purchase price of $74 million, consisting of cash, and the issuance of 301,599 units of limited partnership interest in NHP/PMB. Also effective as of February 1, 2010, we entered into a joint venture with an affiliate of PMB. This affiliate contributed a property to the joint venture, and we contributed $6.3 million in cash and committed to make loans to the joint venture in an aggregate amount up to $8.8 million, of which $6.8 million was disbursed initially. If certain conditions are met, NHP/PMB may acquire this property in the future.

 

As a result of this transaction, Dr. Rush and certain entities affiliated with Dr. Rush received 77,309 limited partnership units in NHP/PMB, valued at approximately $2.6 million at the time, in exchange for interests in the medical office buildings contributed to the partnership. After a one-year holding period, holders of limited partnership units may redeem such units for cash or, at our option, shares of our common stock (on a one-for-one basis, subject to adjustment).

 

Effective as of March 1, 2010, NHP/PMB acquired controlling interests in two additional medical office buildings from affiliates of PMB for an aggregate of $129.6 million. Also effective as of March 1, 2010, we entered into a joint venture with an affiliate of PMB. This affiliate contributed a property to the joint venture, and we contributed $13.5 million in cash and committed to make loans to the joint venture in an aggregate amount up to $59.5 million. If certain conditions are met, NHP/PMB may acquire this property in the future.

 

As a result of this transaction, Dr. Rush and certain entities affiliated with Dr. Rush received 59,761 limited partnership units in NHP/PMB, valued at approximately $2.0 million at the time, in exchange for interests in the medical office buildings contributed to the partnership. After a one-year holding period, holders of limited partnership units may redeem such units for cash or, at our option, shares of our common stock (on a one-for-one basis, subject to adjustment).

 

Effective as of March 1, 2010, we also acquired, for $2.6 million in cash and the assumption of $6.2 million of debt, the remaining 55.05% interest in an affiliate of PMB that owns two medical office buildings. Dr. Rush, through an unaffiliated entity, has an ownership interest in such affiliate of PMB.

 

This section contains a discussion of the material elements of compensation awarded to, earned by or paid to the principal executive and principal financial officers of the Company (Douglas M. Pasquale and Abdo H. Khoury, respectively), and the other executive officer of the Company (Donald D. Bradley). These individuals are referred to as the “Named Officers” in this proxy statement.

 

Role of Executive Officers in Compensation Decisions

 

The Company’s current executive compensation programs are determined and approved by the Compensation Committee of the Board (the “Compensation Committee”). None of the Named Officers are members of the Compensation Committee. The Company’s Chief Executive Officer, Douglas M. Pasquale, recommends to the Compensation Committee the base salary, annual bonus and long-term compensation levels for other Named Officers. In addition, Mr. Pasquale generally attends Compensation Committee meetings (except when such meetings are in executive session). However, Mr. Pasquale does not participate in discussions regarding his own compensation, which is entirely determined by the other members of the Compensation Committee. None of the other Named Officers had any role in determining the compensation of other Named Officers.

Executive Compensation Program Objectives and Overview

 

The Company’s current executive compensation programs are intended to achieve three fundamental objectives: (1) market competitiveness to attract and retain qualified executives; (2) pay for performance, including the recognition of exceptional individual performance, to motivate and direct executives’ efforts toward superior company and individual results measured over appropriate short- and long-term periods; and (3) alignment of executives’ interests to those of our stockholders, and where reasonably practicable, tied to variables that management can control. In structuring our current executive compensation programs, we are guided by the following basic philosophies:

 

 

As described in more detail below, the material elements of our current executive compensation program for Named Officers consist of a base salary, an annual bonus opportunity, a long-term equity incentive opportunity, 401(k) retirement benefits, the ability to receive compensation on a deferred basis (with partial matching contributions and investment earnings), and severance protection for certain actual or constructive terminations of the Named Officers’ employment.

 

We believe that each element of our executive compensation program helps us to achieve one or more of our compensation objectives. The table below lists each material element of our executive compensation program and the compensation objective or objectives that it is designed to achieve.

 

 

In 2009, the Compensation Committee again retained FW Cook & Co. as its independent compensation consultant to review and identify appropriate peer group companies, to obtain and evaluate current executive compensation data for the peer companies, to make recommendations regarding the base salary, bonus levels and long-term incentive awards of Named Officers for 2009 in light of compensation data for the peers, and to support the Company’s future financial and strategic performance objectives.

 

Based on the recommendations of FW Cook & Co., the Compensation Committee approved the following peer group of eight healthcare REITs and seven non-healthcare REITs that represent the relevant competitive labor

market for Company executives and are reasonably similar to the Company in revenue size and market capitalization:

 

 

Source: Thomson One Financial

 

 

We use competitive data as a guide in determining our executives’ pay levels. Comparative analysis is provided by FW Cook & Co. based on compensation data from the peer group and from the 2008 NAREIT Compensation Survey, a pay survey published annually by the National Association of Real Estate Investment Trusts and FPL Associates. The survey includes 98 real estate investment trusts (REITs) and real estate operating companies. However, in order to be size appropriate, companies used to construct benchmarks are limited to those with market cap from $1.0 billion to $6.0 billion. Data sources are weighted as follows, with peer group data emphasized for positions that can be closely matched:

 

 

Competitive benchmarks were developed for base salary, total cash compensation (base salary plus actual annual incentives), target annual incentives, target annual long-term incentive values, and total direct compensation (total cash compensation plus target annual long-term incentive values). Individual executives may be high or low in relation to the market based on individual performance, experience, promotability, impact on Company results, and importance of retention. The weighting for target annual long-term incentives benchmarks for each Named Officer is 100% in relation to the peer group data (no survey data was used).

