Like any public company, REITs find retaining executives is a key issue

By Steve Bergsman

At the beginning of 2007, Real Estate deals were made fast and furiously, with many private players holding high cards in the game. The deals have slowed in the autumn months, but there is still a lingering concern among REITs that talent may jump to the private side of the real estate investment fence. As a result, REITs have been forced to contemplate what it takes to hire and retain talented employees with countless investment banks, opportunity funds, hedge funds and private equity players also building their expertise in real estate investing.

Defections to the private side abound, but some chief executives claim that none of their key people have crossed over to the other side of the investment world. "We have not lost a single executive to a competitor in many years," says Paul McDowell, CEO of Capital Lease Funding, Inc. (NYSE: LSE).

That is an interesting phenomenon, considering REITs are supposedly lagging the private market companies in terms of attractive compensation programs. How do REITs' compensation packages stack up against those of the private sector?

The Private Plan

When you look at the private side of the real estate market, one of the largest components of executive compensation plans is the long-term incentive package, according to Kevin Christenson, senior managing director and CEO of FPL Associates, a real estate and finance consulting firm. "Most of these long-term programs are tied to the value that is created in real estate itself. The private equity world typically receives a carried interest, which is a disproportionate sharing of the profit above a preferred return. A major benefit of carried interest is that related gains received by managers are typically structured as capital gains income."

These programs, however, are not exclusive to the private investment world. REITs have entered the value-added and opportunistic side of the business and are not just owners and operators of stabilized assets these days. In fact, there have been quite a few REITs that have raised their own opportunistic funds, which include carried interest opportunities for executives.

Additionally, some REITs have initiated out-performance plans, which are based on longer-term metrics, such as shareholder return over a three-year period, that mirror the opportunity in the private world.

REITs Step into the Ring

During the past few years, REITs have become more aware of the private market space and what it is doing from a remuneration perspective, according to FPL Associates.

Nevertheless, retaining key executives remains a concern for REITs. In April, SL Green Realty Corporation (NYSE: SLG) announced a series of promotions, but the company made a point of stating that the organizational moves were designed to reward the accomplishments of its leadership team. Marc Holliday, CEO of the company, noted that it is essential to continue to attract and retain the best executives. "When we announced nine new appointments, eight were internal promotions. The company wanted to retain these employees, and in doing so we are willing to compete with the private equity firms."

Holliday admits it is somewhat harder to compete within the public format because of the market's focus on near-term earnings as opposed to future growth, but it can be done if a REIT strikes a balance. "We have been able to retain our people, who live and work in New York, in the middle of the hotbed of private equity, Wall Street and fixed-income channel jobs," he says.

In doing so, SL Green has successfully used pay-for-performance compensation programs. "Through the use of bonuses and stock options, equity REITs can craft packages that are just as competitive with the private market—provided the performance is there," Holliday says.

A lot of senior executives in the REIT world have done very well with stock packages, adds Michael Frankel, global and Americas tax leader—real estate sector for Ernst & Young LLP. "There are a number of REITs that have created programs where the managers receive partnership units, which gives them shares in the company going forward. The units are tied to the performance of the REIT by whatever benchmark is chosen."

Beyond Compensation

While compensation is indeed an important selling point in the recruitment and retention of key executives, it is not the only factor, says William Ferguson, chairman and chief executive officer of Ferguson Partners Ltd. and co-chairman and co-CEO of the FPL Advisory Group. Senior level executives have to consider other ancillary attractions such as working environment, flexibility and even room for advancement. "If it was all about compensation in this environment, you would see a mass exodus of REIT executives out the door," he says.

In fact, many REITs have solid compensation packages that entice senior executives to stay in the industry. William Elder, senior vice president with SL Green, was a senior vice president at Reckson Associates Realty before the REIT was acquired in January. "I had a lot of great options, some of which were private equity opportunities. There were a number of different things I was looking at," he says.

He adds that, from a baseline salary perspective, private equity firms and public companies are reasonably equal. "I did not see a tremendous spread between the two. I choose SL Green not just because of a great economic package, but because it was also the platform they have in New York City, the executive officers of the company. This is a progressive firm continuing to grow. I weighed that against the merchant mentality of the private players."

Big Advantages

Some REIT CEOs would say they lost talent to the private market, but that doesn't mean the REITs are at a disadvantage, notes Lisa Sarajian, a managing director with Standard & Poor's. "REITs have been successful at tapping the talent that was needed. As the companies have expanded operationally, the various business platforms provide employees with a broader range of career options."

A public REIT that is conservatively capitalized has limits in terms of compensation it can provide, but it can offer a lot of other things to an employee, including a rich learning opportunity, Sarajian notes. "This industry is a small community, and there is quite a bit of mobility. Your lender of today might be your CFO of tomorrow."