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CFO’S LOT A BUSY ONE AS RULES MULTIPLY

CFOS AT SHOPPING CENTER DEVELOPMENT FIRMS FIND THEY ARE DOING A LOT MORE THAN CRUNCHING NUMBERS THESE DAYS TO KEEP UP WITH TIGHTER GOVERNMENT REGULATION

By Steve McLinden

Today’s CFO wears more hats than a milliner’s mannequin — and he must wear them all at the same time. Part policy shaper, part cost cutter, part risk manager and a dozen parts everything else, the retail company CFO is effectively an organizational bridge between the realms of business generally and finance specifically.

Given the dramatic expansion of contemporary reporting obligations in combination with the tons of other fiscal complexities, a finance chief is, more than ever, accountable for far more than simple accounting. And all this has happened in less than a decade.

“Versus just five years ago, the CFO has had to become far more versatile, taking on more challenges and touching on all spectrums of the organization, from management to the board to the shareholders,” said Thomas O’Hern, CFO and executive vice president of The Macerich Co. The Sarbanes-Oxley Act of 2002, which tightened accounting standards for public companies, is but one driver of the CFO’s changing role. Joint ventures, private-equity buyouts, international expansions and the challenge of managing a swelling support staff — these and many more responsibilities crowd the plate of the finance chief today, according to seven retail real estate CFOs who spoke with this magazine.

Sector consolidation continues to add complexity to the job, O’Hern says. “There are now only a handful of companies that own more than 10 malls,” he said. “That, obviously, increases the scale of what we do.”

CFOs have evolved into chief communicators, not only serving as spokesmen for analyst meetings and in quarterly reports, but also dealing with regulators and shareholders and their demands for financial integrity. “It is a far more complicated world we are operating in today, and accounting rules have gotten much more complex along the way” O’Hern said. “The derivative accounting pronouncement, for example, is 200 pages and applies to a surprising number of applications in our business.”

Development pipelines have become more labyrinthine too. “Today we are putting up complicated buildings with lots of different kinds of capital and even getting some of these properties back,” said Bernard Freibaum, CFO of General Growth Properties. “Before, we would just build a new mall from scratch or add another wing. Now, with department store consolidation, we are tearing apart existing sections and reconfiguring them, and some of that space is coming under our control.” Retail real estate CFOs are more involved with other departments than ever, Freibaum says. “I find myself spending much more time dealing with different groups, such as legal and asset management, and external constituents,” he said.

The CFOs of public retail REITs are acutely aware that their companies can ill afford to miscalculate when Wall Street is analyzing their every move. “We don’t have the luxury of saying we’ll build it and they will come,” said Lisa Payne, CFO of Taubman Centers. “We have to know [a property] is going to be a gangbuster from the first day. Disappointing the investor is the worst thing we can do as a public company.”

Private companies, too, have seen their CFO roles expand. “Much like their public counterpart, the private company CFO absolutely has to be much more relationship-oriented today,” said Jason Tompkins, CFO of Columbia, S.C.-based Edens & Avant, a private development firm that owns 140 retail centers in 16 Eastern states. “The position is much more sophisticated and flexible than ever and, frankly, much more forward-thinking. Across the industry the CFO has become a true business partner to the CEO and to the president.”

Private firms such as Edens & Avant have the luxury of selectively implementing Sarbanes-Oxley elements that “make good business sense but still provide clear and detailed disclosures to all investors and lenders,” Tompkins said. “And we work hard at this, and it certainly results in investors and lenders having a high degree of confidence in the company.”

Tompkins sees himself as an agent of change. “I am encouraged to challenge the status quo and to understand the business across the board,” he said. CFOs are under increasing pressure to produce information that is more accurate and timely and to develop risk management and investment strategies that are more sophisticated, he says. “We are intensely focusing on adding value, leveraging technology and developing partnering approaches, plus maintaining a well-capitalized balance sheet — while still remaining flexible.”

Tompkins says the retail real estate industry is in the early stages of institutionalizing. “There have been billion-dollar banks for nearly a hundred years,” he said, “but there have been billion-dollar real estate companies for only a couple of decades.”

Offshore investment is a relatively new prerogative for many CFOs, creating more complexities in currency exchange, communications, and accounting continuity, says William Schafer, CFO of Developers Diversified Realty Corp. The firm’s $1.1 billion acquisition of a Puerto Rican portfolio and its venture to buy several Brazilian centers with Sonae Sierra Brazil are examples. “We will continue to grow in countries where there are opportunities,” said Schafer. “And we are also looking at [international] outsourcing in certain areas, such as back-office functions.”

CFOs of companies outside the U.S. are experiencing similar challenges. “It is a diversified role that has widened,” said Gervais Levasseur, CFO and executive vice president of Montreal-based Ivanhoe Cambridge. “We do more work with more sectors, such as international management and investing … and you have to manage currency risk and tax risk and the many different partner relationships.” In the end, financing fundamentals rule, he says.

Edmundo Figueiredo, CFO of Portugal-based Sonae Sierra, says the globalization of real estate companies, with increased cross-border expansion and more international shareholders, poses additional strategic challenges. “Investment and divestment decisions are more complex and more risky,” he said. “At the same time, competitive gaps are being quickly closed.” Risk management, cross-border tax management and corporate and environmental responsibility all demand increasing oversight from finance officers, he says. “The CFO needs to respond to all these new challenges and still provide sustainable attractive returns to shareholders through stringent cost disciplines and growing rental income.”

