Equity REIT CEO Changes Yield a Mixed Bag

By Sean Pattap, Senior Director, U.S. REITs, Fitch Ratings: A look into the ramifications of REIT CEO turnover.
Sean Pattap

Changes at the CEO position among U.S. equity REITs in recent years have been a notable topic of interest, with their outcomes yielding mixed results.

There have been 25 instances of REITs changing CEOs or announcing pending changes in the CEO suite since Jan. 1, 2013. Though CEO succession planning has impacted large and small issuers alike, the rate of REIT CEO turnover has been lower than the rate of turnover amongst broader corporates. Senior leadership is an important qualitative factor in an issuer’s credit ratings. Fitch considers management’s financial discipline, strategy and experience, ability to balance the sometimes opposing interests of various constituencies, and willingness and track record of issuing equity.

There have been two types of REIT CEO changes, which range from stable to uncertain situations.  The first category applies to situations whereby the predecessor CEO stepped down or retired while the company simultaneously announced a non-interim successor. The other category applies to other situations, which include a CEO resignation, an interim CEO appointment or unique circumstances.

A CEO stepping down or retiring while the company simultaneously announces a non-interim successor provides stability concerning the company’s strategy, while resignations or interim CEOs can introduce strategic uncertainties. During CEO transitions, Fitch examines whether successors are insiders because this factor is tied to corporate governance and therefore the company’s credit profile. Issuers with strong governance and performance may benefit from the continuity of an insider assuming the CEO role. Conversely, companies with operating or financial weaknesses may benefit from new strategic perspective. Of REITs that have changed CEOs since Jan. 1, 2013, 13 have announced new CEOs that were previously insiders.

One notable example that Fitch is keeping a close eye on is Mack-Cali. Fitch revised Mack Cali’s rating outlook  to Negative late last year because of the likelihood of credit metrics remaining strained by weak operating fundamentals and development. A closer look reveals that Mack Cali’s search for a successor to its long-tenured CEO is adding uncertainty as well. Fitch will watch whether the company will make major capital allocation decisions prior to the hiring of a new CEO.