REIT Boards – Are they doing their job?

When a REIT is publicly traded, the Board of Directors is being evaluated every day by the performance of the stock. Board members are vetted by the investment bankers taking the REIT into their IPO. Analysts monitor the traded REIT and issue reports as they perceive change. ISS (Institutional Shareholder Services) annually issues an opinion regarding every traded REIT including whether individual board members deserve election. But where is the oversight of the board of a non-traded REIT?

 

To begin with, size matters. A REIT does not generally become traded until it controls over a billion dollars of assets; a non-traded REIT comes out with no assets. Therefore, the board members recruited to the board of a non-traded REIT will receive significantly lower compensation, typically 1/3 of that available to their counterparts on a traded REIT board.

 

The risks to the board member, though, may be significantly greater on a start up non-traded REIT (the equivalent of a baby chick versus a full grown bird). The motivation to accept a board seat will likely be different, resulting in a greater percentage of “friends of the family” being on the board of non-traded REIT boards. They are still independent for security purposes, but they are often closer to the founder of the company than those who might be found on a traded REIT board.

 

Where the REIT is self advised (the vast majority of traded REITs), the board decides on the compensation of the senior management. With a non-traded REIT, there is a management agreement for a fixed price (or percentage of assets or some similar calculation). Senior management typically works for multiple business interests of the sponsor as the start up non-traded REIT does not generate sufficient fees to cover this cost.

 

For all REITs, three required committees of the board (audit, governance and compensation), the majority of the board members should be independent. The audit committee selects and engages the independent audit accounting firm.

 

When you are doing due diligence on a non-traded REIT, you may wish to look at the frequency of the meetings of the board and the various committees (typically quarterly at a minimum). When you visit the home office of the REIT, ask to look at a random sample of the minutes of the board and committees to make sure the minutes are being kept and to determine the quality of discussions at a board level. While some of the material may be redacted (to protect confidential information), the depth of discussion should still show through what is left.

 

Because non traded REITs are fully registered offerings, the independent board members will be reluctant to discuss with you one-on-one any details about the REIT (though not traded, information relating to a full registered security needs to be available to all potential investors). You may, though, be able to arrange a conversation with a REIT board member, with a member of the REIT staff available to help keep the discussion on appropriate matters. Ask their opinion on the quality of board and committee deliberations and how they would compare the operation of this non-traded REIT to other firms they may serve.