Joint ventures between REITs and pension funds are the new hot topic in the real estate industry.
Real estate investment trusts need new ways to access capital and pension funds are on the lookout for new types of investments, consultants say.
A couple of years ago, when REITs were the hot new growth stocks, such ventures would have been unthinkable. But after struggling through a year and a half of sinking returns, REITs are turning to pension funds to help them finance their deals.
"The pension funds have been doing these deals mainly through advisers running opportunity funds," said Susan Hudson-Wilson, president Property & Portfolio Research, Boston. "The pension funds have the capital and are happy to be regarded as a good source of money."
Most of the ventures involve setting up a new entity between the pension fund and/or adviser and the REIT; terms of ownership range from 50-50 to 20-80. Generally, the pension fund or adviser gets the bigger stake.
J.P. Morgan Investment Management Inc., New York, has been a particularly active participant in such deals through its commingled real estate funds. In recent months, it committed and closed joint ventures with the Gables Residential Trust, Atlanta, and Rouse Co., Columbia, Md. Another is pending with Simon Property Group, Indianapolis, said Benjamin Gifford, chief investment officer for Morgan's real estate investments.
REITs normally prefer to raise money in the public markets, but because of their low valuations, they have been seeking other ways to access capital, Mr. Gifford said.
The Gables deal, which just closed, involves a joint venture for seven apartment complexes that Gables will operate in seven cities throughout the Southeast and Southwest. Five of the complexes are 30% to 50% completed, while two are yet to be built. Those under construction are Gables San Raphael in Dallas; Gables Raveneaux, Houston; Gables Metropolitan, Atlanta; and Gables San Michelle II, South Florida. Morgan is investing $200 million in the project from its $1.5 billion commingled Special Situation Property Fund, managed on behalf of pension fund clients.
The Rouse venture is structured differently. Morgan co-invested in it with the New York State Teachers' Retirement System, Albany. The retirement system has a 32 1/2% stake; Morgan has 32 1/2% for its $3.5 billion commingled Strategic Property Fund, and Rouse has 35%. The partnership is investing in four regional malls, two of which have been completed; the other two are in development, Mr. Gifford said.
The Simon venture, which is under discussion, also involves the New York State Teachers system, which would be a co-investor.
Abbott Davis, the recently retired director of real estate at the system said other joint ventures with REITs also were under consideration. "The REITs recognize these ventures offer a good way for them to raise cash," he said.
Fred Carr, principal with the Penobscot Group, Boston, a consultant to real estate advisers, said these joint ventures are win-win situations for pension funds and REITs, especially if the REIT is operating the businesses. "Then the pension fund is getting the benefit
of top level property management," Mr. Carr said.
Union pension funds are signing up for these joint ventures. Chadwick Saylor & Co., Atlanta; Landon Butler & Co., Washington; and Kennedy Associates Real Estate Counsel, Seattle, have created a commingled fund just for union pension plans, known as Multi-Employer Development Partners LP, to do joint ventures with REITs.
Plumbers & Pipefitters National Pension Fund, Washington, committed up to $50 million to the fund; Bricklayers & Trowel Trades International Pension Fund, Washington, committed up to $20 million; and National Automatic Sprinkler Industry Pension Fund, Landover, Md., committed up to $50 million.
Mike Jacobson, administrator of the Sprinkler Industry pension fund, said the trustees were interested in the fund because it invests in REITs that provide union jobs.
Landon Butler, principal of the firm that bears his name, said the three commitments allowed the partnership to do its first closing at $121.2 million. He expects the fund's capitalization to go to $250 million. "We have a good deal flow and expect to have some deals by summer," he said.
In Toronto, the Ontario Teachers' Pension Plan Board teamed up with Macerich Partnership LP, Santa Monica, Calif., last month to buy five regional shopping malls in the United States for U.S.$75 million. The U.S.$39 billion pension fund, which owns a 10% equity stake in Macerich, has a 49% stake in the shopping center deal, which includes Washington Square Shopping Center, Tigard, Ore; Kitsap Mall, Silverdale, Wash; and Cascade Mall, Burlington, Wash.
Lee Fullerton, fund spokeswoman, said the Macerich deal is the fund's first joint venture with REITs. "It was a good opportunity for us to start investing in the U.S.," said Ms. Fullerton, who noted the fund had wanted to diversify its real estate portfolio.
Arthur Coppola, president and chief executive officer of Macerich, said his firm is putting up half of the money and talent. "This allows us to leverage capital at a difficult time." He added Macerich has been approached by several pension funds that want to co-invest in regional malls in southern California.
The $150 billion California Public Employees' Retirement System, Sacramento, joined with Burnham Pacific Properties Inc., San Diego, last month to buy 28 shopping centers for $663.4 million from AMB Property Inc., San Francisco. The partners created an entity known as BBP Retail LLC to buy 5.1 million square feet of shopping centers. Six additional centers are under contract for $284.4 million with BPP, subject to financing.
The joint venture, in which CalPERS holds an 80% stake and Burnham, 20%, gives Burnham capital to reinvest in some industrial properties and to reduce its debt. Under the agreement, Burnham will collect both management and leasing fees from CalPERS, said James W. Gaube, chief investment officer at Burnham. The size of the fees will depend on location, he said.
Mike Kirby, principal at Green Street Advisors, Newport Beach, Calif., said he expects to see more of these types of joint ventures during the year, because REITs have no other source of capital. "It might help the REITs, but it's an expensive source of financing," he said.
"The day after the Burnham-CalPERS deal closed, Burnham's stock price shot up," Mr. Green said. CalPERS "paid a rich price and too many fees. They would be better off just investing directly in REITS."
CalPERS' Mr. Pacheco responded the fund doesn't mind paying management fees to run the shopping centers. "We wanted strategic partners who would put some of their own money at risk. They (Burnham) are investing 20% in this ... The first dollar lost would be Burnham's."
