LOS ANGELES - Real estate industry experts are praising Lowe Enterprises Investment Management Inc.'s novel new arrangement with TIAA-CREF, saying it will give Lowe plenty of capital, apparently without costing it any clients.
Lowe, which manages around $3 billion in its tax-exempt advisory business, last month announced it would sell a 49% stake to New York-based Teachers Insurance and Annuity Association-College Retirement Equities Fund; terms were not disclosed. TIAA-CREF also will gain two seats on Lowe's board.
Susan Hudson-Wilson, president of Property & Portfolio Research Inc., Boston, an independent consulting firm, observed: "It's clever as hell and a way for Lowe to get an enormous amount of ready capital. Capital will also be readily available for co-investment. And Lowe is doing that without giving up control of its business."
Officials at TIAA-CREF declined to comment on the deal. Spokesman Jim Tolve said: "We don't discuss our investments."
"This should be great for clients," added Ms. Hudson-Wilson. "It makes them (Lowe) very attractive from a co-investment perspective, and also less needy. They don't have to go around to pension funds groveling for capital."
More to come?
If the deal is a success, there could be more like it, she predicted. Big life insurance companies might do these kinds of investments. "Under this arrangement they're both independent, which can be better than a large bank or insurer buying an independent manager, such as Deutsche Asset Management buying RREEF earlier in the year. Now Deutsche and RREEF are married to each other. This deal allows everyone involved more freedom."
Another real estate adviser, who declined to be identified, said: "It's a win-win for everyone because it takes care of Lowe's money issues and allows them to concentrate on managing the real estate."
But Paul Saylor, chief executive officer at CS Capital Management Inc., an Atlanta-based real estate advisory firm, had a different perspective. "While this could be good for TIAA and Lowe, it's hard to tell if it will be good for pension plans. Everyone in management is going to stay in place for now, but this investment by TIAA could be the first step in their taking it over. Even though the Lowe people are saying everything will be the same, everyone doesn't stay on in these deals. There are a lot of unanswered questions. You can't keep everyone. How successful it is will depend on who runs it."
Ted Leary, Lowe president, said: "Nothing will change on a day-to-day level. The senior executives will stay on for a period of time." He would not be more specific. "This gives us a way to diversify our offerings to clients. For example, TIAA has a REIT product, which we might be able to offer to our clients. And TIAA could co-invest in our funds if it wished."
Lowe focuses on value-added strategies, while TIAA offers core products. In 1999 the two teamed up in a joint venture known as LCDC, for Lowe Commercial Development Co., through which they develop large office and industrial projects.
Most Lowe pension fund clients said they were not worried about the change, but plan to monitor it carefully.
However, Lee Livermore, chief investment officer at the $10.5 billion Alaska State Pension Investment Board, Juneau, said: "We have a few questions to ask, and Lowe representatives are coming to see us (the week of Aug. 19). We want to know how they will handle conflicts. If we and TIAA both want to own the same property, who will get preference?" asked Mr. Livermore. He added that Alaska has not put Lowe on its watch list because it wants to discuss the new setup first. Lowe manages $200 million in a core separate account for Alaska.
Mr. Leary said clients wondered whether TIAA would get preference in seeing deals first. The answer is no, he emphasized.
And Ms. Hudson-Wilson added she doubted there would be conflict-of-interest problems, explaining that when big money managers have more than one client using the same strategy, they offer deals to clients on a rotational basis.
Reassurances from TIAA
Gloria Gil, senior investment officer at the Los Angeles County Employees Retirement Association, Pasadena, Calif., said: "We have been reassured that TIAA will handle the big picture, but not the day-to-day operations, which Lowe will continue to manage. We feel comfortable with the new arrangement, but we're watching to observe that nothing changes."
Lowe manages $180 million in a mezzanine debt single-family housing program in an exclusive arrangement that has done very well for the $26 billion pension system, she said.
Gary Bruebaker, chief investment officer at the $41 billion Washington State Investment Board, Olympia, said he didn't expect the system to be affected by TIAA's taking a minority stake in Lowe.
"There's no advantage or disadvantage to us at this point. We'll be dealing with the same people at Lowe that we've been dealing with. Down the road there could be changes, and we'll evaluate them as they occur." Lowe manages $345 million in a value-added strategy for the system.
And Bill Estabrook, executive director of the $8.5 billion Ohio Police & Fire Pension Fund, Columbus, said: "We were assured by Lowe's management that they will still be making all the decisions and that we won't see any difference. We have no reason to believe anything will change, but we will be reviewing them on a regular basis, and if there are any changes we'll certainly let the trustees know."
Lowe manages $82 million in a separate account for the pension fund.