REIT investors face new risk as CEOs age, raising succession questions

Investors in REITs were given another step to worry about: the people who started options are growing older and once they retire, the folks taking their place will need to gain the confidence from the market and could attempt a different strategy.

That in a nutshell is the gist of a 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 for you 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 listed in the S&P/TSX REIT index continue to be led through the founding chief executive.

In all, 21 REITs – which range from Agellan (which has been led by Frank Camenzuli since 2011) to CAP (Thomas Schwartz: 1997) to Killam Properties (Philip Fraser: 2000) to RioCan (Ed Sonshine: 1993) – continue to be 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 people in S&P/TSX REIT index will retire over the next 5 years. (RioCan, CAPREIT and CREIT are the that appears to be part of the 70 per cent “from a purely mathematical perspective.”)

Meanwhile the founders aren’t getting younger. For example, the average age of a REIT CEO is higher (by two years) than the average chronilogical age of a bank chief executive: twenty years ago the typical chronilogical age of a bank CEO was 15 years over the average REIT CEO.

A sub-theme of Avery’s paper is the fact that without correct planning for CEO succession – an exercise which takes several years to implement – situations “can lead to an elevated possibility of a sale.”

In certain cases that “elevated possibility” turns into a fact. The report lists 16 REITS that have been sold by the founding CEO to a number of buyers including a fellow REIT, a pension fund or an institutional investor. Their email list includes: Alexis Nihon (bought from 2007 five years after going public); Amica Mature Lifestyles (1997; 18 years); Healthlease (2014, 2 yrs); and Whiterock (2012: seven.)

The report notes there has been 34 REIT takeovers in Canada over the past 10 years, and “very few appear appear to have been significantly motivated by leadership retirement.”

Despite that Avery will follow the recent comment of a merger-arbitrage investor. “If there is a multi-factor M&A model to predict takeovers, chronilogical 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’s going to happen if you find a succession shift.

He did have some examples including: Cominar REIT, which was taken public in 1998 and which, for health reasons, changed CEOs in 2005. Underneath the new CEO (Michel Dallaire) the debt-averse company has moved from its core Quebec market. It’s 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 essential, Avery also argues the age of the board – and the period of time they have been for the reason that role – are also important in assessing the possibility of strategic change.

bcritchley@nationalpost.com