In addition to the weighting of data sources to develop the benchmarks, the Company also looks at the positioning for each compensation element relative to the competitive benchmarks for each Named Officer. This information is contained in the table below.

 

 

Consistent with the Company’s compensation philosophy that total compensation should have a substantial linkage to stockholder interests, base salary for Named Officers in 2009 comprised a relatively low percentage (approximately 13% for the Chief Executive Officer, and approximately 20% for Named Officers at the Executive Vice President level (Messrs. Khoury and Bradley)) of total compensation. Bonuses for Named Officers in 2009, which, as described below, were determined based on Company, business unit and individual performance, comprised a relatively larger percentage (between approximately 26% and 29%) of total compensation. The Company believes this allocation of base salary and bonus in proportion to total compensation is consistent with market practice and in line with the Company’s previously stated pay objectives and philosophy.

 

Current Named Officers Compensation Program Elements

 

Base Salaries

 

Like most companies, our policy is to pay Named Officers’ base salaries in cash. To accommodate any Named Officers who may prefer to receive all or a portion of their base salaries on a deferred basis, we currently offer them the opportunity to electively defer the receipt of up to 100% of their base salaries under the Company’s Deferred Compensation Plan described in the “Non-Qualified Deferred Compensation Plan” section below.

 

During its review of base salaries for Named Officers in 2009, the Compensation Committee primarily considered:

 

 

Base salary levels for the executive officers are considered annually by the Compensation Committee as part of the performance review process as well as upon a promotion or other major change in job responsibility. Based on market data provided by FW Cook & Co., the Compensation Committee determined that the 2009 base salaries for the Named Officers would remain the same as their 2008 levels. The base salaries for Messrs. Pasquale and Bradley approximate the market median for salary, and the base salary for Mr. Khoury is below the median.

Annual Bonuses

 

The Company’s normal policy is to pay any annual bonuses earned by the Named Officers in cash. To accommodate Named Officers who may prefer to receive all or a portion of their earned bonuses on a deferred basis, we offer them the ability to electively defer up to 100% of the earned annual bonus amounts under the Deferred Compensation Plan described in the “Non-Qualified Deferred Compensation Plan” section below.

 

As previously stated, the Compensation Committee believes that compensation should be linked to stockholder interests, and where reasonably practical, should be tied to variables that management can control. Compensation also should reflect measurable individual performance and reward exceptional individual achievements. Consistent with these principles, each Named Officer is eligible for an annual bonus based on the achievement of the performance criteria that we believe are the most determinative of the individual Named Officer’s performance during the year that supports the Company’s business objectives. The performance criteria that are used as guidelines for determining a Named Officer’s annual bonus fall into one or more of the following three categories: (1) a corporate performance component (with specific factors consisting of funds from operations (FFO) growth, return on investment, acquisition achievements, portfolio management, capital structure and capital cost); (2) a business unit/function component for executives with these responsibilities; and (3) an individual performance component (with specific factors including quality of work, teamwork and professional development). The Compensation Committee believes the specific factors of the corporate performance component are the primary factors that drive the Company’s business, especially FFO growth. The factors the Compensation Committee considers for Mr. Khoury’s business unit/function component consist of internal controls, reporting and audit issues, capital availability and cost of capital, strength of balance sheet and liquidity position, and portfolio management based on maximizing returns and minimizing risks on our assets. The factors the Compensation Committee considers for Mr. Bradley’s business unit/function component consist of quantity and quality of acquired facilities, the returns generated by the acquired facilities on a current year and full year basis, financial performance of previous years’ acquisitions, investment diversification, and return on invested capital. To align the Named Officers’ interests with those of the Company’s stockholders, a substantial weighting is given to the corporate component. Because Mr. Pasquale is responsible for the performance of the entire Company, he is not assigned a performance unit/function component and his annual bonus is weighted 90% for the corporate component and 10% for the individual performance component. Annual bonuses for all other Named Officers are weighted 50% for the corporate component, 40% for the business unit/function component and 10% for the individual performance component.

 

The Compensation Committee is responsible for evaluating each of these three components in determining the annual bonus for each Named Officer. The bonus policy does not require a minimum percentage of completion in order for employees to be awarded a bonus, and is not based on pre-determined targets, numerical thresholds or funding targets. The Compensation Committee has sole and absolute discretion in determining whether to award a bonus and the amount of the bonus. In determining the Named Officer’s annual bonuses for 2009, the Compensation Committee considered various Company performance achievements, including, but not limited to:

 

 

In determining Mr. Pasquale’s appropriate target annual bonus opportunity for 2009, the Compensation Committee considered Mr. Pasquale’s employment agreement which provides for a target annual bonus opportunity for Mr. Pasquale equal to 110% (up to a maximum of 220%) of his base salary (based on a $562,500 annual base salary). In determining the appropriate target annual bonus opportunity for the other Named Officers in 2009, the Compensation Committee considered (1) the target and actual annual incentives awarded to comparable executives at our peer group companies, in line with our policy of providing market-derived and market-driven compensation;

(2) Mr. Pasquale’s recommendations; (3) FW Cook & Co.’s recommendations; and (4) a subjective determination of the Named Officer’s expected contributions to the Company. For 2009, the Compensation Committee determined the appropriate target annual bonus opportunity for Named Officers at the Executive Vice President level (Messrs. Khoury and Bradley) to be 85% of base salary (up to a maximum of 170% of base salary), which also remained unchanged from 2008. Target bonus opportunities, as a percent of salary, differ by Named Officer as a function of market levels and individual responsibility.

