A few REITs have begun searching beyond the REIT world for senior executive talent, but the path of succession still typically starts from within.

By Michael Fickes

In 2001, Kenneth P. Roath, founder of Health Care Property Investors, Inc. (NYSE: HCP), began searching for a successor. Roath didn't seek out a real estate maven. Instead, he looked outside of the world of real estate investment trusts (REITs) and eventually struck up conversations with James F. Flaherty III, head of Merrill Lynch's Global Health Care Group and a 20-year veteran of the investment banking community.

When Milton Cooper of Kimco Realty Corporation (NYSE: KIM) went looking for a vice chairman and chief investment officer, he turned to David B. Henry, a 23-year veteran of General Electric. To be sure, Henry had a wealth of real estate experience. As senior vice president and chief investment officer of GE Capital Real Estate and chairman of GE Capital Investment Advisors, Henry managed GE real estate investments worth $20 billion. Still, he had no direct management experience with a public REIT.

Both Flaherty and Henry came on board and brought their companies new perspectives drawn from business experience outside of the real estate box. There have been other notable examples as well. Steven J. Heyer, CEO of Starwood Hotels & Resorts Worldwide, Inc. (NYSE: HOT), came from The Coca-Cola Company in late 2004. Thomas D. Bell, Jr., president and CEO of Cousins Properties Incorporated (NYSE: CUZ), came from the advertising and public relations industries.

It sounds like a good strategy in theory, but it is one not many REITs are instituting as greater value is placed on hiring management with either internal company experience or at least intimate knowledge of the REIT industry.

"If you look at the largest 50 REITs by capitalization, you'll find less than a half-dozen C-level executives that come from outside the industry," says William Ferguson, co-chair of FPL Advisory Group, a Chicago-based executive search firm. "So this is done. But not very often."

"There are industries where it happens more often," notes Steven Littman, managing partner with Rhodes Associates, Inc., a New York-based executive search firm with a specialty in real estate. "Industries that emphasize sales and marketing management often look for a ‘best athlete available' to fill the top position. But in deeply specialized industries like capital markets and real estate, the movement today is toward more and more specialized talent."

Jay Gaines, CEO of Jay Gaines & Co., Inc. executive search firm in New York, agrees. "Generally, once someone establishes a career in a sector, he or she will be more valuable inside the sector than outside," he says.

To Re-Invent HCPI

While REITs rarely recruit from outside the industry, when they do, it is done carefully and with a specific purpose. In 2000, the universe of health care REITs consisted of only a handful of companies larger than $1 billion in assets. With assets valued at $2.4 billion, HCPI was by far the largest. In planning the HCPI succession, Roath wanted someone who could begin as president and move into the CEO post. He also wanted someone capable of wresting the business away from its entrepreneurial roots and institutionalizing modern business processes.

Roath was a client of Flaherty's Global Health Care Group at Merrill Lynch, and the two men knew each other. "I was familiar with HCPI and its board," Flaherty says. "They wanted someone experienced with business development. My background made a good fit."

At Merrill Lynch, Flaherty says he called on CEOs and CFOs at health care companies to develop investment-banking business. He reasoned that if he moved to HCPI, he would call on the same companies to get real estate business. "I felt comfortable with my ability to do that, but less comfortable with my lack of experience running a publicly traded company," Flaherty says. "Then again, I had experience running large businesses at Merrill Lynch. While it seemed like a leap of faith, it wasn't that big of a leap."

Like other REITs in the health care sector at the time, HCPI operated primarily in the sale and leaseback world. Roath could have turned to someone in the health care REIT business had he wanted to expand the status quo.

David Henry, vice chairman and chief investment officer, Kimco Realty Corporation

Instead, he wanted Flaherty to use the deal-making skills of an investment banker to develop a broader business model for HCPI. When Flaherty came on board, he got right to it and changed the HCPI management team. He brought in experienced real estate people, including two from outside the REIT industry. Paul Gallagher arrived from General Electric's real estate group, signing on as executive vice president of portfolio strategy. Talya Nevo-Hacohen of Goldman Sachs' real estate group joined the firm as senior vice president of strategic development and treasurer. "We spent a lot of time thinking about where we could take the company," Flaherty says. "Eventually it became clear that the answers were in the REIT space, although not the health care REIT space. We studied industrial, office and retail REITs, knocked off their best ideas, and applied them to health care."

New business initiatives followed. Flaherty and his team moved HCPI into owning and operating medical office space. They set up a joint venture, with General Electric providing $600 million in capital; since then, the venture has grown into a $1.1 billion enterprise. They studied ProLogis' development activities; last year, HCPI carried out $75 million in health care real estate development projects. Historically, HCPI has held most of its properties. Last year, the company sold more properties than the firm had sold in its 18-year history as a public company.

Has Flaherty's new business activity caused cultural dislocations? "When I arrived, I was encouraged by the board to view myself as a change agent," Flaherty says. "And there has been some angst. In the first year, a lot of people came and went. We changed our business model, changed our infrastructure, and changed several board members. But we did it fast, and now it's over. Today, I can show an organization chart that has been completely stable for 12 months."

Throughout the changes, HCPI has grown. Between 2000, the year before Flaherty's arrival, and 2004, total assets increased from $2.4 billion to $3.1 billion, while revenues surged from $288 million to $429 million.

Adapting to The Business Cycle at Kimco

There was an article in the April 18, 2005 issue of Fortune magazine titled "Get Me A CEO From GE," that focused on GE's status as somewhat of an executive breeding ground. While Kimco Realty wasn't looking to hire a new CEO, Milton Cooper, the current CEO, did dip into the GE talent pool and brought David Henry to Kimco as vice chairman and chief investment officer in 2001. With Cooper now 75, Henry provides bench strength for the company, while tailoring new business models to the realities of the current business cycle.

