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

Investors in REITs were given another step to be worried about: those who started options are getting older and when they retire, the people taking their place will have to gain the confidence from the market and may embark on a different strategy.

That the bottom line is may be 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 demand more transparency,” writes Avery after noting 64 percent of companies listed in the S&P/TSX REIT index continue to be led by 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) – are still led through the founder. And Avery, who spent in regards to a year preparing the report, expects 70 per cent of the CEOs of the members of S&P/TSX REIT index will retire within the next five years. (RioCan, CAPREIT and CREIT would be the that appears to be area of the 70 percent “from a purely mathematical perspective.”)

Meanwhile the founders aren’t getting younger. For example, the typical age of a REIT CEO is higher (by two years) compared to average age of a bank chief executive: two decades ago the typical age of a bank CEO was 15 years over 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 apply – situations “can lead to an elevated chance of a sale.”

In certain cases that “elevated possibility” becomes a fact. The report lists 16 REITS which have been sold by the founding CEO to some number of buyers together with a fellow REIT, a pension fund or an institutional investor. Their email list includes: Alexis Nihon (bought from 2007 5 years after going public); Amica Mature Lifestyles (1997; 18 years); Healthlease (2014, 2 yrs); and Whiterock (2012: seven.)

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

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

He did find some examples including: Cominar REIT, that was taken public in 1998 and which, for your health, changed CEOs in 2005. Underneath 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 also the amount of time they have been for the reason that role – are also essential in assessing the potential of strategic change.

bcritchley@nationalpost.com

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