 

The Company does not maintain any specific financial performance targets associated with our incentive compensation. Furthermore, the Compensation Committee did not assign any particular weight to any single measure of Company or individual performance in order to determine the annual bonuses of the Named Officers.

 

For each Named Officer, the specific awards disclosed below relate, in part, to overall Company performance achievements as previously disclosed in this proxy statement. In addition to the Company performance achievements, the Compensation Committee reviewed the business unit/function performances for Messrs. Khoury and Bradley. Specifically, the Compensation Committee reviewed the following accomplishments achieved by Mr. Khoury during 2009:

 

 

In determining Mr. Bradley’s business unit/function performance, the Compensation Committee reviewed the following accomplishments achieved by Mr. Bradley during 2009:

 

 

Finally, the Compensation Committee reviewed the individual performances of Messrs. Pasquale, Khoury and Bradley. The Compensation Committee reviewed the following accomplishments achieved by Mr. Pasquale during 2009:

 

 

 

In determining Mr. Khoury’s individual performance, the Compensation Committee reviewed the following accomplishments achieved by Mr. Khoury during 2009:

 

 

In determining Mr. Bradley’s individual performance, the Compensation Committee reviewed the following accomplishments achieved by Mr. Bradley during 2009:

 

 

In February 2010, the Compensation Committee determined to fund the corporate and individual performance components at 75% and 100% of the high levels, respectively, for Mr. Pasquale. Additionally, the Compensation Committee awarded an additional discretionary bonus in the amount of $195,000. The Compensation Committee determined to fund the corporate, business unit/function and individual performance components at 75%, 89% and 100% of the high levels, respectively, for Mr. Khoury. Additionally, the Compensation Committee awarded an additional discretionary bonus in the amount of $35,000. The Compensation Committee determined to fund the corporate, business unit/function and individual performance components at 75%, 72% and 100% of the high levels, respectively, for Mr. Bradley.

 

Based on an evaluation of the performance of the Company and each Named Officer in relation to the applicable strategic goals, we determined that the appropriate amount of each Named Officer’s annual bonus earned for 2009 was the amount reported for such Named Officer in Column (d) of the “Summary Compensation Table — Calendar 2009”.

 

 

Long-Term Equity Incentives

 

Based on the Company’s executive compensation objectives and philosophy, Named Officers’ long-term compensation should be directly linked to the value provided to our stockholders. Therefore, based on recommendations from FW Cook & Co., in 2007 the Compensation Committee implemented a long-term incentive program consisting of annual grants of stock appreciation rights (“SARs”) and performance shares, designed to reward performance for absolute and relative total stockholder return. In 2009, the Compensation Committee, based on recommendations from FW Cook & Co., determined that a more effective compensation program design would be accomplished by redesigning the SAR program. As part of this redesign, the fixed exercise date was eliminated and the exercise period was lengthened to 10 years and the dividend equivalents (which still only remain payable for three years) were no longer offset by stock price depreciation. As part of the same change, the Compensation Committee determined that, given the relatively scarce utilization of SARs as a delivery vehicle for long-term incentive compensation, and since the economic consequences of the two vehicles were essentially the same, options should replace SARs. Accordingly, stock options with parallel dividend rights were granted, comprising approximately 40% of long-term incentive program value. The stock options were designed to generally mirror the terms and conditions of the SARs. The remaining long-term incentives were granted in the form of performance

shares with the same structure as the previously granted performance shares. Options represent the right to purchase shares and are valued based on the increase in stock price, and therefore reward absolute stockholder return. The Company’s performance shares are based on the Company’s stockholder return as compared to all other REITs and therefore reward relative stockholder return. The following is a summary in effect during 2009: Approximately 40% of the Named Officers’ target annual long-term incentive compensation is in stock options with parallel dividend rights and the remaining 60% is in the form of performance shares. The options are granted at fair market value, vest one-third per year over three years, and have a 10-year life. Following a termination due to death, disability or retirement, the options accelerate and remain exercisable until their normal expiration dates. Options may be assumed or substituted in connection with a change in control. If not assumed or substituted, options fully accelerate and remain exercisable for no less than 30 days, and they immediately accelerate in the case of a qualifying termination that occurs in connection with a change in control. For each option granted, a dividend right is also granted. During the first three years after the option is granted, in the event that the Company pays an ordinary cash dividend on its common stock, the Named Officer will be paid cash equal to the dividend rate times the number of shares for which dividend rights have been issued. Payment occurs regardless of whether the option has been exercised, but dividend payments cease upon the third anniversary of the grant date. Following (1) a termination due to death, disability or retirement; (2) a qualifying termination that occurs in connection with a change in control; or (3) a change in control if not otherwise assumed or substituted, the dividend equivalents accelerate and are paid immediately in a lump sum in an amount equal to (x) the number of remaining dividend payments that would have been payable under the award if no termination had occurred, multiplied by (y) the number of dividend equivalents subject to the award, multiplied by (z) the value of the quarterly dividend payment that was most recently paid prior to the termination. In February 2009, the Compensation Committee awarded the following number of stock options with three-year dividend equivalents and a per share exercise price of $25.40 to the Named Officers: Mr. Pasquale (101,300 options), Mr. Khoury (33,100 options), and Mr. Bradley (31,700 options).

