REIT sector’s next challenge: succession
Getting there — with new chief executives and teams of new directors for the companies that make up Canada’s $ 100- billion real estate investment t rust i ndustry — over the next few years promises to be quite the ride. All companies will be affected — in large part because many of them are still run by their founders (who are now much older chief executives) and because there has been little turnover in the ranks of the directors. And some will be better equipped to handle the journey than others.
That’s the nub of a recent report by Alex Avery at CIBC World Markets. The report, Tending the Flock: REIT Leadership is the second on the theme Avery has published in the last two weeks. He spent more than a year gathering data.
As REITs approach a change in leadership, Avery writes in his 25- page report “management of executive succession and board continuity and renewal will introduce new challenges to Canadian REITs not previously encountered on a widespread basis.” Indeed Avery expects replacing founding CEOs will be more difficult and more time consuming than anticipated.
One problem is that some REITs have not had to replace the CEO; another problem is that the board members have, in some cases, been around for a long time — all of which can “complicate the discussion, development and execution of comprehensive succession processes.”
In another part of the report, Avery notes, “the evolution of board management practices among Canadian REITs may have failed to keep pace with the evolution of the REITs they govern.”
Three measures of not keeping up: 84 per cent of directors are male, 97 per cent are white and average board tenure is 10 years. ( In some countries, directors lose the right to be termed i ndependent after being around for that length of time.) Avery uses the term Pale, Male & Stale to describe that situation.
“We expect investors will increasingly prefer more independent, well- composed boards,” he wrote noting, “it seems reasonable to pursue more gender- diverse boards.” As well Avery lends his support to the idea of term limits for directors because that “reflects the pragmatic reality that board independence can be compromised by the deeper relationships that develop over long periods of service.”
Avery offers some suggestions on replacing chief executives, a task more complicated than for some other industries, in part, because of the effects of the 1990s recession when very few professionals entered the real estate industry. Accordingly the real estate executives are under- done when it comes to both experience and in building relationships with investors and analysts.
Avery believes proactive REITs could have a so-called first-mover advantage if they attract and retain the next generation’s best and brightest. In general he is not a supporter of the CFO becoming the new CEO — unless the executive has taken time to gain operational experience. The key reason is the different skill- sets required for the two positions.
Avery extends that view arguing the new CEO should have different skill-sets than the founder, in part because the organizations are now larger and more complex.
The bottom line is that investors need to pay attention given the strong likelihood that the future will be different than the past.