Partners REIT, a growing real estate investment trust whose shopping centre properties house tenants such as Shoppers Drug Mart, is bringing its management in-house.
The decision counters the pervasive trend in the REIT world to externalize management teams. Unlike regular corporations, more and more REITs are paying third parties to run the show, meaning their executives are compensated by an outside organization.
Some of the country's biggest REITs operate under this model. Michael Cooper's family of REITs – Dundee REIT, Dundee Industrial REIT – are externally managed by DREAM (which Mr. Cooper is now taking public), and Tom Hofstedter's H&R REIT employs the same structure.
Despite the popularity, there are sharp critics of this model – chiefly Edward Sonshine, the chief executive officer of RioCan REIT, the largest in Canada. In December, he spoke to me for a magazine story on Mr. Cooper. "Everybody here at RioCan stands or falls with the success of RioCan," says CEO Sonshine. "When you're externally managed, it's not quite the same."
The thinking goes like this: When you're a small REIT, it actually makes more sense to look outside, because you can hire an established, reputable firm to help manage your properties. They have scale and expertise, and you typically pay external fees as a percentage of revenues, so you can afford it.
But as you grow, your revenues do too, and that means you have to shell out more cash to the third-party. You also have to pay external managers acquisition fees. Every time you buy a property, you have to cut them a cheque worth a percentage of the purchase price.
This gets even more convoluted if the external asset manager is owned by the REIT CEO – as is the case with Dundee's DREAM. Some argue this structure gives the REIT incentive to strike deals, even if it's not in the shareholders' interests, because the CEO will get a nice cheque through the external management fee no matter what.
This situation also applies to Partners REIT, whose external manager is League Financial Partners. Adam Gant co-founded League, and he is also Partners' vice-chair. Until last month, he was also the REIT's CEO.
In the announcement of its decision to internalize management, Partners' independent directors said "that it would be less expensive for the REIT to employ individuals directly rather than have the REIT managed by the [external] manager."
The REIT's independent trustees also believe "the internalization of management will remove any conflicts of interest between the manager and the trust and significantly improve corporate governance of [Partners]."
The question now is how League feels about this. They own 12 per cent of Partners and could theoretically launch a proxy contest if they are unhappy with the decision. Partners' annual general meeting takes place the first week of June.
(Tim Kiladze is a Globe and Mail Reporter.)
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