 

The annual performance share grants are denominated in stock units and vest on December 31 of the third year following the grant date based on performance measured over the three-year period, subject to the Named Officer’s continued employment. Performance shares that become vested will be paid in an equivalent number of shares of our common stock. Earned awards from grants made in 2009 are based on the Company’s three-year total stockholder return compared to the total stockholder return of the companies in the NAREIT Index as of 12/31/08. Stock prices at the beginning and end of the performance period are calculated as an average of the closing prices on the preceding 20 consecutive trading days (i.e., 20 trading days prior to 1/1/09 and 1/1/12, respectively). Earned awards may vary from 50% to 200% of target, with 50% of the target value being provided for continued employment, similar to restricted stock. If the Company’s total stockholder return is negative for the performance period, the earned award shall never exceed 100%.

 

There are no specific numerical targets associated with the percentages in the right-hand column of the table below. As described above, the vesting of the Company’s performance shares is based on the Company’s three-year total stockholder return during the performance period compared to the total stockholder return of the companies that comprise the NAREIT index during the same time period. If, at the end of the three-year performance period, the Company’s total stockholder return ranks less than or equal to the 50th percentile of that of its peer group, the Named Officer will receive 50% of the target number of shares awarded. The table below lists the percentage of the award the Named Officer is eligible to receive based on the Company’s total stockholder return when such total stockholder return is compared to that of the NAREIT index group.

 

The performance shares granted in 2009 and 2010, which are further disclosed below, were granted for a target number of shares covering a three-year performance period (i.e., the performance period for the shares granted in 2009 commenced on January 1, 2009 and will end on December 31, 2011; and the performance period for the shares granted in 2010 commenced on January 1, 2010 and will end on December 31, 2012). Since the three-year performance periods for such shares have not lapsed, there are no corresponding percentiles that relate to such shares at this time.

The funding schedule is summarized as follows, with linear interpolation between points for both performance and percent of target shares earned:

 

 

In the event of termination due to retirement (for awards issued prior to December 31, 2009 at age 60 with at least five years of service, and at age 60 with at least ten years of service for awards issued subsequent to December 31, 2009), performance shares are eligible for continued vesting, subject to pro-rated payment based on performance for the entire period as compensation for the period of time worked. In the event of a change in control, awards are accelerated, with payment determined based on then-current performance. In the event of termination due to death or disability, performance shares are subject to pro-rated payment, with payment determined based on then current performance. In February 2009, the Compensation Committee awarded the following target number of performance shares to the Named Officers: Mr. Pasquale (53,000 shares), Mr. Khoury (17,300 shares), and Mr. Bradley (16,600 shares).

 

401(k) Retirement Benefits

 

The Company provides retirement benefits to the Named Officers under the terms of its tax-qualified 401(k) plan. Each year, the Company makes an automatic matching contribution on behalf of each participant equal to 3% of the participant’s compensation (regardless of whether the participant contributes to the plan). In addition, the Company makes an additional matching contribution on behalf of each participant equal to one-half of the first 6% of compensation, again, up to the Internal Revenue Code limit, contributed to the plan by the participant up to the allowable limits under the Internal Revenue Code, which was $16,500 in 2009 ($22,000 for participants age 50 or older). The Named Officers participate in the plan on substantially the same terms as our other participating employees. The Company does not maintain any defined benefit plans.

 

Deferred Compensation Opportunities

 

As mentioned above, Named Officers are currently permitted to electively defer up to 100% of their base salaries and annual bonuses under the Deferred Compensation Plan. The Company makes a matching contribution to the non-qualified plan on behalf of participants equal to the lesser of one-half of the compensation (other than annual bonus) deferred by the participant under the plan for such year, or 4% of the participant’s compensation (other than annual bonus) for the same such year. The Company believes that providing the Named Officers with deferred compensation opportunities is a cost-effective way to permit officers to receive the tax benefits associated with delaying the income tax event on the compensation deferred, even though the related deduction for the Company is also deferred. The Company believes that making a matching contribution to the plan is a cost-effective way to provide an additional retirement benefit to Named Officers and to encourage enhanced retirement savings through participation in the Deferred Compensation Plan.

 

Please see the “Non-Qualified Deferred Compensation — Calendar 2009” table and related narrative section “Non-Qualified Deferred Compensation Plan” below for a description of the Company’s Deferred Compensation Plan and the benefits thereunder.

Severance and Other Benefits Upon Termination of Employment or Change in Control

 

Consistent with the Chief Executive Officer’s employment agreement, in the event Mr. Pasquale’s employment is terminated during the employment term either by the Company other than for “cause” or “disability” or by Mr. Pasquale for “good reason” (which includes any “change in control” of the Company) (as those terms are defined in the employment agreement), Mr. Pasquale will be entitled to severance. We treat the occurrence of a change in control of the Company as a “good reason” for the Chief Executive Officer to be able to terminate (within six months prior to or three years following the change in control) because our view is that a change in control transaction results in significant changes in the duties and authorities of the Chief Executive Officer, and in the composition of the board of directors to which he reports, which may constitute a constructive termination of employment for the Chief Executive Officer. If the Chief Executive Officer’s employment is terminated by the Company without cause or by the executive for good reason, we believe that providing the Chief Executive Officer with cash severance benefits based on salary and bonus levels for three years following his actual or constructive termination of employment plus his pro-rata target bonus for the year of termination is consistent with reasonable competitive practice and provides him with financial security during a period of time when he is likely to be seeking new employment.

