Commercial property such as hotels, office towers, industrial sheds and shopping centres remain in high demand due to ongoing low interest rates, which have reduced the cost of debt and also boosted distributions to investors.
And pubs are no exception.
Over the past 18 months, Lantern Hotel Group (ASX:LTN) has sensibly taken advantage of the strong pub market to sell its 16 mostly owned-and-operated pubs and distribute the proceeds to shareholders.
With Lantern’s share price around 8.5 cents 18 months ago, investors have since received 14.1 cents in distributions and own shares currently priced at 1.1 cents.
Yet while shareholders have done well, a significant minority of them believe the executives who executed this strategy have done a little too well from it.
Options converted to distribution target
In April 2016 three executives – the CEO, COO and Financial Controller – were given options exercisable at zero cost if Lantern’s share price hit certain targets up to $0.15 over the next two years. Lantern’s share price was then around $0.10.
After disposing a number of ‘non-core’ properties – those properties that didn't have strong gaming revenues – Lantern successfully obtained shareholder approval to sell its entire portfolio of pubs.
Being sub-scale and with many of Lantern's pubs requiring significant investment, this was the prudent course. It was also sensible to exploit the booming pub market before the cycle turned, as it inevitably will sooner or later.
On average, Lantern's hotels with strong gaming revenues were sold at a 47% premium to book value while its non-core properties were sold at a 14% premium.
Given the change in strategy, the executives’ incentive compensation was amended in August 2016 to a cash payout based on the amount of distributions paid to shareholders.
As noted, shareholders have already received 14.1 cents per share and management estimates additional distributions of up to 1.2c per share. If an additional 1.0 cents is distributed, the three executives will be entitled to cash payouts totalling $2.4m, or around 0.27 cents per share.
However, at the recent EGM to approve these cash payouts, 42% voted against approving them.
I think they are mistaken.
While $2.4m might seem like a lot of money, it represents just 5.3% of the $45m in value created for shareholders since April 2016 (assuming further distributions of 1 cents per share). That works out to a more than 50% return in around a year, which is impressive for what is supposed to be a staid and boring listed property trust.
It seems the 42% have also forgotten the management and Board turmoil at Lantern that preceded the current strategy being implemented.
The cash payout did what was intended: incentivise the executives to maximise returns to shareholders. As such, they deserve their payouts.
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Disclosure: the author recently sold his shares in Lantern.