Relevant Resource: Family Office Database
I am in the final stages of negotiating a head of acquisitions position for a small newish REIT focused on industrial on the east coast. We've had a couple interviews, I've been told I'm the favorite for the position by the exclusive recruiter and I have one last "interview" coming up. The previous discussions have been relatively high level with some focus on how they underwrite and approach deals but little details on the nut and bolts. I put interview in quotations because its no longer at a candidate selection stage but more of a come in, meet everyone and make sure I have all the information I need to make a decision.
I am currently at a family office of one of the largest real estate owning families in the country. We look at acquisitions targets with a hold in perpetuity mindset. Therefore our acquisition process is more qualitative than most, starting at selecting markets we want to be in long term, then premier submarkets within that market and then buying good real estate and least concerning to us is credit, lease roll, etc. This explanation is to highlight that we are the furthest thing from an IRR driven shop, only the most complex 1% of deals we do have an IRR calculation anywhere near the proforma. The idea is to buy multi-tenant industrial, low event risk real estate at attractive stabilized cash on cash yields with a strong bent towards qualitative decisions that will be "good for the family."
They are a relatively newly REIT'd company (existing before but not as a REIT). They espoused how they liked the system I've been looking at deals through but did acknowledge decisions are more quantitative. My biggest concern is not being able to produce deals due to arbitrary IRR requirements that are related more about their stock price and dividend that can change or be a moving target due to markets. This is not a position I would normally take if the plan was to stay small but they have said they have plans to tap capital markets now that they are a REIT to grow the portfolio by orders of magnitude (which we've all heard before).
Now this is where I need advice from the board. For those of you familiar with the REIT side of the business I need some thoughts on the right questions I should be asking regarding how REIT's make investment decisions, how are they may be subject to change with changes in the equity market. How much does "the street" have influence to drive dividend (and possibly therefore target cap rates on acquisitions). Basically I'm an acquisition professional used to running with loose guidelines (of which there are positives and negatives) looking for potential pitfalls that are unique to REITs that could negatively affect my ability to win deals (and therefore harm potential personal earnings).
My take- yes the market will determine determine investment temperature as much as you seem to feel. Where the stock is will directly determine free cash and your position in acquisitions, and if execs will greenlight deals you bring to them. When the market tanked last week, most REITs held up pipeline deals until this week showed the sky wasn't falling. So perhaps have that be a factor in how your comp is structured in this arrangement. You probably won't have an option of carry, so look to RSAs and bonuses for discretionary pay, more around company performance. That would be my main clarification. Not sure about your question on dividends related to cap rates.
If they are looking to buy and hold as you say, FFO will lead most conversations and stock price, not exit cap. If you can show good YOC numbers at stabilization with a conservative take on future rents and quality tenants, your deals will move forward.
This is exactly the type of color I'm looking for. Thank you for your thoughts on the matter.
One question: How much influence does the Board Chairperson generally have in acquisitions? I assume less in larger institutions and more in smaller but anyone seen a deal tank because the Chairperson had a problem with it?
Totally varies depending on the company. A Chairman can be a chair emeritus, or... he can be active on EVERYTHING and make or break every decision like they were the CEO, really depends. And yes, either can happen no matter how big the REIT.
This is pretty spot on. I think that as a REIT gets larger, daily fluctuations in share price isn't going to weigh as heavily on individual investment decisions, but to the extent you are persistently trading at a meaningful discount to NAV, it's going to be hard to grow. Is this a public REIT? Go public with roll-up of existing portfolio? Lot of what I'm saying below is based on idea that it's public...
As calculatedrisk mentioned, I think that the IRR focus isn't going to be as big of a focus at a REIT either. For the most part you are going to be buying to hold so strategy may not be too different from family office. I think that it's totally reasonable to ask about their investment criteria from a returns perspective. If they are hoping to invest in core plus with stabilized yields in the low double digits, that's probably a red flag that nothing is going to pencil. You can also back into this based on what management is saying publicly or if there are analysts covering the stock.
Regarding your question about Chairpersons input on investment decisions - I would try to understand how their investment decisions are made. Meeting with all of the members of the investment committee (to the extent it exists) would probably be a good idea for a head of acq. If it's one person (CEO/Chairperson's) ultimate call on investments, I would make sure that you are in alignment on your investment thesis and that you think you can bring deals that satisfy his or her requirements. I don't think that having a CEO/executive chairperson who ultimately calls the shots is a rare phenomenon in REITs (especially new ones) for two reasons: (1) REITs are often formed from a roll-up of an existing portfolio - so that means that top exec(s) has aggregated assets themselves and they can operate with a "founder" mentality and (2) the way REITs are organized, there are major impediments to shareholder activism which can allow a top exec to have a lot more control than may be possible otherwise. Bottom-line - find out who is making investment decisions, be that a CEO, investment committee, or board, and make sure you are in alignment. Don't want to set yourself up for failure.
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