 

For Named Officers other than the Chief Executive Officer, our philosophy is that severance should only be payable upon certain terminations of employment in connection with a change in control. We believe that the occurrence, or potential occurrence, of a change in control transaction will create uncertainty regarding the continued employment of Named Officers. This uncertainty results from the fact that many change in control transactions result in significant organizational changes, particularly at the senior executive level. In order to encourage the Named Officers to remain employed with the Company during an important time when their prospects for continued employment following the transaction are often uncertain, we provide Named Officers other than the Chief Executive Officer with severance benefits pursuant to a change in control agreement if their employment is terminated by us without cause or by the executive for good reason within six months prior to or three years following a change in control (such a termination is referred to as a “Change in Control Termination” in the agreements). We believe that a protected period of six months prior to, through three years following, a change in control is in line with reasonable competitive practice and protects Named Officers from being involuntarily terminated in contemplation of a change in control in order to avoid severance obligations. We also believe that the Named Officers should receive their change in control severance benefits if their employment is constructively terminated in connection with a change in control. Given that none of the Named Officers other than the Chief Executive Officer has an employment agreement that provides for fixed positions or duties, or for a fixed base salary or actual or target annual bonus, absent some form of constructive termination severance trigger, potential acquirers could constructively terminate a Named Officer’s employment and avoid paying severance. For example, following a change in control, an acquirer could materially demote a Named Officer, reduce significantly his salary and/or eliminate his annual bonus opportunity to force the Named Officer to terminate his own employment and thereby avoid paying severance. Because we believe that constructive terminations in connection with a change in control are conceptually the same as actual terminations, and because we believe that acquirers would otherwise have an incentive to constructively terminate Named Officers to avoid paying severance, the change in control agreements we have entered into with our Named Officers other than the Chief Executive Officer permit the Named Officers to terminate their employment in connection with a change in control for certain “good reasons” that we believe result, in those circumstances, in the constructive termination of the Named Officers’ employment. In the event the employment of a Named Officer other than the Chief Executive Officer is terminated by the Company in a Change in Control Termination, we believe that providing these Named Officers with cash severance benefits based on salary and bonus levels for three years following actual or constructive termination of employment is consistent with reasonable competitive practice and provides them with financial security during a period of time when they are likely to be unemployed and seeking new employment.

 

In the event that a Named Officer becomes entitled to severance under the principles described above, in addition to cash severance benefits described above, we believe that it is also appropriate to provide Named Officers with other severance protections, such as (1) continued medical insurance coverage; (2) accelerated vesting of long-term incentive compensation awards; and (3) any dividend equivalents on outstanding stock options for the three-year period following the termination date. Similar to cash severance benefits, we believe these other severance

benefits are consistent with reasonable competitive practice and provide the Named Officers with financial and personal security during a period of time when they are likely to be unemployed and seeking new employment.

 

We generally do not believe that Named Officers other than the Chief Executive Officer should be entitled to severance benefits merely because a change in control transaction occurs. The payment of severance benefits is generally only triggered by an actual or constructive termination of employment. However, under the terms of our stock incentive plans, if there is a liquidation, sale of all or substantially all of our assets, or merger or reorganization that results in a change in control where the Company is not the surviving corporation (or where it does not survive as a public company), and in the case of awards under the 1989 Stock Option Plan such outstanding awards will not be continued or assumed following the transaction, then, unless the award agreements provide otherwise, like all other employees, Named Officers will receive immediate vesting and/or payout of their outstanding long-term incentive compensation awards. Although this vesting will occur whether or not a Named Officer’s employment terminates, we believe it is appropriate to fully vest equity awards in these change in control situations because such a transaction may effectively end the Named Officers’ ability to realize any further value with respect to the equity awards.

 

As part of their severance benefits, Named Officers are reimbursed for the full amount of any excise taxes imposed on their severance payments and any other payments under Section 4999 of the Internal Revenue Code. We have provided the Named Officers with a “gross-up” for any parachute payment excise taxes that may be imposed because we have determined the appropriate level of severance protections for each Named Officer without factoring in the adverse tax effects on the Named Officers that may result under Section 4999 of the Internal Revenue Code. The excise tax gross-up is intended to make the Named Officers whole for any adverse tax consequences they may become subject to under Section 4999 of the Internal Revenue Code, and to preserve the level of severance protections that we have determined to be appropriate. The agreements that provide the excise tax gross-up (for Messrs. Khoury and Bradley, their change in control agreements, and for Mr. Pasquale, his employment agreement) were not materially amended during 2009 and were first entered into in 2007 (for Messrs. Khoury and Bradley) and 2003 (for Mr. Pasquale).

 

Please see the “Potential Payments Upon Termination or Change in Control” section below for a description of the potential payments that may be made to the Named Officers in connection with their termination of employment or a change in control.

 

Perquisites

 

The Company provides certain Named Officers with perquisites and other personal benefits that the Company and the Compensation Committee believe are reasonable and consistent with its overall compensation program to better enable the Company to attract and retain superior employees for key positions. The amounts attributable to such benefits are included under “All Other Compensation” column in the Summary Compensation Table.

 

Tax and Accounting Considerations

 

Section 162(m) Policy

 

The Compensation Committee has considered the anticipated tax treatment to the Company regarding the compensation and benefits paid to the Named Officers in light of Section 162(m) of the Internal Revenue Code. The basic philosophy of the Compensation Committee is to strive to provide such Named Officers with a compensation package which will preserve the deductibility of such payments for the Company. However, certain types of compensation payments and their deductibility depend upon the timing of a Named Officer’s vesting or exercise of previously granted rights. Moreover, interpretations of and changes in the tax laws and other factors beyond the Compensation Committee’s control may affect the deductibility of certain compensation payments. The Compensation Committee will consider various alternatives to preserve the deductibility of compensation payments and benefits to the extent reasonably practicable and to the extent consistent with its other compensation objectives.

