SAN FRANCISCO, Calif. - AMB Institutional Realty Advisors Inc. received permission from a majority of its investors Thursday to roll up the investors' property holdings into a $2 billion REIT that it intends to take public, several industry sources confirmed.
It is the first instance in which pension funds approved the roll-up of private pension fund real estate holdings by a traditional real estate manager. AMB's success might make it easier for other real estate managers attempting the strategy.
A roll-up occurs when properties from a private partnership or owned separately by an investor are contributed to a new entity that will manage the properties in an operating company. The real estate investment trust boom of 1993-'95 was characterized by individual property owners' use of the technique.
Now, it appears, it is the turn of in institutional investors. AMB held a shareholder's meeting Thursday, but voting by proxy already indicated a sufficient number of investors approved the proposal, allowing the firm to reach the $1.2 billion threshold needed to make it appealing to REIT investors.
The firm's investors include the pension funds for Ameritech Corp. and Bell Atlantic Corp., the California Public Employees' Retirement System, California State Teachers' Retirement System, Kamehameha Schools Bernice Pauahi Bishop Estate, San Diego City Employees' Retirement System, San Francisco City & County Employees' Retirement System, Los Angeles County Employees Retirement Association and the University of Missouri System.
The bulk of AMB's assets are held through separate account relationships, said Frank Blaschka, consultant with The Townsend Group. The firm has three commingled funds: Western Properties I, Current Income and Value Added, which represent almost $1 billion of AMB's total assets under management of $2.5 billion.
More than 90% of the commingled fund investors - representing about 60 pension funds - approved the proposal, sources said. The balance represents contributions by separate account investors.
Two-thirds of the proposed REIT's assets will be composed of warehouses, and one-third will be shopping centers, said several sources.
Morgan Stanley & Co. Inc. is the deal's underwriter.
Officials with AMB declined to comment. Telephone calls to Morgan Stanley were not returned.
Sources close to the proposal said that trustees for the Los Angeles County and California Teachers pension funds did not approve the proposal. Telephone calls to officials with both funds were not returned.
CalSTRS trustees might have voted against the proposal because they have been operating without a real estate consultant since April, when Institutional Property Consultants resigned. The CalSTRS trustees' reported thumbs-down is ironic because they approved the hiring of AEW Capital Management Inc. last year to explore securitization options for the pension fund's real estate investments.
The AEW hiring was regarded by the industry as forward thinking by a public pension fund. Less than a year later, however, the program was suspended.
"The board was not comfortable with the structure and put it (the program) on hold," CalSTRS Chief Executive Officer James Mossman told Pensions & Investments in April. "As you know, we are dealing with lay trustees and securitization is new to them."
AEW was retained by the CalSTRS' staff to evaluate the AMB proposal, and is believed to have recommended its approval.
LACERA's reported opposition might be due to the pension fund's lack of a policy for investing in REITs, said a real estate professional knowledgeable about the fund's operations.
Pension fund real estate professionals hail AMB's success as the watershed event which might lead to other successful roll-ups of traditional pension fund real estate advisers.
Equity Institutional Investors, a company controlled by Sam Zell, successfully rolled up four institutional investor partnership composed of office buildings earlier this year, but it was the firm's intent from the outset to use a public market exit strategy (P&I, May 1, 1995).
"It's a significant event because it (AMB) is more of a pure private-to-public transaction," said Timm Judson, a partner with Courtland Partners, a Cleveland-base real estate consultant. "Sam Zell and his organization are much more public-markets-oriented to begin with, and this exit was always contemplated."
AMB first entered the pension fund real estate business as a separate account real estate manager and then added its commingled fund, said Barbara Cambon, president of Institutional Property Consultants, San Diego. The firm's commingled funds had provisions allowing it to seek investor approval for a roll-up, but it wasn't contemplated that it would occur, said Ms. Cambon.
Other pension fund real estate money managers working on roll-ups are Cabot Partners L.P., Legg Mason Real Estate Services and MIG Realty Advisors Inc.
Just three months ago, the likelihood that a roll-up by a traditional real estate manager would succeed seemed unlikely. Pension funds in May scuttled Chicago-based Heitman Capital Management's second attempt at rolling up the properties that firm manages for pension funds. A 1995 effort by Heitman and The RREEF Funds also failed.
AMB was successful because clients on the whole like the firm, said Susan Hudson-Wilson, president of Property and Portfolio Research, Boston.
"They have done what they said they were going to do," said Ms. Hudson-Wilson.
According to the Pensions & Investments Performance Evaluation Report, AMB's Western Property I, a $76 million closed-end fund, ranked in the top decile among its peers for the five-year period ended Dec. 31. Performance slipped some in the shorter term; the fund was in the fifth decile for the three-year period.
The firm also has performed for separate account investors. AMB has returned 14.6% for the almost five years it has been a separate account manager for the $9 billion San Francisco retirement system, said Clare Murphy, executive director. The NCREIF Property Index returned 8.7% during that time, she said.
Ms. Cambon said AMB succeeded where Heitman failed because the former is focused on two property types, and the deal is simpler. AMB is creating one company of warehouses and shopping centers, she said. Heitman tried to do four companies of four separate property types and a disposition pool of unwanted properties.
According to industry sources, AMB will register an initial public offering in mid- to late September and go to market in November. Investors contributing properties will get shares in the new company in proportion to the value of their units or properties.
Separate account investors that don't want to be included in the new company can remain clients of AMB, but their accounts will be advised by a wholly-owned subsidiary of the new public entity. New investments for those clients would then be done in 50-50 joint ventures between the separate account investor and the public company.
By approving the roll-up, investors are trying to capture the premium the public real estate market is paying for real estate. Alignment of investor's interests with that of the manager's is a secondary consideration. According to Realty Stock Review, which performs market analysis of REITs, shopping center REITs were trading at an average premium of 21% to net asset value as of July 22. Warehouses were trading at a premium of almost 25% to NAV.
"It's an opportunity to participate in the private to public market arbitrage, which has provided significant returns for holders of assets that have become shareholders of public REITs," said San Francisco's Ms. Murphy.
"It was that premium that attracted the board," said Ms. Murphy, whose board elected to contribute its $129 million of properties that AMB manages for it in a separate account.
San Diego officials also viewed the arbitrage as a good opportunity.
"Anytime you have an opportunity to create liquidity in an illiquid investment, certainly that should be duly considered," said Doug McCalla, investment officer with the $1.9 billion San Diego system, which has a $10.5 million stake in Western Properties Fund I.
"Given the dynamics of the marketplace, not only should we get market prices for the assets, but there should be some recognition of AMB's management abilities," said Mr. McCalla.
Investor perception of management is the cause for REITs to trade at a premium to net asset value, said Mr. Judson.
"What you see in those premiums are a combination of growth expectations and franchise value," he said. "Growth expectations are generated by the management team and by achieving economies of scale over a large portfolio.
"The skills and strength of the management team and the strategy going forward will determine if the premium will be captured," said Mr. Judson.
But there are no guarantees the premium will be there when the pension funds are able to sell their stock one year after the public offering, noted Ms. Hudson-Wilson.
Not all AMB investors were in favor of the roll-up, particularly some separate account investors. The proposal isn't viewed as favorable to them because they lose control of their property; a subsidiary of the new company would provide advisory services to remaining separate account investors, leading to questions about the amount of attention these investors would receive.
Also, the multiple applied to AMB's management was rich to some investors. The value of AMB's management was determined to be worth $90 million to $92 million, said a source familiar with the proposal. But the multiple on that figure was eight.
By comparison, Mr. Zell's management was valued at $160 million, but the multiple was five, the source said.