NEW YORK CITY-Insignia Financial Group shareholders were less than pleased at the company’s “languishing” performance, and they made no bones about it during yesterday’s regular conference call to report on Q2 performance results. Threatening a “major backlash from your shareholders” if changes were not implemented immediately, one participant leveled charges at CEO Andrew Farkas that included personal reimbursements for use of his boat and airplane totaling, he said, “$950,000 of corporate money.”
Also on his list of complaints were “some very significant contributions to political campaigns for potential candidates who at best could be seen as long shots to win. I’m wondering if that’s an appropriate use of corporate monies, given the times we are in, the difficulties the company is having and attempts to lower expenses.” Identifying himself as one of the “largest shareholders in the company,” he also questioned “numerous loans to officers–yourself [Farkas] included–that seem to be below the company’s own cost of financing” as well as individual investments made in Insignia partnerships.
Seeking a Greater Comfort Level
“Shareholders would feel a lot more comfortable if your interests were better aligned with ours,” he went on to say, “and your interests were solely in the stock. We’d rather see all of us eating from the same trough, and you make a lot of money and we make a lot of money. But right now, you are in a position to make a lot of money while your stock is languishing at eight bucks.”
On Thursday, July 25 at 1:21pm, Insignia traded at $8.30, down 2.35% from the previous trade. In addition, the commercial segment of the operation posted revenues of $136.5 million for Q2, compared with $138.8 million for the same period a year ago. EBITDA totaled $10.9 million, versus $13.0 million for the second quarter of ’01. For the first six months of ’02, commercial revenues totaled $257.3 million, compared with $284.4 million for first-half ’01. First-half EBITDA hit $17.3 million, versus $29.8 million for the first half of ’01. The down-ness was chalked up to soggy leasing activity stemming from “a general lack of corporate real estate decision-making begun in 2001,” according to a statement released by the firm.
But the news wasn’t all bad and overall, Insignia Financial did have an up quarter, with income from continuing operations of $3.2 million ($0.12 per diluted share), an improvement from a loss of $1.7 million ($0.09 loss per diluted share) in the second quarter of ’01. Much of this buoyancy was provided by Insignia Douglas Elliman, the company’s residential sales and brokerage unit, which had what the statement termed “record performance.”
Farkas Cites Solid Returns
Asked what he and the other members of the compensation committee are doing to address the shareholders’ concerns, Farkas responded that, “the compensation committee has retained outside consultants as it has over the last several years to advise it on all matters relating to compensation, including any and all reimbursements of anything done by any of the executives. And the compensation committee has retained independent counsel to advise it in connection with same. The compensation committee is constantly reviewing these programs, all of which have been in place since the company was founded in 1990. So the programs have not changed over the history of the entire operation. The returns to the company generated by the types of investments that have been made in funds in which the company deployed capital have generally been north of 30% on an IRR basis.”
Not to be assuaged, the shareholder asked if these included Internet investments, and Farkas admitted that they did not. He did defend his position in terms of alignment with shareholder interest. “I believe the interests of the shareholders and the interests of management are very much aligned.” The CEO then invited the investor to “spend some time with the compensation committee, and they would be happy to review it with you in detail.”
But another shareholder was waiting in the wings to address these issues. “We feel similarly and would think the company should come back very promptly with how to fix its corporate governance issues before this turns into a media circus.”
Insignia Responds to the Charges
In an interview after the conference call, a spokesperson for Insignia Financial responded to each of the major charges leveled during the meeting. Concerning the reimbursements of Farkas’ boat and airplane, he said, “That was in 2001, and it pertains to specific business uses of the boat and the plane. The company made the decision not to own the assets but did want to use them. If clients go out on the boat, he [Farkas] is reimbursed. It is all approved by the independent compensation committee and all disclosed in the proxy.”
Likewise, he says, political contributions toe the legal line. “Like most companies, Insignia makes political contributions,” he responded. “All the contributions apply to election laws and the amounts we’ve given are modest at best. Over the past 18 months, Insignia and its subsidiaries donated $150,000. We’ve given to all the major New York gubernatorial candidates as well as candidates for other offices. Our revenues over that same 18-month period were more than a billion dollars, so we’re talking about less than one fiftieth of one percent.”
Concerning the loans made below the cost of financing, the spokesman said there are two aspects to the situation. “There are loans made in 1998 as part of a program that allowed employees to buy stock in the company,” he explained. “That’s once aspect. The other concerns loans made to [Insignia/ESG chairman Steve] Siegel and Farkas, and all the loans are approved by the comp committee and fully disclosed. The interest is at Insignia’s cost of funds.” He added that, despite the claim of the shareholder, the loans were not “numerous.”
He also denied that company individuals benefited from partnerships while shareholders lost out. “That’s never true in any instance,” he fired back. “The company functions like an investment bank, and no employee receives any upside until the company first recovers its cost of funds and receives a preferred return. This too is approved and reviewed annually by the comp committee, and it’s standard practice for the real estate industry.”
Finally the spokesperson noted that the firm was “reviewing corporate governance as we speak and we will address the concerns of the shareholders promptly.”
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