CHICAGO - The $14.5 billion Ameritech Corp. pension fund has cashed in part of its real estate portfolio, joining a small but growing list of pension funds contributing properties to a public REIT and receiving cash and stock in return.
The technique, so far, has been used by pension funds that have invested in joint ventures with developers, separate accounts or co-investments. But one real estate expert said it can be adopted by commingled fund investors, although the process is arduous and contentious for the pension funds, and it requires the fund manager step down.
Ameritech sold 12 of 13 properties it owned in its Diversified Storage Fund B for $47.8 million to Storage Equities Inc., a Glendale, Calif., public real estate investment trust, said Darrell Woody, a spokesman for the buyer, which since has merged with an affiliate and is now known as Public Storage Inc.
Ameritech was advised by Boston-based Aldrich Eastman Waltch, industry sources said. Public Storage was advised by Los Angeles-based Chadwick, Saylor & Co. Inc., said industry sources.
Representatives at AEW and Chadwick, Saylor declined to comment.
The pension fund received $28.4 million in mandatory convertible participating preferred stock and $19.4 million in cash.
The preferred stock will convert automatically to common stock on June 30, 2002, if Ameritech does not exercise the conversion, said Mr. Woody.
Instead of a fixed rate of return, Ameritech will receive a dividend that is equal to the cash flow generated by the properties it is contributing. It can convert its preferred stock to common around $18 a share, which is a premium to the stock price when the deal closed in September.
Ameritech's pension fund owns an additional 16 self-storage properties in another limited partnership. William Stephens, chief investment officer for the fund, declined to discuss the transaction, the amount Ameritech originally had invested in the partnership and the fund's plans for the remaining portfolio.
REIT investors take an unfavorable view of advised REITs - those that rely on external companies for property and finance functions - and will pay a premium for fully integrated or self-advised REITs, like the new Public Storage. Indeed, Public Storage's share price rose on news of the merger.
With the close of each deal like Ameritech's, public and private real estate continue to move closer together. The process of pension funds liquefying real estate via the public market began in 1993, when the pension fund for IBM Corp. converted its joint venture interest with the then-private General Growth Properties and IRT Property Co. into restricted stock.
The two companies then went public, and real estate industry observers have said IBM has made a handsome return on its investment.
"It's wonderful to have more markets available to you," said Susan Hudson-Wilson, president of Property and Portfolio Research, a Boston-based consulting firm. "It's even more wonderful to use them."
According to Ms. Hudson-Wilson, pension funds were unable to liquefy real estate using the public markets because of the small size of the public REIT universe. The growth in the universe during 1993 and 1994 has made it viable, Ms. Hudson-Wilson said.
"The REIT guys operated on the left and pension funds on the right," she said. "They barely knew the other existed.
"Now you can compare price (in the public and private sectors) and make a sensible decision," said Ms. Hudson-Wilson. "It opens up a whole new avenue.
"Having more exit strategies can never be a bad thing," she said.
The availability, however, is no panacea.
"Pension funds still have to be diligent and do their homework," said Ms. Hudson-Wilson.
"It's a pricing question."
The technique is best exploited by large pension funds that have made separate account investments or pension funds that have co-invested in limited partnerships.
It is extremely difficult for pension funds invested in commingled fund group trusts to use the strategy because federal law restricts their group trust ownership to pension funds. But it is not impossible, according to Ms. Hudson-Wilson.
A real estate manager could propose to investors in a commingled fund group trust that a successor fund be structured as a REIT or a limited partnership. The new fund would then be open to new investors and not restricted to pension funds. The proceeds from the new investors would be used to pay investors that want liquidity.
Potential problems include a disagreement on the fund's direction among the investors and the valuation of the properties that would need to occur before a REIT could invest, according to Ms. Hudson-Wilson.
Additionally, these deals haven't occurred because REITs need a property and geographic focus, and very few commingled funds meet that criteria, said Brent Donaldson, president of Liquidity Financial Group, Emeryville, Calif. Liquidity Financial operates a secondary market for trading commingled funds.
Also, the fund's real estate manager, which would have to step aside for another manager, could be an obstacle.
"In most cases, the money manager still believes in the assets and has the confidence in its abilities to manage it," Ms. Hudson-Wilson said. "That's honest and straightforward."
A cynic might argue a real estate money management firm doesn't want to derail its own fee gravy train by advising its clients to replace the firm. But Ms. Hudson-Wilson said a real estate adviser is "obligated to look at all possible ways to liquidate, including ways that don't leave it in the deal."
"There is no evil there," Ms. Hudson-Wilson said. "They (real estate managers) get maligned."
