08/06/2014 | By Sarah Borchersen-Keto
Most U.S. Equity REITs have strong corporate governance attributes that benefit bondholders, and they should ease their concerns about the impact of investor activism, according to a report from ratings agency Fitch Ratings, Inc.
Based on its review of 64 U.S. Equity REITs, Fitch concluded that “corporate governance is pretty strong for bondholders in the REIT space,” said Sean Pattap, a senior director at Fitch. “The positives outweigh the negatives,” he added.
Fitch noted that corporate governance analysis is an integral part of evaluating a bond’s risk profile because certain changes in policies may weaken a company’s anti-takeover defenses or raise the influence of activist shareholders, which could increase the implied riskiness of a bond.
Pattap highlighted a number of positive corporate governance attributes that benefit REIT bondholders. They include board declassification, member independence and diversity, and the incorporation of credit metrics into management compensation targets.
Pattap noted that only 11 percent of boards surveyed have directors elected to staggered, multiyear terms. The remaining 89 percent of REITs included in Fitch’s study operate with non-staggered or unclassified boards. That means their members are elected annually for a one-year term. The advantage of a non-staggered board, according to Pattap, is the increased accountability that results from being able to easily replace ineffective board members or management teams.
Fitch also looked at the level of independent board chairs and members among the 64 REITs analyzed. Fitch found that only 38 percent had independent board chairs, which represents a low percentage. However, independent board members comprised 78 percent of board positions. Pattap also highlighted that almost 40 percent of boards were made up of individuals without an explicit commercial real estate background. “Distinctive viewpoints are a positive,” he said.
Furthermore, Fitch said it was encouraged by that fact that 61 percent of REITs incorporated at least one credit metric into management compensation.
One negative corporate governance aspect, Pattap noted, was the fact that about 63 percent of REIT CEOs surveyed serve as independent members of other boards.
“It can be challenging sometimes, particularly with large cap REITs, to manage their day-to-day responsibilities,” Pattap said.