The best of Chicago-based Heitman/JMB Realty Corp.'s 12 closed-end commingled funds managed a return of only 7.2% for the five years ended Dec. 31.
The best performing of the six closed-end fund sponsored by The RREEF Funds, San Francisco, managed only 4.5% during the same period. All six of the closed-end funds sponsored by TCW Realty Advisors posted negative returns for the period.
By comparison, publicly traded real estate investment trusts posted a return of 11.5% for the same period.
With performance like this, Jon Fosheim wonders why pension funds don't invest more in public REITs. Mr. Fosheim is president of Green Street Advisors, a Newport Beach, Calif., analyst of public real estate securities.
The question has been asked before, but Mr. Fosheim's ire is raised because real estate managers that have performed so poorly for pension funds are now structuring their vehicles as private REITs, piggybacking on the good reputation enjoyed by their public counterparts.
In addition to Heitman/JMB, RREEF and TCW, other traditional pension fund real estate advisers that recently closed their private REITs or are raising money are: The Yarmouth Group, New York; DRA Advisors Inc., New York; Cabot Partners L.P., Boston; AMB Institutional Realty Advisors, San Francisco; Metric Institutional Realty Advisors, Foster City, Calif.; and MIG Realty Advisors Inc., West Palm Beach, Fla.
A real estate commingled fund by another name would still perform poorly if it kept all of the bad elements of its namesake, contends Mr. Fosheim.
But private REITS sponsors claim they are not seeking to capitalize on the popularity of their public counterparts. The ability to easily go public was not the primary reason for electing REIT status, many said.
For example, tax benefits was the primary factor in structuring the Yarmouth Capital Partners II as a private REIT, said Charles Purse, a Yarmouth senior vice president.
In a report - "Private REITs: Commingled Funds with a New Name," Mr. Fosheim criticized private REITs and the performance of the managers that sponsor them.
According to him, the new funds are blind pools that don't offer investors a chance to look at the properties; they don't have liquidity because they are private securities; ownership by management is either minimal or non-existent; and compensation is based on fees or tied to the size of the portfolio.
Also, there are numerous conflicts of interests because the advisers manage different portfolios for different investors, and the management structure of the new funds would make them unpalatable to public REIT investors, if the private REITs went public.
Most important, track records of the managers of the old commingled funds are poor, Mr. Fosheim points out. Public REITs over the long- and short-term outperform commingled funds, he said.
The name change is just an attempt to capitalize on the good name that REITs presently enjoy, contends Mr. Fosheim.
"Right down the line - corporate overhead, conflicts of interests, the level of insider share ownership, corporate democracy, franchise value, etc. - the private REITs as a rule do not appear to measure up to publicly traded REITs," Mr. Fosheim said in his report.
"Moreover, by not being listed to trade on any of the major stock exchanges, the shortcomings of the private REITs are compounded by their lack of liquidity and a real-time pricing mechanism."
T. Robert Burke, chairman of AMB, said Mr. Fosheim "makes a lot of valid points, but he made a gross generalization."
"He implied that no advisers made money for their clients," said Mr. Burke. "Not true.
"We made money right through the real estate recession, which is why we were able to raise $400 million from 33 investors."
Still, all but one of the managers contacted the Pensions & Investments confirmed their private REIT vehicles were advised or managed REITs and not self-administered, which is preferred by public market investors because of alignment of interests.
The RREEF Funds' America Income and Growth fund was the only one that was self-administered, but it contained many of the other elements (minuscule insider ownership, for example ) that Mr. Fosheim said would make it unpalatable to public REIT investors.
Jonathan Litt, REIT analyst for Salomon Brothers Inc., New York, said his recommendation to public advised or managed REITs is "to get self-administered" because of the potential for conflict of interest.
Management should make money for its ability to raise the company's share price, said Mr. Litt.
Proponents of private REITs are taking issue with Mr. Fosheim's report.
"The fundamental issue that we had with (the report) is we didn't create a vehicle designed to compete with public REITs," said David Hodes, managing director of The Yarmouth Group.
Yarmouth was featured prominently in Mr. Fosheim's report. According to Mr. Fosheim, a Yarmouth commingled fund returned 3% for the four years ended Dec. 31; a composite of the firm's separate account relationships returned -3% for the same period. The NAREIT Index was up more than 17% during the same period, Mr. Fosheim said.
"Based on track record," wrote Mr. Fosheim, "the Yarmouth private REIT would have to be assigned a very low rating relative to public REITs."
Private REITs have long been available to pension investors. Paul Saint-Pierre, executive director of the Real Estate Clearinghouse, San Francisco, estimates there are 76 private REITs; 26 of have a net asset value of $5.6 billion.
"Most of the big money raised in commingled funds (in the future) will be raised in the private REIT format," Mr. Saint-Pierre said.
Many newer closed-end funds adopted the structure beginning in 1993 because plan sponsors wanted the potential for liquidity and a say in the sale of properties.
Public REIT proponents are not opposed to real estate advisers structuring their vehicles as private REITs. Mark Decker, president of the National Association of Real Estate Investment Trusts, Washington, welcomes them.
But Mr. Decker is wary of real estate managers using the private REIT structure as a thin veil for business as usual. "To the extent that private REITs are being formed and sold to U.S. or foreign institutions as a proxy for yesterday's commingled funds, this is more smoke and mirrors by pension fund advisers and pension fund consultants who don't want to be separated from their gravy-train fees as intermediaries.
"Pension fund investors investing through intermediaries cannot compete in terms of management expertise, access to low-cost equity and debt capital and long-term performance of the underlying asset with our quality public REIT companies."