By Stacy Rapacon

Company leadership, especially at the highest level, is an important criterion for analysts when valuing public companies. Over the past decade, REIT analysts have watched the shift to the new generation of leaders carefully and noted how the top executives have evolved in conjunction with the industry.

"Just as the new generation of REIT managers has changed, so too have the business objectives and management styles that analysts and investors are looking for," according to Gregory Whyte, managing director of Morgan Stanley's U.S. real estate and REIT research team. "I believe investors are much more focused on returns these days, and want companies that focus on maximizing shareholder values, and not just on being the most acquisitive."

David Shulman, senior equity REIT analyst with Lehman Brothers, agrees that focus on acquisitions has shifted. "People thought in the early 1990s that the most important skill set was buying right. I think the most important skill set right now is selling right," he says. "The mindset of the new generation of CEOs isn't growth for the sake of growth. The mindset should be how to invest profitably and whether that leads to a bigger or smaller company is irrelevant."

The new generation of leaders needs to have more of a "trading mentality" than their predecessors, says David Fick, senior real estate analyst with Legg Mason.

"The old-style REIT manager fell in love with his real estate and never sold anything. The new-style REIT manager is looking to maximize shareholder value and everything's for sale," Fick says. "They're constantly looking to manage their portfolios in a way that will increase value so they don't fall in love with their real estate. They realize that it is an income-generating vehicle."

In a business where the spread between investment returns and cost of capital is critical, Carey Callaghan, vice president of credit risk management and advisory at Goldman, Sachs, & Co., says that managing the capital side of the equation is increasingly important and one that reflects an increasing level of financial savvy needed in today's market.

"The new leaders need the ability to understand an increasing number of capital sources and how they could be critical to the company," Callaghan says. "They might be in the form of joint ventures, international funds, preferred equity, convertible instruments, street equity or various forms of debt. So having fluency in all these various instruments is critical and a relationship with investors across the full spectrum of types of capital is critical."

Fick adds that REIT CEOs now spend approximately a third of their time on capital markets and investor relationships. The new generation has to be adept at speaking to an increasingly diverse shareholder base.

The increased shareholder accountability brought on by the broader market acceptance of REITs is a positive influence on REIT leadership, Shulman says.

"It forces greater discipline onto management because when a company is accountable to only one person it's subject to that person's ego as to where and how it invests," Shulman says. "When a company is subject to the discipline of a broad section of investors, it means other capital market factors are being taken into account." Shulman adds that the market can often be short-sighted and become too engrossed in quarter-to-quarter earnings, which is why a modern-day CEO needs to be able to "say no to the investor base and do what is right for the company long-term without having that look like an ego-driven decision."

This ties into another commonly discussed shift in the traits of the new leaders—they are less entrepreneurs and more professional managers. The new leaders are business school trained with a breadth of professional experience (often at an investment bank) as compared to the street smarts and knowledge by trial-and-error of the industry founders, Fick says.

Along the same lines, as the companies have become more professionally run, the depth of quality executives within an organization has expanded. Senior managers are more collaborative and rely on their executive team and board of directors more than ever, Fick says.

"They need good people around them more than ever," Fick says. "They need more information than they ever had before to make decisions. And that means that they have broader talent bases [surrounding them] than they ever had before. Because it's not just the CEO making all the decisions and cutting all the deals."

The new generation of leaders will need all of the resources at their disposal to continue the growth of the industry set forth by their predecessors. Among the many challenges they face will be continuing to deliver growth in an onerous regulatory environment, Callaghan says.

A key part of this will be the ability to measure risk. Since the founders have established the industry and already built significant corporations, the new leaders must be more creative in order to further growth.

Whyte says the industry is moving into a number of adjunct businesses and foreign markets, both of which add an extra component of complexity and risk. "The new management teams need to be able to appropriately assess the risks, and assess the requisite rewards to take them on," he says.