The line of succession at Boston Properties, the $18 billion real estate investment trust, seemed clear to the real estate industry: When Mortimer Zuckerman stepped down as CEO, surely the firm’s president would take over.
But Zuckerman announced his resignation last month and his replacement is not Doug Linde, the son of his longtime friend and business partner, Ed Linde, who died in 2010. Instead, the 75-year-old Zuckerman and the company board went outside Boston Properties for its new top leader — to the financial world.
Their choice: Owen Thomas, 51, who has headed Lehman Brothers Holdings for the last year, successfully unraveling many of the bankrupt investment bank’s real estate assets, after nearly a quarter-century of top jobs at Morgan Stanley. On April 2, Thomas started a three-year stint with Boston Properties as CEO and board member. Zuckerman, perhaps best known as publisher of the New York Daily News, will stay on as chairman until at least 2015, presumably to shepherd the transition.
“Linde seemed to be being groomed for [the CEO] role,” said Alexander Goldfarb, an analyst at investment bank Sandler O’Neill + Partners.
However, Zuckerman said the choice to bring in fresh blood was part of a plan to recreate the trio of leadership that had existed when he, Ed Linde and Doug Linde ran the firm together. He said he was attracted to Thomas’s “easy-going style,” which he felt made him an ideal member of the triumvirate.
“We did not do this casually,” Zuckerman told The Real Deal.
Neither Thomas nor Doug Linde could comment for this story.
“The team-oriented approach is very much a part of the culture at Boston Properties,” said Michael Knott, an analyst at commercial real estate research firm Green Street Advisors.
For the REIT, insiders told TRD, “slow and steady wins the race.” But they noted that Thomas is used to a quicker pace and short-term deals, the hallmarks of corporate investing.
So now the question is: What, if anything, will change under Thomas’s leadership?
The answer may be found by looking at how he ran operations at Lehman and Morgan Stanley.
“Everyone wants to learn more about Owen,” Goldfarb said. “He is very new to the street.”
While Thomas is a fresh face on the REIT scene, there is no doubt that he knows real estate from the financing end.
His first job at Morgan Stanley, in 1987, was with the real estate group within the investment banking division. By 1995, he had jumped up to managing director of the firm’s real estate investing business. And from 2000 to 2008, he led Morgan Stanley Real Estate Fund. Next, Thomas wore two hats — CEO of Morgan Stanley Asia and chairman and CEO of Morgan Stanley Real Estate Investing. By the time he left the company in 2011, he was chairman of Mitsubishi UFJ Morgan Stanley Securities, a large Japanese investment bank . He is even a former chairman of the Pension Real Estate Association, a trade group.
And Thomas, with a mechanical engineering degree from the University of Virginia and an M.B.A. from Harvard Business School, has been described as “cerebral and understated,” though analysts are concerned that he still might make deals too fast for Boston Properties, known for its long view of the market — even among REITs.
The company is regarded as a smart, yet careful player that has assets like the iconic GM Building and Boston’s John Hancock Tower, which seem almost immune to market fluctuations, and a low risk-tolerance that consistently serves its investors well. When it bought the GM building in 2008, Boston Properties paid the highest price ever for an American office building: $2.8 billion. But in 2012, the REIT was quiet — not closing a single transaction. Zuckerman had always left the day-to-day deal making to Ed Linde; he stepped into a more hands-on role only after his friend’s passing.
“They keep it simple, limit themselves to a few markets,” Knott said. “They basically own high-quality properties … in markets where demand is good in good times, and doesn’t fall off in bad times, and where it’s hard to add supply.”
By contrast, Morgan Stanley Real Estate Fund — widely known in the industry as MSREF — is a private equity fund, which inherently makes it more aggressive and more willing to take chances.
“The private equity approach is ‘go wherever, get the timing right,’” Knott said. “But what we’ve found in the 15 years that REITs have been around is that lower leverage is connected to higher returns.”
During Thomas’s tenure, MSREF performed well. But it stumbled after his 2005 departure, reports show.
Indeed, in 2007, MSREF bought Crescent Real Estate Equities for $6.5 billion in an ill-advised leveraged buyout at the market’s peak. And in the fourth quarter of 2008, it posted a $1.2 billion pre-tax loss — all under the direction of John Carrafiell and Jay Mantz, who sources told TRD were handpicked by Thomas to succeed him. Finally, in 2009, Morgan Stanley brought Thomas back to patch things up for the deeply troubled fund, according to reports.
Lionized at Lehman
For the past year, Thomas has been overseeing the liquidation of Lehman’s vast portfolio of real estate assets. That included the sale of the massive Archstone portfolio to Sam Zell’s Equity Residential and AvalonBay Communities for $6.5 billion in cash and stock.
The complicated Archstone deal was a reversal from Lehman’s earlier bid to take Archstone — the nation’s 11th largest landlord and a massive residential apartment owner — public in order to raise cash. Industry observers lauded the deal as an aggressive but very effective play.
Lehman had wrested control of Archstone away from Zell before, outbidding him for the final stake in the portfolio last June, when it bought out Barclays and Bank of America so that it could sell the sprawling portfolio intact later. When Lehman finally sold Archstone in November, it netted 17 percent more than the asset had been appraised at just six months earlier, according to reports, and ended up the largest investor in both Equity and AvalonBay because part of the payout came in stock.
Analysts consider the deal an overwhelming success — and told TRD that it gives them confidence that Thomas can successfully tackle his new role at Boston Properties.
In that new role, Thomas will earn an annual salary of $750,000 and an annual target bonus of 230 percent of his base pay, which should work out to roughly $2.5 million. (The median pay for a REIT CEO is $3 million, according to Green Street.) He will also get $4.5 million in grants and options, according to public documents.
By comparison, Doug Linde, 48, earned $4 million in 2011 as head of the company’s office in Boston and owns about $30 million of company stock. But in the last month Linde has sold off shares, according to one analyst, who asked not to be identified for fear of damaging his relationship with the company. The sale has led analysts to speculate that Linde is getting ready to walk because he lost out to Thomas.
Linde, though, told the source that he unloaded the share for personal tax reasons, not because of any bad will toward Boston Properties.
“A knee-jerk reaction is to believe this is a hard punch to the gut, and that he will soon be out the door,” a report on Boston Properties by Green Street said, “but deeper consideration suggests that a departure may not be that likely.”
How Thomas will work with Linde and acquisitions head Ray Ritchie, both considered more analytical than their faster-paced new boss, has the industry’s attention. Their different styles and knowledge bases could either complement one another or clash.
“There is a sense of uncertainty as to whether the company’s strategy and culture will change, how [executives] will mesh,” Knott said.
Still, analysts remain confident that Boston Properties will not waver from its signature long-term strategic buys and holds.
“Boston Properties is one of those companies that you give the benefit of the doubt,” Knott said. “They have executed over a very long time frame a strategy that has worked out very well.”