 

However, the Company believes that, because it qualifies as a REIT under the Internal Revenue Code and pays dividends sufficient to minimize federal income taxes, the payment of compensation that does not satisfy the

requirements of Section 162(m) will generally not affect the Company’s net income. To the extent that compensation does not qualify for deduction under Section 162(m), a larger portion of stockholder distributions may be subject to federal income taxation as dividend income rather than return of capital. The Company does not believe that Section 162(m) will materially affect the taxability of stockholder distributions, although no assurance can be given in this regard due to the variety of factors that affect the tax position of each stockholder. For these reasons, the Compensation Committee’s compensation policy and practices are not entirely guided by considerations relating to Section 162(m).

 

Subsequent Compensation Actions

 

In February 2010, based on market data provided by FW Cook & Co., the Compensation Committee decided to increase the base salaries for the Named Officers, as follows: Mr. Pasquale’s base salary increased to $650,000, Mr. Khoury’s base salary increased to $385,000 and Mr. Bradley’s base salary increased to $375,000. At this time, the Compensation Committee also established target cash bonus awards (as a percentage of base salary) of 130% (up to a maximum of 260%) for Mr. Pasquale, and 100% (up to a maximum of 200%) for each of Messrs. Khoury and Bradley. In addition, the Compensation Committee established the components of long-term compensation. Based on recommendations from FW Cook & Co., approximately 40% of the Named Officers’ target annual long-term incentive compensation is in the form of stock options with parallel dividend rights (such dividend rights were granted for a specified time period of three years), and 60% is in the form of performance shares, with terms consistent to those granted in 2009. The stock options and performance shares awarded to the Named Officers in 2010 were granted under the terms of the Company’s 2005 Performance Incentive Plan, as follows: Mr. Pasquale (114,200 options and 62,300 performance shares); Mr. Khoury (37,600 options and 20,500 performance shares); and Mr. Bradley (36,700 options and 20,000 performance shares).

 

On February 8, 2010, the Board adopted an Incentive Compensation Repayment Policy, commonly referred to as a “claw back” policy. Under the claw back policy, if the Board or an appropriate committee of the Board determines that an executive officer or other employee engaged in an act of embezzlement, fraud, breach of fiduciary duty or misconduct during his or her employment that, in the determination of the Board or such committee, contributed to an obligation to restate the Company’s financial statements, the Board or such committee, in its discretion, will take the action it deems necessary or appropriate to address the events that gave rise to the embezzlement, fraud, breach of fiduciary duty or misconduct and to prevent its recurrence. Such action may include, to the extent permitted by applicable law, requiring partial or full reimbursement of any bonus paid to the employee. The Board has given the Compensation Committee and/or the Audit Committee the authority to make determinations under this policy.

 

The remedies that may be sought by Board or committee are subject to a number of conditions, including, that: (1) the bonus to be recouped was predicated upon the achievement of certain financial results that were subsequently the subject of a restatement; (2) the employee in question engaged in conduct that caused or partially caused the need for the restatement; and (3) a lower payment would have been made to the employee based upon the restated financial results. Following a restatement of the Company’s financial statements, the Company will recover any compensation received by the Chief Executive Officer and Chief Financial Officer that is required to be recovered by Section 304 of the Sarbanes-Oxley Act of 2002 or any other applicable law or regulation. In addition, the claw back policy will terminate upon a “change in control event” as defined in the Company’s 2005 Performance Incentive Plan. In order for the claw back policy to be enforceable, each employee identified by the Board will enter into a consent agreement with the Company thereby agreeing to the terms of the claw back policy. On March 15, 2010, Messrs. Pasquale, Khoury, Bradley, William Wagner, Roger Laty and Brent Chappell entered into a consent agreement for the claw back policy to govern any bonuses earned by the Named Officer in 2010 and future years.

 

Equity Grant Practices

 

The Compensation Committee grants equity awards at the first regularly scheduled meeting, which is normally held the day before the first regularly scheduled Board meeting (generally held in January or February of each year). Board meeting dates are set in the prior year. With respect to the grant of options, the grant date value is based on the closing price on the NYSE on the trading day the Compensation Committee awards the options. With respect to the

grant of performance shares, the grant date value is based on the Company’s closing stock price on the NYSE on the trading day the Compensation Committee makes the award. In the event a new employee is hired between Compensation Committee meeting dates, the Compensation Committee generally makes an equity award at its next scheduled meeting.

 

Stock Ownership Guidelines

 

It is the policy of the Company that each director and officer should commit to achieving and maintaining a certain level of stock ownership (i.e., wholly owned shares). Newly elected or appointed officers and directors should work toward achieving the targeted levels of ownership over a five-year period. The policy outlines the following target levels of ownership:

 

 

As of the date hereof, all of the Named Officers are in compliance with the Company’s stock ownership guidelines.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION(1)

 

The Compensation Committee has certain duties and powers as described in its charter. The Compensation Committee is currently composed of the four non-employee directors named at the end of this report, each of whom is independent as defined by the New York Stock Exchange listing standards.

 

The Compensation Committee has reviewed and discussed with management the disclosures contained in the Compensation Discussion and Analysis section of this proxy statement. Based upon this review and our discussions, the Compensation Committee has recommended to our Board that the Compensation Discussion and Analysis section of this proxy statement be included in the Company’s 2009 Annual Report on Form 10-K filed with the SEC.

