Joint ventures between real estate managers and real estate investment trusts are becoming more prevalent than ever, at a time when REITs have been struggling to find cash.
Cooperative ventures have picked up in the past several months because REITs have needed to find new ways of paying off debts and financing acquisitions.
REITs have also become good buys, said Max Swango, associate partner at INVESCO Realty Advisors, Atlanta. "That's because the price of public real estate is trading below its net asset value, which means it's now cheaper to buy real estate on Wall Street than on Main Street."
That means pension funds can buy these REITs cheaply and do joint ventures with them, Mr. Swango said. "It makes Wall Street happy, and the REITs get to keep their properties," he said.
INVESCO, Brandywine make a deal
INVESCO recently completed a joint venture with Brandywine Realty Trust, Newtown Square, Pa., in a deal in which Brandywine will act as the venture's leasing agent, development manager and property manager. INVESCO is contributing up to $25 million in equity on behalf of its institutional clients.
INVESCO manages $4.45 billion in real estate assets, of which $4.16 billion is for U.S. institutional clients. The firm has also done some joint ventures with private REITs and has more in the pipeline.
A number of pension funds have been teaming up with retail REITs that operate big shopping malls. J.P. Morgan Investment Management, New York, has been active in this arena on behalf of its pension fund clients, said Ben Gifford, managing director and chief investment officer for direct investments.
Of the $17.42 billion in real estate assets J.P. Morgan reported as of June 30, $16.11 billion is in tax-exempt assets.
In the past year, the firm has done $400 million worth of joint venture deals with The Rouse Co., Columbia, Md.; Westfield America Inc., Los Angeles; and Simon DeBartolo Group Inc., Indianapolis.
One of its pension fund clients, the New York State Teachers' Retirement System, Albany, took a 26% stake in the Simon venture, while J.P. Morgan took 11% for its Strategic Property Fund on behalf of other clients. The other owners are Simon, with 49%, and the Teachers Insurance and Annuity Association, New York, with 14%. But going forward, Morgan plans to diversify into office and industrial REITs with CarrAmerica Realty Corp., Washington, and Duke-Weeks, Realty Corp., Indianapolis, Mr. Gifford said.
"We like joint ventures because of the expertise these local operators have available to them in the areas of leasing, knowledge of property and development skills," said Mr. Gifford.
Of the $1 billion in new investments that J.P. Morgan expects to make next year, 30% will be in co-investments.
Heitman gears up
At Heitman Capital Management Corp., Chicago, president and CEO Mary Ludgin anticipates 60% of the $1 billion it plans to invest next year will be in the form of joint ventures with REITs. Recently Heitman did a $750 million joint venture with Prologis Trust, Aurora, Colo., a large industrial REIT, and it is in the process of finalizing another with AMLI Residential Properties Trust, Chicago.
"It's great to pair up with a REIT that is the dominant landlord in many markets, such as Prologis is," noted Ms. Ludgin. "It results in higher tenant retention, which can push up rents." Heitman manages $9.43 billion in real estate assets, $8.86 billion for U.S. institutional investors.
The firm also recently has launched its Strategic Venture Fund, which expects to raise $250 million by June 2000. It will seek value-added returns of 13% to 15% through joint ventures with both public and private REITs investing in class B properties that will be repositioned into higher-producing properties.
Some pension funds won't do joint ventures, because they prefer to own 100% of their assets, Ms. Ludgin said. But others, like the $115 billion New York State Common Retirement Fund, Albany, have been engaged in numerous joint ventures. In recent months, the system closed on several deals valued at more than $1.7 billion, which included a $425 million deal with Lexington Corporate Properties Trust, New York, to buy single-tenanted, investment-grade office and industrial properties around the country.
At Lend Lease Real Estate Investments Inc., Atlanta, three joint ventures with REITs valued at a total of $1 billion are set to close before the end of the year, and a fourth one with Prentiss Properties Trust, Dallas, was completed in April, said Don Miller, principal.
Their pension fund clients include the Public Employment Retirement System of Idaho, Boise, which invests in REITs through its Lend Lease Rosen subsidiary; the Kansas Public Employees' Retirement System, Topeka; and Los Angeles County Employment Retirement Association, Pasadena.
