Morgan Stanley: Merlin Properties May Reap Millions For Its Executives

28/10/2014 – El Diario

Generosity of the renumeration scheme adapted by the executives of Merlin Properties, a Socimi (Spanish REIT vehicle) listed on the stock exchange on 30th June, has drawn attention of investment bank Morgan Stanley. The entity reckons the incentive system may have ‘a tremendous impact on the final profitability of its shareholders’.

In the latest report published this 13th October, the U.S. bank calculates the renumeration the nine directors of the firm could rake in. According to the estimations, the amount may rise to €117 million over the next three years: €43 million in 2015 and €37 million both in 2016 and 2017. A long shot across the board, with figures not seen even during the bonanza times in the real estate sector.

The beneficiaries who will receive an average of €13 million per capita will be the president and the CEO of Merlin, Ismael Clemente (who by the way said back December that absolutely nobody paid taxes in Spain, pictured), Finance and Transaction director Miguel Ollero, head of Investment David Brush and other six key executives.

Further on, the report states it is fairly benevolent of the company to strive at a price of 11.6 euros a share (22% higher than it is today). Morgan Stanley also points out that although the compensation scheme involving stock options ‘initially encourages investors’, in mid-term the ‘management could take a considerable part of the final return’ in the detriment of the stakeholders.

The bank highlights the directors’ compensation is ‘directly linked to the total return of a shareholder’ and the incentive is executed within a five-year term.

In any way, the Socimi’s Net Asset Value (NAV) is expected to shoot up in the upcoming years as a result of  the acquisitions carried out by the firm recently and those still awaiting closing.

Not in vain, Morgan Stanley takes into account a highly optimistic scenario showing a 20% annual return.

Once Merlin Properties gives back 8% to its investors, the board of directors may start receiving their bonuses, equalling to up to 60% of their fixed monthly income.

The U.S. bank foresees that at some point the stakeholders might want to renegotiate the bonus scheme and they might be successful in that venture.

‘Our experience shows that the behavior of the managers tends to be shaped by the incentives and therefore we notice emerging risk of Merlin increasing its asset base more than it would do if the bonus scheme was different’, says Morgan Stanley.

Deeper in the study, the entity assures that such a system brought to executives of Land Securities and British Land €520 million (£410 million) in only two years, while Unibail-Rodamco directors earned €429 million, to name few extreme cases. These companies are much bigger than Merlin which currently ranks the third in Spain in terms of stock value, just behind Testa and Colonial.


Original article: El Diario (by Antonio M. Vélez)

Translation: AURA REE