 

Compensation Committee of the Board

William K. Doyle (Chair)
Robert D. Paulson
David R. Banks
Richard I. Gilchrist

 

The Compensation Committee members whose names appear on the Compensation Committee Report above were committee members during 2009. Mr. Banks was the Chairman of the Company from 1985 when it was organized until 1988 when it became an independent REIT, and has been a director since its inception. Neither Mr. Banks nor any current member of the Compensation Committee is a current or former executive officer or employee of the Company or had any relationships requiring disclosure by the Company under the SEC’s rules requiring disclosure of certain relationships and related-party transactions. None of the Company’s executive officers served as a director or a member of a compensation committee (or other committee serving an equivalent

 

 

(1)  SEC filings sometimes incorporate information by reference. This means the Company is referring you to information that has previously been filed with the SEC, and that this information should be considered as part of the filing you are reading. Unless the Company specifically states otherwise, this report shall not be deemed to be incorporated by reference and shall not constitute soliciting material or otherwise be considered filed under the Securities Act or the Securities Exchange Act.

function) of any other entity, the executive officers of which served as a director or member of the Compensation Committee during the fiscal year ended December 31, 2009.

 

RELATIONSHIP BETWEEN COMPENSATION POLICIES AND RISK MANAGEMENT

 

The Board routinely conducts a company wide risk assessment, as described above (See “Item 1 — Election of Directors — What is the Board’s Role in Risk Oversight?”). Based upon this assessment, the Board carefully evaluates any potential linkage between executive compensation and corporate risks. On this basis, with input from the Compensation Committee, the Board has concluded that current compensation programs are not reasonably likely to have a material adverse effect on the Company.

 

In reaching this conclusion, the Board and the Compensation Committee considered both the cash and equity components of total compensation. With respect to cash compensation, the Board and the Compensation Committee noted that base salaries are fixed in amount and thus do not encourage risk taking. Separately, while the discretionary performance-based cash bonus awards focus on achievement of annual goals, and annual goals may encourage a focus on shorter-term performance, cash bonuses do not represent a majority of any individual’s total compensation opportunities. The Board and the Compensation Committee believe that the bonuses appropriately balance risk and the desire to focus employees on specific annual goals which are important to both the Company’s annual and multi-year financial success, and that the bonuses do not encourage unnecessary or excessive risk taking. In addition, commencing 2010, the Board adopted an Incentive Compensation Repayment Policy that allows the Board or an appointed committee to take action to recover cash bonus awards in the event of a material restatement of the Company’s financial statements.

 

A significant portion of the compensation provided to executive officers and other senior employees of the Company is in the form of long-term equity incentive awards that are important to help further align the interests of the recipient with those of the Company’s stockholders. The Board and the Compensation Committee believe that these awards do not encourage unnecessary or excessive risk taking because the ultimate value of the awards is tied to the Company’s stock price. These equity awards are staggered for overlapping multi-year periods and subject to long-term vesting schedules to help ensure that recipients have significant value tied to the Company’s long-term, and sustained stock price performance. In addition, the Company’s stock ownership guidelines align an appropriate portion of the personal wealth of our officers and directors to the long-term stability and performance of the Company.

 

 

Summary Compensation Table — Calendar 2009

 

The following table presents information regarding compensation of our Named Officers for services rendered during 2009, 2008 and 2007.

 

 

 

 

 

Detailed information about the amount recognized for specific awards is reported in the “Outstanding Equity Awards at Calendar 2009 Year-End” table below. For a discussion of the assumptions and methodologies used to calculate the amounts reported in Columns (e) and (f), please see the discussion of equity incentive awards contained in Note 13 (Stock Incentive Plan) to the Company’s Consolidated Financial Statements, included as part of the Company’s 2009 Annual Report on Form 10-K filed with the SEC, which note is incorporated herein by reference.

 

 

 

Mr. Pasquale is a member of our Board. As an employee-director, Mr. Pasquale does not receive additional compensation for his services as director.

 

 

Compensation of Named Officers

 

The “Summary Compensation Table — Calendar 2009” above quantifies the value of the different forms of compensation earned by or awarded to our Named Officers in 2009, 2008 and 2007. The primary elements of each Named Officer’s total compensation reported in the table are base salary, an annual bonus and long-term equity

incentives. Named Officers also earned the other benefits listed in Column (h) of the “Summary Compensation Table — Calendar 2009,” as further described in footnote (2) to the table.

 

The “Summary Compensation Table — Calendar 2009” should be read in conjunction with the tables and narrative descriptions that follow. A description of the material terms of each Named Officer’s base salary and annual bonus is provided immediately following this paragraph. The “Grants of Plan-Based Awards in Calendar 2009” table, and the description of the material terms of the stock options and performance shares granted in 2009 that follows it, provides information regarding the long-term equity incentives awarded to Named Officers in 2009. The “Outstanding Equity Awards at Calendar 2009 Year-End” and “Option Exercises and Stock Vested in Calendar 2009” tables provide further information on the Named Officers’ potential realizable value and actual value realized with respect to their equity awards.

 

The “Non-Qualified Deferred Compensation — Calendar 2009” table and related description of the material terms of our non-qualified Deferred Compensation Plan provides a more complete picture of the potential future payments due to our Named Officers. The discussion of the potential payments due upon a termination of employment or change in control that follows is intended to further explain the potential future payments that are, or may become, payable to our Named Officers under certain circumstances.