With the real estate cycle at its peak, real estate prices have risen about as high as most analysts think they are going to go. "It's difficult for most REITs to make money buying high-priced properties," Henry says. "The returns simply aren't there. By definition, at this point in the cycle you have to think about new business initiatives. So, it is time to look for people that know how to build other kinds of businesses within the real estate world."

Among his new business efforts, Henry led Kimco's entry into Mexico. He developed a participating lending program called Preferred Equity and has expanded this into an asset management business by creating joint ventures.

"I've been able to leverage relationships from GE to build joint ventures and lending relationships," Henry says. "So far we've started two successful joint ventures with GE, one for Mexican shopping centers and one for U.S. shopping centers."

Henry's GE experience has served him well at Kimco. At GE, executives are encouraged to look outside the box for business opportunities.

"At Kimco, we know a lot of retail customers very well," Henry says. "We know the shopping center business. We have a very strong reputation. We have a nationwide field organization. Now we're trying to leverage those strengths into other businesses. For example, if we know how to buy shopping centers, why not lend money on shopping centers? If you're going to buy and lend on shopping centers, why not develop them? If our tenants are in Canada, why shouldn't we be in Canada? Over time, we've increased the number of things we do in the shopping center world. That's the part of GE that transfers well to the REIT world—the constant search for new products and new programs to expand the basic business."

CFO: A Good Place to Start

Certain REIT job functions offer more opportunities than others to groom executive talent from outside the industry.

"I would argue that going outside the REIT industry for talent is a poor strategy if you're thinking about roles that involve development, leasing, asset management and other highly specialized functions," says Anthony J. LoPinto, managing director and CEO of Equinox Partners, a New York-based executive search firm specializing in real estate. "But there are key functions within REITs where it might make sense."

LoPinto points in particular to the position of chief financial officer (CFO). "In today's environment, with complex financial reporting requirements related to laws such as Sarbanes-Oxley, a CFO with a broad corporate background might be advantageous," he says. "To be a win-win, however, it would be even better if that CFO came from a company that dealt in some capacity with real estate."

Marsha C. Williams, executive vice president and CFO of Equity Office Properties Trust (NYSE: EOP), fits that description. Williams came to Equity Office in 2002 from Crate & Barrel where she served as chief administrative officer and sat on the retailer's real estate and operations committees. Prior to that, Williams was vice president and treasurer of a multinational oil company and a commercial banker.

"I've always had an interest in real estate," she says. "In both banking and retail, I had tangential experience in real estate and enjoyed it a lot. The combination of EOP's great reputation and the opportunity to work full time in real estate seemed like an exciting opportunity to me."

Williams says that her broad industry experience has helped in EOP's efforts to increase the transparency of financial disclosures. "I've tried to suggest changes in this area to make our story more clear to investors," she says.

In the wake of a management shakeup, Christopher Genry came on as CFO at United Dominion Realty Trust (NYSE: UDR) following career stops at Arthur Anderson and Centex, a home and building construction firm. At Centex, his responsibilities lay in the company's general contracting unit. Centex employed a segmented marketing strategy, with divisions that specialized in hospitals, schools, prisons, office buildings, and so on. The specializations provided reasons for clients in particular areas to deal with Centex. At United Dominion, Genry is applying his experience with Centex market segments to the multifamily business.

"While many multifamily companies try to differentiate themselves by promoting clean, safe, well lighted modern communities, we're trying to go a step further and appeal to various demographic groups such as the elderly, Asian, and gay and lesbian populations," he says.

A Tool, But Not a Trend

Industry observers agree that, despite the success some companies have had, hiring executive talent from outside the REIT universe has not and probably will not become a widespread trend.

"I'm on the anti-side of this," says Littman of Rhodes Associates. "Considering the challenges facing most REITs, they are better off hiring someone with specialized skills rather than reaching outside the industry for someone that might be a best athlete. Our REIT clients believe this, too. Most of our position specs have gotten narrower and more specialized. Because of the amount of capital flowing into the market, the pricing of deals, the decline of cap rates, you need people with better financial skills, deeper real estate knowledge, and experience specific to the job."

What about Steven J. Heyer, the former president and chief operating officer of Coca-Cola who joined Starwood in late 2004? His appeal presumably stemmed from deep involvement in Coke's brand management marketing strategy. Brand management, of course, is a fundamental Starwood strategy as well.

"I would say that supports my argument," says Littman. "Coca-Cola is a brand management company. So is Starwood. If they have brought him in because of his experience in branding, they went outside the industry to get deep experience in a specific skill important to their industry."

Perhaps Heyer is an anomaly. Even so, isn't it possible to find real estate expertise combined with management expertise in companies outside of the REIT world? "You might go outside to a multi-sector company with real estate interests—like GE—and find someone with recognized management skills inside their real estate group," says LoPinto of Equinox.

Another thought: While it might be risky for a REIT to look far and wide for a CEO, talented outsiders with an interest in real estate may, on the other hand, offer bench strength for the future.

"If you're building bench strength with individuals that have skill sets and characteristics that draw from other industries, it makes sense to integrate them a couple of rungs down," says Marie Rice, managing director with Jay Gaines & Co. "For logical reasons, it is difficult to find the right CEO. Forget changing industries—it's difficult to hire a CEO from outside the company."

If the idea of fresh perspectives from executive talent acquired from outside the industry appeals to you, take a look at the companies that have made it work. But remember: it isn't done often and then only when it serves a specific corporate objective.