By Steve Bergsman
More M.B.A. than mogul, a new group of REIT leaders will write the next chapter in the REIT story
Donald Wood |
Donald Wood began his professional career with the accounting firm Arthur Andersen, where some of his early clients were real estate companies, regional homebuilders and the Trump Organization. For Trump, Wood also worked on his casino operations and some of his bigger deals like the acquisition of the Plaza Hotel.
Did Trump ever have him compete for an "apprentice" position? Wood laughs, "I missed that by about 15 years. I could have gotten fired officially."
Today, if anyone does the firing it is Wood, who holds the titles of president and chief executive officer of Federal Realty Investment Trust (NYSE: FRT). He is also a member of Federal Realty's board. All this happened relatively recently. After being chief financial officer of Caesers World (casinos), Wood moved to Federal Realty in 1998 to take on the same position. He became president in 2001 and chief executive last year, succeeding Steve Guttman, a long-time REIT executive and past NAREIT chairman who headed Federal Realty for 25 years.
Wood is one of a new generation of REIT chief executives, a group of leaders charged with either replacing the company founder or the legendary driving force in the expansion and growth of a particular REIT.
Like Wood, the next generation of leaders isn't as much up-from-the-bootstrap entrepreneurs, as they are young executives with solid backgrounds in accounting, finance or in some cases real estate. This prior experience will serve them well as these relatively new chief executives face an environment where management and leadership will be more important than empire building.
Christopher Nassetta |
The next generation is a varied group with little common thread in regard to path of succession. Some had worked at their current companies for almost their entire professional life, while others came on board only in recent years. Christopher Nassetta became CEO of Host Marriott Corporation (NYSE: HMT) in 2000 after joining the company in 1995. Dennis Oklak joined Duke Realty Corporation (NYSE: DRE) in 1986 before it went public and was named CEO in April 2004. On the other end, Jay Flaherty joined Health Care Property Investors Inc. (NYSE: HCP) from the investment banking industry in late 2002.
Hand-Picked
Richard Kincaid |
One thing tying most of these leaders together is the fact that they were chosen by their predecessors to succeed them. Instead of high profile searches, most of the companies had an informal succession plan in place where the next generation was groomed to take over the top slot. Ironically, this probably won't happen when the third generation of REIT leaders rise to the top. Unlike the founders and drivers of the REIT industry before them, this generation must consider itself professional managers first and foremost, rather than developer/entrepreneurs, and processes like succession will be institutionalized, not idiosyncratic.
Gordon DuGan, president, co-CEO and director with W.P. Carey & Co. LLC, had one of longest grooming periods, going to work at W.P. Carey right out of college in 1988. His first job: assistant to the chairman, who was none other than company founder William Carey (still chairman and co-CEO). DuGan's last stop before becoming co-CEO was heading W.P. Carey's acquisition and investment group. He ascended to his current role in December 2002.
Dennis Oklak |
Richard Kincaid, president, CEO and trustee of Equity Office Properties Trust (NYSE: EOP), also received early mentoring at the heels of the founding chairman. While working at First Chicago Bank, Kincaid began his association with Equity Office Chairman Sam Zell back in 1990. Kincaid helped Equity Office go public in the mid-1990s and became CFO in 1997. He succeeded Timothy Callahan as CEO in April 2003.
 "You are a rudder in a very large ship, which means that you cannot do everything. The most important skill you can have is flexibility. You have to have a sense of trends, you have to be a great communicator and you need to evolve as much as you are asking your company to evolve."
THOMAS TOOMEY
|
While most of these next generation leaders are the second
person to hold their company's top post, Thomas Toomey, president and CEO of United Dominion Realty Trust Inc. (NYSE: UDR), is the company's third head. He succeeded John McCann who wasn't the founder, but ran the company for 25 years. Toomey was another financial star who began his career with Arthur Andersen, again working with real estate companies such as Lincoln Property Co. in Dallas. He migrated to the corporate world in 1995 when he became CFO of AIMCO Properties LP. Toomey moved up the ladder at AIMCO, eventually becoming chief operating officer. Toomey joined United Dominion in 2001.
Jay Flaherty |
Like Toomey, Flaherty also arrived from the outside, but his circumstances were a little different. While he is now the president, CEO and member of the board of directors for Health Care Property Investors, Flaherty was by profession an investment banker. In a 20-year career at Merrill Lynch, Flaherty had been the primary investment banker to HCP since 1986. When Ken Roath, the founder of the company, decided to relinquish the CEO title but stay on as chairman, Flaherty—on the strength of his knowledge of the company—was recruited to fill the vacancy. He stepped into the top position at HCP in May 2003.