International expansion also provides an opportunity for European companies to break free from the constraints of domestic tax systems. “CFOs have the opportunity to plan and structure investments in more efficient ways now,” said Figueiredo.

The CFOs of four U.S. public companies had only slightly varying views on Sarbanes-Oxley’s impact five years after its enactment. “The pendulum has swung too far, and we are all waiting for it to swing back,” said Macerich’s O’Hern. “We hear that we’ll be getting some slight pullback.” But Sarbanes remains relatively small in terms of Macerich’s overall operating expenses, he says.

Taubman CFO Lisa Payne concurs that Sarbanes-Oxley has overreached and that the SEC knows it. But this has forced the industry to refine its accounting procedures, and that is a good thing, she says. “There have been some major documentation benefits in what was already an excellent process here,” she said. “Fortunately, we were able to implement our own internal controls with only a modest hiring requirement and without spending significant consulting dollars.”

Sarbanes-Oxley’s focus on documentation and controls is really geared toward what CFOs are already supposed to be doing from an operating and accounting perspective, says DDR’s Schafer. “We’ve created an internal audit program as part of something that we were already moving toward,” Schafer said.

At shopping centers in General Growth’s portfolio, most retail tenants are public companies subject to the same transparency requirements and Sarbanes-related complexities as GGP, says Freibaum. One accounting change spells out when a retailer can begin expensing store costs. “It used to be that started when the retailer opened, but now when you do a 10-year lease and give [retailers] money to build out their stores, that expense has to be straight-lined,” he said. “Sometimes a 10-year lease has to go to 10 years and three months to take into account finish-out.”

International companies, too, are focused on fine-tuning what has become essentially a global transparency initiative. Although Sonae Sierra, which was listed on the Lisbon Stock Exchange from 1997 until 2001, is now a private company, its corporate governance and transparency reporting requirements are managed as if the firm were still listed, says Figueiredo. “Our public reporting is actually more detailed and more transparent than many other real estate companies listed today,” he said.

The financial landscape for private U.S. companies has changed significantly, says Tompkins. “Today tens of billion of dollars of retail real estate has gone private, and that has allowed us to expand capital markets alternatives,” Tompkins said. “We believe there’s a fairly even playing field now between private and public companies.” CFOs have to be familiar with capital markets and the sundry types of financing products and know when to tap into them, says O’Hern.

“You have to be prepared well in advance and be very opportunistic in taking advantage of the many different kinds of capital before those opportunities are gone,” said Freibaum. Long-range planning, in fact, is starting earlier and earlier as companies grow larger and more complex, he says. “[Controls] are a lot more rigorous in that everything has to be thoroughly vetted. That’s not a problem, there are just more steps in processes. You just have to begin things sooner, plan more and be prepared. There is less ability to do things on very short notice.”

Given these new demands, the quest for qualified personnel can be meticulous and drawn-out. “All of these responsibilities have elevated the need for highly competent professionals in accounting and tax areas,” said Payne. “The challenge is finding and keeping them.” Tompkins agrees. “There is a literally a battle to find and retain talent,” he said. “Because it’s such a differentiating factor in our unique culture, we tend to spend a lot of time recruiting, finding people with inherent discipline and a relationship-based approach to business.” Edens & Avant has retooled its entire financial group over the past few years, bringing in a new chief information officer and a new chief accounting officer.

Schafer says that as DDR has grown, the most significant changes have occurred on the human capital side.

There is evidence that CFOs are being compensated in accordance with these ramped-up responsibilities. Annual pay for the CFOs of large companies surged 25 percent from 2004 to 2005, says a 2006 survey compiled for CFO magazine.

Today’s CFO gets the type of birds-eye perspective on an organization that was once largely confined to the CEO or chairman. “You get to view all of the business sectors and all of the investments, both planned and realized,” said Ivanhoe Cambridge’s Levasseur. “In that regard, you are in a position to get a clear view of the successes of different new orientations and strategies. It certainly makes it interesting for the CFO of a real estate company, with the tremendous growth in this industry … and very interesting for our staff, as the accounting group interacts and aligns with other countries.”

As the reach and stature of the CFO have increased, the demand to walk a finer and finer line has been a result. Many companies are relying upon these officers to streamline financial and nonfinancial departments and to reinvent ways of conducting business internally and externally, and all without sacrificing any critical business functions. Payne estimates that her job as CFO of Taubman is 75 percent internal and 25 percent external.

In many ways, the retail industry CFO’s job is still being shaped, according to Payne. “It’s only been 15 to 20 years since retail REITs were created, and that is a very short time in the course of public companies,” she said.

And Figueiredo says a retail real estate CFO now “is about new metrics, new targets and how these new metric and targets feed into the company’s value-creation model. If today’s companies must create value through corporate responsibility and sustainability, then the CFO will need to be involved in that discussion.”

But perhaps most important, says Payne, retail CFOs “have established a culture that allows people to raise their hand if they don’t think something is right.”

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