WHY REIT INVESTORS SHOULD FEAR THE REAPER.
Investors in REITs were given another factor to worry about yesterday: the people who started them are getting older and once they retire, the people taking their place will have to gain the confidence of the market and may embark on a different strategy
That in a nutshell is the gist of a 35-page report released Thursday by Alex Avery, a real estate analyst with CIBC World Markets.
“A proper succession process requires significant planning and time to implement well ahead of founder departures, and we expect investors will increasingly demand more transparency,” writes Avery after noting 64 per cent of companies listed in the S&P/TSX REIT index are still led by the founding chief executive.
In all, 21 REITs — ran- ging from Agellan ( that’s been led by Frank Camenzuli since 2011) to CAP ( Thomas Schwartz: 1997) to Killam Properties ( Philip Fraser: 2000) to RioCan ( Ed Sonshine: 1993) — are still led by the founder. And Avery, who spent about a year preparing the report, expects 70 per cent of the CEOs of the members of S&P/TSX REIT index will retire over the next five years. ( RioCan, CAPREIT and CREIT are the most likely to be part of the 70 per cent “from a purely mathematical perspective.”)
Meanwhile, the founders aren’t getting younger. For instance, the average age of a REIT CEO is higher (by two years) than the average age of a bank chief executive: Twenty years ago, the average age of a bank CEO was 15 years above the average REIT CEO.
A sub- theme of Avery’s paper is that without proper planning for CEO succession — an exercise that can take several years to implement — the circumstances “can lead to an elevated possibility of a sale.”
In some cases that “elevated possibility” becomes a fact. The report lists 16 REITS that have been sold by the founding CEO to a variety of buyers, including a fellow REIT, a pension fund or an institutional investor. The list includes: Alexis Nihon (sold in 2007, five years after going public); Amica Mature Lifestyles (1997; 18 years); Healthlease ( 2014; two years); and Whiterock (2012; seven.)
The report notes there have been 34 REIT takeovers in Canada over the past 10 years, and “very few appear to have been significantly motivated by leadership retirement.”
Despite that, Avery agrees with the recent comment of a merger-arbitrage investor. “If there was a multi-factor M&A model to predict takeovers, age of the CEO would have the biggest weighting.”
Because of the small sample size and because most of the turnover has flowed from changes in controlling shareholders, external managers or strategic tenant relationships, Avery argued it’s tough to predict what will happen when there is a succession shift.
He did find some examples including: Cominar REIT, which was taken public in 1998 and which, for health reasons, changed CEOs in 2005.
Under t he new CEO ( Michel Dallaire) the debtaverse company has moved away from its core Quebec market. It has expanded across the country, acquired two other REITs (Alexis Nihon and CANMARC) and operates with higher leverage. Now the REIT is on another path: asset sales, de-leveraging and unit buybacks.
While the CEO’s age is key, Avery also argues the age of the board — and the amount of time they have been in that role — are also important in assessing the possibility of strategic change.