Alliance Capital Management L.P. and real estate adviser Koll Investment Management are teaming up to offer REIT portfolio management to pension funds.
The joint venture is a testament to the growing interest pension funds are showing in public real estate investment trusts. It is also the first one in which a company known primarily for stock and bond money management has joined with a manager of privately held real estate investment services to offer REIT portfolio management.
New members in the growing field of companies offering REIT management usually are independent start-ups or traditional real estate money managers that started or acquired a REIT subsidiary. The growth in REIT offerings has gone hand in hand with the transition of properties from private ownership to being publicly held.
"It is an interesting and attractive opportunity in what looks to be a growth area in securities investment," said Dave Williams, chairman of Alliance Capital, New York. "There is anecdotal evidence that pension funds are increasingly interested in real estate via publicly traded vehicles.
"Today, it's quite small," said Mr. Williams. "It doesn't have to get much bigger for it to get attractive."
The joint venture will be known as The Alliance Capital/Koll Real Estate Securities strategies.
Koll, of Newport Beach, Calif., will be responsible for analysis of the properties and the markets in which the public REITs own properties, said Richard Wollack, Koll's president. Alliance will be responsible for the securities, financial analysis and portfolio construction, he said.
Eaton & Associates, Rowayton, Conn., will market the products, said Mr. Wollack.
The strategy will hinge on a process that examines all of the properties held by REITs, an ability Mr. Wollack claims is unique.
"We have a model that first tells us where is the best potential, which no one else has," he said. "Then we have people that can look at those properties, and we have developed a system to rate those REITs."
Alliance had looked at real estate opportunities over the past 15 years, but the joint venture with Koll "just happened to come along," said Mr. Williams.
In addition to exploiting a market viewed as attractive, Mr. Williams liked Koll's systematic approach to market research and the track record the approach generated.
"It (the Koll system) has elements in it that are comparable to the way we pick stock," said Mr. Williams. "Our analysts use a ranking system for evaluating stocks. We liked the discipline and the breadth and depth of it."
The Koll REIT model marries the market research of the Koll National Real Estate Index - a database tracking transactions, rents and expenses of more than 30,000 properties - and the property management operations of Koll Co. Inc., a multiline real estate company, and parent of the investment adviser.
The process begins with a quarterly valuation of the more than 7,000 properties owned by REITs. Each property is ranked based on its potential.
The prospects for the next two to three years of each asset type in the largest 64 U.S. markets are then determined by examining economic and demographic data, real estate fundamentals and specific asset and market trends. This information is derived from Koll's index and its property management people in 44 offices in 29 states. Finally, a weighted-average relative score is derived for each REIT.
Alliance will then conduct securities and financial analysis of the REITs ranked by Koll.
According to numbers provided by Mr. Wollack, the ranking of the highest-rated REITs substantially outperformed an index of REITs constructed by the National Association of Real Estate Investment Trusts, a Washington-based trade group. The REITs ranked lowest by the model underperformed the NAREIT index by a large margin.
For the year ended Dec. 31, the top 30 REITs ranked by the Koll model outperformed the index by 740 basis points or 21.1% vs. 13.7% for the index; the bottom 30 REITs ranked by the model underperformed the index by 690 basis points, 6.8% vs. 13.7%.
One drawback of the model is its short time frame. The model was completed in mid-1994 and implemented one quarter later.
To counter arguments that the model's track record is too short, Mr. Wollack offers an independent statistical assessment of the process' record performed by Theodore Steinberg, a principal with Parametric Economic Research, a San Jose, Calif., research and forecasting consultant.
Mr. Steinberg said the model's performance "since fourth quarter 1994 has been so good as to leave no reasonable doubt that it resulted from skill, rather than chance."
Mr. Williams acknowledged the short track record is less than ideal, but said the process is attractive.
"We know that randomness can effect these things mightily, but what attracted us was the discipline," said Mr. Williams. "It won't work every year as it did, but we like the approach and that is what resonated with us."
Although the process is labor intensive, the Alliance/Koll venture won't have to charge fees above the industry average because the elements of the process are already in place, Mr. Wollack said.
"All of the research costs are covered" already, he said.
Koll and Alliance will split the management fee, said Mr. Wollack. Pension funds now are paying REIT managers between 40 and 80 basis points, depending on the size of the investment.
Messrs. Wollack and Williams declined to give estimates on the amount they expect to have under management one, three and five years from now, but Mr. Wollack sized up the potential saying: "You wouldn't get an organization like ours joining together if we didn't think that this was a significant business category for us, and if we didn't think the interest in REITs wasn't growing significantly."
