A year after failing to restructure closed-end commingled real estate funds, RREEF Funds, San Francisco, and Heitman/JMB Advisory Corp., Chicago, are back with very different approaches to their real estate partnerships.
RREEF has liquidated nearly $500 million this year from funds at or close to their expiration dates, and firm officials are hoping to convince investors to redeploy the proceeds in RREEF America, its new private real estate investment trust.
Heitman/JMB is again working on a restructuring, seeking input from clients, but this time officials are loath to term it a roll-up. However, sources said that's one of the proposals; officials would then create a new vehicle in the form of a private REIT divided into four subcategories based on property type.
The roll-up technique - transferring properties from one or more funds and placing them into a new vehicle - was used frequently in 1993 and 1994, when many developers combined limited partnerships into REITs and took them public. RREEF and Heitman worked on their roll-ups for almost two years to no avail.
At RREEF, partner Stephen Steppe said by letting its funds expire when they're supposed to, RREEF is bucking an industry trend.
Although in theory closed-end funds can be liquidated when they expire, in practice that doesn't always happen. In fact, many pension fund investors have been frustrated when their investment managers renew partnerships rather than allow them to expire and sell off the properties.
"Other firms do indeed pull that trick. If they do that, we've basically said we want our money back," said John Krimmel, associate investment officer of the $7.25 billion State Universities' Retirement System of Illinois, Champaign, a RREEF client.
Still, he concedes, investors "don't have much leverage. . . . Their (the firms') worst enemy is bad publicity.
"I think a lot (of firms) are trying to set up other funds and shift assets to different funds rather than liquidating anything. Their revenues are tied directly to assets under management. As their asset base shrinks, so do their fees. They certainly have an interest in keeping the properties as well as the investors," said Mr. Krimmel.
The State Universities' of Illinois, which made a decision in June to exit real estate as an asset class, has been investing the proceeds in a Wilshire 5000 equity index fund run by BZW Barclays Global Investors.
"We still have about 4% of the fund in real estate, down significantly. We were 10% at one point. We had 5% as of June," Mr. Krimmel said.
RREEF is the system's largest real estate manager.
"Their funds have date-certain lives. Several have gone past (those dates). They're actively harvesting that portfolio," he said.
Russ Flynn, director-pension fund investment at Chrysler Corp., Highland Park, Mich., said his $15 billion fund is in closed-end funds with Heitman/JMB and RREEF. "In terms of being innovative and getting the most value out of the properties they have, I give (both firms) high marks," he said. Prudential Private Asset Management Group-Real Estate - the Chrysler fund's adviser on direct real estate investments - will have a big say in whether Chrysler favors the JMB plan.
Neil Darling, manager-investment analysis of Chevron Corp., San Francisco, said RREEF's liquidation "has been going on for a number of years."
For Chevron, "the amount of money is not that large. When those monies come in we just put it into our money account for paying benefits. We don't make an explicit reinvestment. We're not an investor in RREEF America." Mr. Darling declined to provide Chevron's investment.
RREEF's Mr. Steppe said several have been wound up: West I, II and III. West IV has one property left and West V has a couple left. Properties from Mid-America I, II and III have been liquidated.
But RREEF didn't undertake the sales until after its unsuccessful roll-up attempt.
Late last year, RREEF Funds' attempt to start a private REIT by transferring five regional shopping centers from two commingled funds was quashed by pension fund investors in two of its closed-end commingled funds.
RREEF had wanted to do the roll-up because officials felt in late 1995 it was not a good time to sell regional malls (Pensions & Investments, Nov. 27, 1995).
Now RREEF is in the process of liquidating USA I and II, West V, Mid America IV and V. All of these sales will be completed by June, Mr. Steppe said.
He said some of the money returned to investors has been redeployed in separate accounts with RREEF or in the firm's new fund, RREEF America, a private REIT that has raised $400 million.
Why the sudden rash of property sales? "Values have come back. There are a lot of antiquated structural issues with closed-end funds. We're better off moving on to different vehicles," said Mr. Steppe.
Heitman is working on a proposal to restructure $3 billion in closed-end commingled funds and group trusts of Heitman/JMB, according to Charles Wurtzebach, chief investment officer of Heitman Capital Management Corp.
Mr. Wurtzebach said plans are still preliminary: "We are working with clients and their consultants. We have not presented a detailed proposal yet."
The proposal, which might involve establishing a private REIT or a real estate operating company, won't be ready until the first quarter of 1997.
"The gist of it is to take a look at '80s-style commingled vehicles, analyze their characteristics and come up with a proposal that addresses the disadvantages that those present to current investors," Mr. Wurtzebach said.
He said many of the funds have five to eight years left before they expire and "are not the kind of vehicle, in retrospect, (plan sponsors) would have selected."
"There's a much longer list of issues beyond the (lack of) liquidity of the vehicles," he said.
While many real estate managers also are wrestling with clients' disenchantment with commingled funds, Mr. Wurtzebach said: "I don't know anyone who's tried to do (the restructuring)."
One pension consultant said Heitman is trying to roll up properties from the commingled funds into a private REIT and later take it public. The REIT would be broken down into four specific property types.
He wasn't sure investors would like the idea - especially those that invested in a closed-end fund to achieve diversification. "If they get shares in all four private REITs, maybe. We're waiting for more to happen before we'll really comment. We haven't really told them much. We have four or five clients in their funds."