There was, however, a tiny bit of grooming. Flaherty actually joined Health Care Property at the end of 2002 as president and chief operating officer. "I had a little bit of a running start," says Flaherty. "I had about five months to get a general sense as to what were the opportunities and challenges at the company."
Experience Counts–A Lot
When Flaherty became CEO of Health Care Property, his initial thought was how daunting it was to step into the shoes of a REIT legend. Roath not only founded the company, but is considered by many to be a pioneer of the health care REIT sector.
As Equity Office's Kincaid observed, there are some things you can not prepare yourself for, such as "how much clearer the responsibility rests with you, and the various constituencies, such as the board, that are looking at you."
Nevertheless, Flaherty, Kincaid and the other CEOs of the next generation bring considerable experience and talent to handle their new jobs. While they may have limited experience running a REIT, many of these executives feel that the diversity of their past experiences makes them more well-rounded leaders.
"I have two decades of experience operating in the health care industry," Flaherty says. "That's significant in that 100 percent of our real estate is owned by health care providers. I also have a track record of running a variety of businesses that were professional in nature. While I was not at a REIT, there were more parallels and overlaps in terms of experience than I might have initially considered."
Over at Host Marriott, Nassetta says his broad-based background has been an asset. Early in his career, Nassetta held a lot of different positions all related to real estate.
"I did finance, development, asset management and I've been on the leasing side. And I've been in a lot of different real estate sectors," Nassetta says. "That mix of experience and skill sets—organizational, analytical and interpersonal—have been very helpful to me. It allowed me to do the things that I have been able to do here."
The same holds true for Duke Realty's Oklak and Equity
Office's Kincaid.
"I've been involved in the industry full time for 18 years and closer to 25 years on a tangential basis," Oklak says. "So, I can look through and understand the cycles and not get too caught up when the pendulum swings one way or the other. We are industrial and office developers and we do that in 13 Midwestern and Southeastern cities. We are going to continue to stay the course because we have had a lot of success with that strategy."
To which Kincaid adds, "I have a lot of background in finance and capital markets. Plus, I understand the real estate business. So, as a CEO I have a good idea of where we should be and how to get there."
Big Companies, Big Jobs
"In my view," notes Federal
Realty's Don Wood, "balance,
good judgment and vision
are the keys to giving yourself
the best chance for success.
Real estate assets, by their
nature, are not high growth
vehicles and, in most
cases, they shouldn't be
run as if they can be."
DON WOOD |
Thanks to the efforts of the industry founders, REITs have become mainstream investment vehicles listed on the S&P 500 and cornerstones for portfolio diversification. REITs are on par, if not superior, to the rest of corporate America in terms of corporate governance. With rising market capitalizations, REITs own billions of dollars in assets and attract significant retail and institutional investment capital. These are all achievements that the first generation of leaders scratched and fought to attain.
As an example, Equity Office is the largest REIT and publicly held owner of office properties in the country. At last count it owned and managed 123.6 million square feet of office space in 700 buildings. Now that's a tough situation to come into, and it doesn't get easier with the office real estate market going soft. "The challenge when you become so large is to figure out how to utilize your size," Kincaid says. "You have to rethink how you do things: the systems, processes, management and talent."
Kincaid's dilemma is how to use market scale to an advantage. "What we need to do is build on what we have, concentrate on fewer markets and prepare for another dramatic growth spurt, because there will be a lot of opportunities in this cycle," he says. "We have spent a lot of time putting in the systems, processes and changing our organization. We need to keep our format, be disciplined and prepared for the opportunities."
Duke Realty, a fully integrated real estate company, owns 109 million square feet in a diversified portfolio that consists primarily of industrial, office and retail properties. It's Oklak's job to keep this engine on track. "If you look back at our industry, many of the REITs evolved from private entrepreneurial companies. They had strong individual leaders who carried these companies to great success," he says. "Now these companies have grown into significant corporations. We have 1,000 employees. The key to my job is managing people and building an organization."
United Dominion ranks as one of the country's largest owners and operators of apartments with more than 260 communities and 76,244 apartments. "It isn't like you are taking over a small company, the challenge and opportunity was taking over the fourthlargest apartment community," Toomey says. "The first thing you realize is that you are not in control. You are a rudder in a very large ship, which means that you cannot do everything. The most important skill you can have is flexibility. You have to have a sense of trends, you have to be a great communicator and you need to evolve as much as you are asking your company to evolve."
Health Care Property has carved a large swath through its sector, owning directly or through joint ventures 554 properties in 44 states, including hospitals, long-term care facilities, retirement and assisted living facilities, medical office buildings and other health care structures.
