BOSTON - Warning to pension fund real estate money managers: What you are about to read may ruin your day.
The $2.2 billion New England Teamsters and Trucking Pension Fund, Boston, has more than 26% of its assets - about $580 million - invested in real estate. The fund has done it on its own and has made lots of money.
For the 10 years ended Sept. 30, 1994 - the most recent data available - the fund's real estate portfolio earned an annualized return of 15.8%; the cash yield was 12.4%, said Thomas Prendergast, president of Net Properties Management Inc., the plan's wholly owned real estate subsidiary.
The NCREIF Property Index, which measures performance of pension real estate managers, earned a total return of 4.57% for the 10 years ended Sept. 30, 1994. But that number is misleading because most real estate managers measured by NCREIF did not return money to their investors, choosing instead to reinvest the income earned.
The average pension fund has a real estate allocation of 5% to 10%, according to the Pension Real Estate Association, but most funds have actually invested 4% to 5% of assets.
"Some people would view us as being heavy (in real estate), but if you look at performance, it's been doing well for us," said David Laughton, a union trustee of the pension fund.
"What's wrong with 20% when it's the best producing asset in the portfolio?" asked Mr. Prendergast.
In most funds, real estate as an investment class followed equity investing. The New England Teamsters and Trucking trustees, however, established its real estate program and Net Properties in the early 1970s, said Mr. Prendergast. Trustees didn't decide to invest in equities until about two years ago; until then, all assets were in real estate and bonds.
Real estate posted steady returns for the pension fund, outpacing bonds. The fixed-income return eventually began to lag, and with an actuarial assumption of 8.5%, the trustees decided to begin investing in equities.
As for why the fund set up its own real estate operation, Mr. Prendergast said: "The thinking was they wanted to control it (investments) themselves."
External real estate managers perpetuate themselves, said Mr. Prendergast, echoing a sentiment shared by many pension funds and investment consultants. "I am judged on performance," Mr. Prendergast said. "If a property has reached its potential, and I don't get rid of it, I have a problem with the board."
Operating a property subsidiary costs the pension fund about $2.4 million a year, 3% to 4% of gross income of $60 million, said Mr. Prendergast.
"That's everything - acquisition fee, brokerage fee, leasing fees, everything," he said. "We are not paying extra fees.
"We are able to give better yields because there are no excess fees," Mr. Prendergast said. "That is far less than other people charge today."
Because the fund controls its real estate, its returns have been strong, according to Mr. Prendergast.
"We've never had a down year," said Mr. Prendergast, who became president of Net Properties in 1980.
Mr. Prendergast's pronouncement about the fund's return and the success of its strategy was confirmed by other real estate professionals in the New England real estate community.
Net Properties didn't miss a step during the early 1990s when real estate hit its nadir, said a Boston-based real estate manager familiar with the company's operations.
"They kept growing and producing yields when everyone else was underwater," said the real estate manager, who requested anonymity.
"He (Mr. Prendergast) has developed some strong contacts in the retail tenant area," the real estate manager said. "When everyone else gets croaked when a tenant goes out of business, he has had the relationships to get those spaces plugged.
"He's got a half-dozen strong tenants that are national or super-regional names that he's able to plug in, often times at higher rents that the predecessor," the real estate manager said.
Net Properties found success with strip shopping centers that it can buy at a discount and expand. More than $407 million of its property portfolio is invested in strip shopping centers anchored by supermarkets and discount retailers.
The balance of the portfolio is invested in small offices, sale-leasebacks and commercial mortgages.
"When we buy a shopping center we always look for opportunities to expand it," said Mr. Prendergast. "We try to maximize potential by increasing the size of a property and its yield.
"If I buy a fully leased building I don't have any upside, and that's what I need," he said.
The other rule to which Net Properties adheres is anchor the strip centers with supermarkets and discount retailers.
"Our goal is to service the person who shops every day," said Mr. Prendergast. "Whether you are employed or unemployed, you have to buy groceries They serve the consumers' everyday need. They are not fancy.
"The biggest key why we are successful is we stuck with what we knew," said Mr. Prendergast. "We know how to work a good piece of property, and we do it ourselves."
Mr. Prendergast also credits Net Properties' success to the relationships he and his staff built up over the years. He has been with the firm 22 years and the seven key executives have averaged 15 years with the company.
"We have spent a lot of time building relationships with retailers," Mr. Prendergast said.
The company also relies on its relationships with brokers and retailers to help it identify attractive markets. The company then attempts to buy enough property - about 1 million square feet - to justify opening a satellite office staffed with three to five employees.
North Carolina and South Carolina are the most recent markets that the Net Properties management finds attractive. The firm bought four strip centers in North Carolina, paying $59.5 million.
"In North Carolina there is a lot of building going on. It's hot. You would be hard-pressed to say anything bad about it," said Mr. Prendergast.
"It's really growing and has all the signs of continued growth," he said. "I try and recognize those."
The company's other markets are suburban New York, New England, Florida and Tennessee. Other areas Net Properties finds attractive but does not invest in are greater Birmingham, Ala., and Las Vegas, said Mr. Prendergast.
The 2-year-old mortgage program is the newest component of Net Properties' investment strategy. To date, the fund has lent about $100 million, primarily to property owners seeking to refinance their debt.