Investors in REITs were given another step to worry about: those who started them are getting older and once they retire, the folks taking their place will need to gain the boldness of the market and may embark on another strategy.
That the bottom line is may be the gist of the 35-page report released Thursday by Alex Avery, a genuine estate analyst with CIBC World Markets.
“A proper succession process requires significant planning and time to implement well in front of founder departures, and that we expect investors will increasingly require more transparency,” writes Avery after noting 64 percent of companies indexed by the S&P/TSX REIT index are still led by the founding leader.
In all, 21 REITs – which range 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 through the founder. And Avery, who spent in regards to a year preparing the report, expects 70 per cent from the CEOs from the members of S&P/TSX REIT index will retire within the next 5 years. (RioCan, CAPREIT and CREIT would be the that appears to be area of the 70 per cent “from a purely mathematical perspective.”)
Meanwhile the founders don’t get younger. For example, the average chronilogical age of a REIT CEO is higher (by 2 yrs) than the average chronilogical age of a bank chief executive: twenty years ago the typical chronilogical age of a bank CEO was Fifteen years above the average REIT CEO.
A sub-theme of Avery’s paper is that without proper planning CEO succession – an exercise which takes many years to apply – situations “can result in a heightened possibility of sales.”
In some cases that “elevated possibility” becomes a fact. The report lists 16 REITS which have been sold through the founding CEO to some variety of buyers together with a fellow REIT, a pension fund or an institutional investor. The list includes: Alexis Nihon (sold in 2007 5 years after going public); Amica Mature Lifestyles (1997; 18 years); Healthlease (2014, two years); and Whiterock (2012: seven.)
The report notes there has been 34 REIT takeovers in Canada over the past Ten years, and “very few appear have been significantly motivated by leadership retirement.”
Despite that Avery agrees with the current comment of the merger-arbitrage investor. “If there is a multi-factor M&One to calculate takeovers, age of the CEO might have the biggest weighting.”
Because of the small sample size and since the majority of the turnover has flowed from alterations in controlling shareholders, external managers, or strategic tenant relationships, Avery argued it’s difficult to predict what’s going to happen if you find a succession shift.
He did have some examples including: Cominar REIT, that was taken public in 1998 and which, for your health, changed CEOs in 2005. Under the new CEO (Michel Dallaire) the debt-averse company has moved away from its core Quebec market. It’s expanded across the nation, 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 age the board – and the amount of time they have been in that role – will also be important in assessing the possibility of strategic change.
bcritchley@nationalpost.com