But, even at that size, a new CEO can make a difference. "Ten months into my tenure, we have changed a number of things," says Flaherty. "We have changed our organizational structure, composition of the board, business model and we did a joint venture last year, which we never did before. Last month, we made a major disposition of a real estate portfolio and we had never done that. We have stabilized up-and-running properties, so a lot of good things have come about."
New Perspective, New Skills
It takes a different skill set and personality to take an existing company and stabilize it for the future while maintaining adequate growth to meet investor expectations, as opposed to starting with little to nothing and creating a vast, multi-million dollar enterprise.
The key with a change in leadership is a change of perspective, Flaherty says. "Whether the change is good or bad, it is a different perspective—someone looking at things differently than the original CEO. That is a very healthy thing for a company."
Gordon DuGan |
A leading provider of sale-leaseback financing, W.P. Carey also owns and manages 600 commercial and industrial properties worldwide. Its new co-CEO, DuGan, doesn't disagree with Flaherty about a new perspective, but he likes to emphasize the long-term perspective. He quickly realized "that you can't be afraid to make long-term, unpopular decisions" and that success depends on team building.
"As the CEO of a modern real estate company, you need to be team captain," DuGan says. "You don't have to be team captain, coach and star player. You can not do it all; you need good people and the skills to do team building."
DuGan's philosophy is to hire people "that are smarter" than he is. "My job is to enable them to use their brains and ability," he adds.
"In my view," notes Federal Realty's Wood, "balance, good judgment and vision are the keys to giving yourself the best chance for success. Real estate assets, by their nature, are not high growth vehicles and, in most cases, they shouldn't be run as if they can be."
Wood strongly asserts, "a company's business plan needs to be aligned with a realistic assessment of what those assets can produce and the communications with our investors needs to be equally realistic, clear and understandable." That's pretty good information from someone who's running a retail REIT that owns and manages approximately 16.9 million square feet of space.
Of all the new generation CEOs, Nassetta has been in the job the longest, so he has a firm understanding of the skills needed by the chief executive of a modern REIT. "The toughest part to get right is organization. REITs are mainstream corporate America and need to be professionally run. You need the right training programs, the right leadership development programs and you need to develop people so ultimately you get an organization that is greater than the sum of its parts."
And there are a lot of parts to companies like Host Marriott, which owns or holds controlling interest in 111 upscale and luxury hotels.
"As the CEO you have to set the right tone in the organization," says Nassetta. "Organizational skills are as critical as analytical skills."
No Shortage of Optimism
As can be expected, the new generation of REIT CEOs expects great things from their industry and individual property sectors over the next few years. This is not just unbridled optimism. The men taking over the top slots at America's REITs have seen the changes in the industry over the past decade and the cruel ways the wind can blow when there are shifts in the economy. In a sense they've seen the worst and best, and for the most part they think they can optimize when markets are improving and moderate declines during deep recessionary times. Only time will tell if they are right.
"We are just in the early stages, the first inning of recovery in the lodging business. The economy is turning around and America is finally starting to travel again. If the economy stays strong and little new supply is added, we expect to have three to five years of good, recovering results," Nasetta says.
Also taking a sector view is Federal Realty's Wood and Health Care Property's Flaherty.
"It is hard for me to see a time when necessity-based shopping in a safe, attractive environment won't be a mainstay of American culture," Wood says. "Formats may change, but when you cut through it all, consumer retail options are the drivers. Attractive shopping centers in a densely populated area with strong barriers to entry will only improve in an improving economy."
Flaherty makes this observation about his sector: "I suspect that health care, which is the least mature of the various property sectors, will catch up with office, retail, industrial and residential. That will happen over the next several years."
Equally optimistic are the new generation CEOs who take universal views of the REIT industry.
"The REIT industry proved itself through this last downturn," Oklak says. "There was skepticism as to how REITs would perform in a downturn. We had a few situations where companies reduced dividends but it has been a pretty small minority of public REITs. We gained a lot of credibility through this downturn."
Kincaid adds, "the REIT industry is going to enter a phase where it becomes a mainstream investment vehicle domestically and internationally. It is lining up with the demographics. You will see more demand from baby boomers and 401(k) types for liquid real estate securities."
The sun shines with a strong, clear light on the road ahead for REITs, say Toomey and DuGan.
"The REIT industry is moving out of its infancy into early teens," observes Toomey. "It has many years of brightness ahead."
To which DuGan concludes, "I have never been more optimistic about the REIT and publicly traded real estate industry."
Steve Bergsman is a regular contributor to Portfolio based in Mesa, Ariz.
