CHICAGO - The first signal to many in the real estate community that JMB Institutional Realty Corp. was going to change direction occurred this spring when Charles Wurtzebach was promoted to president and chief operating officer from director of investment research.
But most people underestimated the ultimate magnitude of the changes.
In a move that surprised many, the principals of JMB Realty Corp. sold the pension fund real estate adviser and affiliates JMB Properties Co. and PRA Securities Advisors to Heitman Financial Corp.
"We expected a recapitalization of the company, but we didn't expect this," said Barbara Cambon, president of Institutional Property Consultants, San Diego.
The transaction is rumored to be worth between $100 million and $150 million, with Boston-based United Asset Management Corp., Heitman's owner, providing the financing.
Norton Reamer, chairman of UAM, said his company broke with its normal practice of acquiring firms and allowing them to operate independently because Heitman Financial Corp. Chairman Norman Perlmutter proposed the acquisition.
"There is more logic for size in this industry (real estate) that may not exist in the stock and bond business," said Mr. Reamer, who added UAM's other real estate advisory firm, L&B Real Estate Counsel, Dallas, has the green light to make acquisitions of other real estate managers.
"The industry is getting smaller as more capital is being made available," said Paul Saylor, chairman of Saylor Property Capital, Atlanta. "Three years ago, there were 130 real estate investment managers. Now, there are about 58, of which one-third is doing meaningful business," said Mr. Saylor.
"They (Heitman and UAM) recognize that a full-size vertically integrated firm is they way to go."
The new company, Heitman/JMB Advisory Corp., leapfrogs into the top spot among pension fund real estate advisers with $11.6 billion under management. JMB had $5 billion, and Heitman had $6.5 billion.
As a result of the transaction, current Heitman Advisory Corp. Chairman Stephen Perlmutter and his counterpart at JMB, Jerome Claeys, will become co-chairmen of the new entity.
Mr. Wurtzebach becomes president and chief operating officer of Heitman/JMB; Heitman Advisory President Andrew Deckas returns to Heitman Properties Ltd. as president.
Among the JMB Realty Corp. units and relationships exempt from the transaction are the company's interests in Urban Shopping Centers Inc., JMB Retail Properties Co., Las Colinas, Catellus and Cadillac Fairview L.P.
The most persistent rumor about JMB Institutional's future with the ascension of Mr. Wurtzebach was that management would buy itself out from JMB Realty Corp.
"The fact that the owners (Neil Bluhm and Judd Malkin) recognized his (Wurtzebach) capabilities was a significant signal," said Ms. Cambon.
"Was it enough to help them turn their image around? The answer is no, as evidenced by the decision."
According to many in the real estate industry, JMB Institutional had to separate from JMB Realty because the common ownership of both entities raised concerns about whose interest - the pension funds' or Messrs. Malkin and Bluhm - came first.
The chief example was the 1988 buy-out of Canadian developer Cadillac Fairview, which 41 pension funds helped finance. It's believed 40 pension funds sold their positions earlier this year at between 20 and 23 cents on the dollar.
As the adviser to Cadillac Fairview, JMB Realty Corp. continued to receive its management fee long after it was determined the deal was a bad one. The arrangement irritated many of the investors.
"Pension funds want advisory firms that are focused exclusively on that business," said one real estate professional who spoke on the condition of anonymity. Another professional could not recall JMB Institutional receiving any significant commitments as pension money began to flow back into real estate in the past 18 months because of the continued affiliation with JMB Realty Corp.
Mr. Perlmutter acknowledges there is a perception in the pension fund community that the institutional business was tainted by the association with JMB Realty. But he said there was respect, nonetheless, for the people that ran the unit. That respect, together with the amount of assets and the clients, made the company attractive, he said.
Mr. Perlmutter noted the acquisition does not include the most highly publicized troubled assets.
But it does include 12 commingled funds, 11 of which are fully subscribed and have had their share of performance problems. All are closed-end, with the earliest scheduled to return investors' money in 1998.
Mr. Perlmutter acknowledged the commingled funds - as well as separate accounts - have performed poorly, but he is optimistic about their prospects because of improvements in many property markets and the steps Heitman is taking to address liquidity.
"The bigger issue is where is real estate going now," said Mr. Perlmutter. "We think the economic factors are very favorable for many classes of real estate. We certainly aren't at the top of the market.
"In recognizing some of the structural issues of closed-end group trusts, we are building investment vehicles which we believe will better deal with the changing desires of our clients," said Mr. Perlmutter.
Specifically, Heitman has created Heitman Mall Investors Inc., a private real estate investment trust being seeded with four shopping centers from its commingled funds and separate accounts.
Properties from the JMB commingled funds eventually could be transferred to the private REIT, thus giving the investors liquidity and governance rights.
"A secondary market between institutions will develop for trading private REIT stocks," Mr. Perlmutter predicted. "We are trying to provide an ongoing commingled vehicle that will be property-specific and fulfill the portfolio needs of our clients."
The new firm will have more than 2,300 employees, yet Mr. Perlmutter believes there will be minimal job loss.
He said no one on the institutional asset management side of the business will lose his or her job because he expects the company to grow significantly.
"On the property management side, there are regional duplications that may have to come together," he said. "It may be restructured a little differently."
Yet, when word of the proposed sale began to leak out the week before it was closed, worried JMB Institutional staffers were calling around inquiring about opportunities at other companies, sources said.
One real estate professional described Mr. Perlmutter as a tough guy who is clear on the area of duplication. The professional predicted there would be a lot of bodies in the streets.