 

Description of Employment Agreements, Salary and Bonus Amounts

 

On September 30, 2003, the Company entered into an employment agreement with Mr. Pasquale, who has served as its President and Chief Executive Officer since April 2004. The agreement was subsequently amended on January 31, 2005, amended and restated on April 23, 2007, and amended and restated again on October 28, 2008. The 2008 restatement reflected technical changes for purposes of complying with Section 409A of the Code, such as clarifying the timing of bonus payments, severance payments and Section 280G tax gross-up payments, and adopting the definitions of “change of control,” “disability” and “separation from service” used under Section 409A of the Code. The term of the agreement is for three years; provided however that on the first day of each month after the effective date of the agreement, the employment term will automatically be extended so as to terminate on the third anniversary of such date unless the Company or Mr. Pasquale gives notice that the term will not be further extended. The agreement provides that Mr. Pasquale will receive an initial annualized base salary of $538,500, subject to annual review by the Compensation Committee. The Compensation Committee generally reviews Mr. Pasquale’s base salary each February, with any increase made retroactive to January 1st of that year. In making its determination with respect to Mr. Pasquale’s base salary, the Compensation Committee considers the factors discussed above under “Compensation Discussion and Analysis — Current Named Officers Compensation Program Elements — Base Salaries.” In 2008, the Compensation Committee increased Mr. Pasquale’s base salary to $562,500, and determined that it should remain at that level for 2009. Mr. Pasquale’s amended employment agreement provides for a target annual bonus opportunity for Mr. Pasquale equal to 100% of his base salary (with the actual bonus ranging from 0% of base salary for performance at the threshold level to 200% of base salary for performance at the high level). Based on FW Cook & Co.’s recommendation after reviewing comparable compensation data for our peer group companies, the Compensation Committee increased Mr. Pasquale’s target bonus opportunity for 2008 to 110% of his base salary (and up to a maximum of 220% of his base salary), and determined that it should remain at that level for 2009. The Compensation Committee will determine Mr. Pasquale’s actual bonus amount each year based on its assessment of the Company’s and Mr. Pasquale’s performance for the year, considering the factors discussed above under “Compensation Discussion and Analysis — Current Named Officers Compensation Program Elements — Annual Bonuses.” Mr. Pasquale is also entitled to receive share-based compensation at least annually in accordance with the Company’s compensation plans and participate in the Company’s other benefit plans applicable to the Company’s senior executives.

Grants of Plan-Based Awards in Calendar 2009

 

The following table provides details regarding plan-based awards granted to the Named Officers during the year ended December 31, 2009. The material terms of each grant are described below under “Description of Plan-Based Awards.” Each award disclosed on the table below was granted under the 2005 Performance Incentive Plan.

 

 

 

 

Description of Plan-Based Awards

 

Each of the awards reported in the “Grants of Plan-Based Awards in Calendar 2009” table was granted under, and is subject to the terms of, the 2005 Performance Incentive Plan.

 

Unless otherwise provided in an individual award agreement, under the terms of the 2005 Performance Incentive Plan, if there is a change in control of the Company, each Named Officer’s outstanding awards granted under the plan will generally become fully vested and, in the case of options, exercisable.

 

Stock Options with Parallel Dividend Rights

 

On February 10, 2009, the Compensation Committee approved an award of stock options with parallel dividend rights to each of the Named Officers. Each option award was granted with a per share exercise price of $25.40, the closing price of a share of the Company’s common stock on February 10, 2009. The options vest one-third per year over three years and have a 10-year life. Following a termination due to death, disability or retirement,

the options accelerate and remain exercisable until their normal expiration dates. Options may be assumed or substituted in connection with a change in control. If not assumed or substituted, options fully accelerate and remain exercisable for no less than 30 days, and they immediately accelerate in the case of a qualifying termination that occurs in connection with a change in control. For each option granted, a dividend right is also granted. During the first three years after the option is granted, in the event that the Company pays an ordinary cash dividend on its common stock, the Named Officer will be paid cash equal to the dividend rate times the number of shares for which dividend rights have been issued. Payment occurs regardless of whether the option has been exercised, but dividend payments cease upon the third anniversary of the grant date. Following (1) a termination due to death, disability or retirement; (2) a qualifying termination that occurs in connection with a change in control; or (3) a change in control if not otherwise assumed or substituted, the dividend equivalents accelerate and are paid immediately in a lump sum in an amount equal to (x) the number of remaining dividend payments that would have been payable under the award if no termination had occurred, multiplied by (y) the number of dividend equivalents subject to the award, multiplied by (z) the value of the quarterly dividend payment that was most recently paid prior to the termination. For more information with respect to the options and the dividend rights, see “Compensation Discussion and Analysis — Current Named Officers Compensation Program Elements — Long-Term Equity Incentives.”

 

Performance Shares

 

On February 10, 2009, the Compensation Committee approved an award of performance shares to each of the Named Officers. The performance share awards granted to Named Officers represent a contractual right to receive a number of shares of common stock if the following time-based and performance-based vesting requirements are satisfied. Subject to the officer’s continued employment, a percentage (ranging from between 50% to 200%) of the number of performance shares subject to the award are eligible to become earned and vested based on the Company’s total stockholder return (“TSR”) over the three-year period between January 1, 2009 and December 31, 2011 relative to the TSR of the companies comprising the NAREIT Index as of December 31, 2008, except that payout is capped at 100% of target if TSR is negative. Performance shares that become earned and vested will be paid in an equivalent number of shares of common stock following the performance period. Named Officers are not entitled to dividends or dividend equivalents with respect to performance shares. For information with respect to the vesting and termination provisions, see “Compensation Discussion and Analysis — Current Named Officers Compensation Program Elements — Long-Term Equity Incentives.”

Outstanding Equity Awards at Calendar 2009 Year-End

 

The following table presents information regarding the outstanding equity awards held by each Named Officer as of December 31, 2009, including the vesting dates for the portions of these awards that had not vested as of that date.