ATLANTA - The revolving door of CEOs at Lend Lease Real Estate Investments is making clients and consultants dizzy.
When the Atlanta-based real estate investment firm last month named David Ross chief executive officer of U.S. operations, he became the company's third U.S. CEO in three years.
As a result of the latest change, most pension fund clients are monitoring their Lend Lease portfolios carefully. And the $8 billion Kansas Public Employees' Retirement System, Topeka, has put the firm on probation, said Bob Schau, real estate investment officer.
Before his appointment, Mr. Ross was global CEO in charge of the global real estate business at the Sydney, Australia-based parent Lend Lease Group. He moved to Atlanta in July to broadenhis involvement in the U.S. operation. News of his latest role came shortly after the company wrote down $300 million in the U.S. business.
Concurrent with Mr. Ross' appointment were the terminations of Lend Lease's three top U.S. executives - Fred Pratt, CEO since April 2001; Jerry Barag, chief investment officer; and Marshall Woodward, head of separate accounts. Messrs. Pratt and Barag received generous severance packages, according to industry sources, but nowhere near as generous as the $8 million paid to Sheryl Pressler when she was ousted as CEO in April 2001 after only a year on the job. Lend Lease declined to give details of the two executives' severance pay.
In an interview, Mr. Ross said the U.S business had been the largest part of his portfolio before and that he had worked with the senior team since September 2001. "The biggest change is ... I no longer have responsibility for the global business, just the U.S. business."
Mr. Ross said he has talked to all of Lend Lease's major clients and assured them nothing will be different. "The key driver is that their portfolio manager teams will still service them, and that's not likely to change. None of the portfolio managers have left," he said.
Nevertheless, the latest shakeup has resulted in a lot of confusion, because there have been so many changes in such a short period and because the U.S. business has been up for sale. Mr. Ross said the company is undergoing a "strategic review," which Merrill Lynch & Co. Inc. has been conducting since November.
"We're reviewing the landscape each of our businesses is operating in, to see how to grow the businesses, to look at potential distribution alliances, joint ventures and a possible sale. We haven't made a determination (about a sale), and we haven't set a time limit," Mr. Ross said.
The parts, not the sum
Several firms were said to have rejected acquiring all of Lend Lease, but some are now interested in buying some of its parts, including the flagship commingled Prime Property Fund and the Lend Lease Rosen real estate investment trust business. Among them are Morgan Stanley Investment Management and Citigroup Asset Management, both of New York, and GMAC Institutional Investors LLC, Atherton, Ga.
Mary Athridge, Citigroup spokeswoman, and Melissa Stoneberg, Morgan Stanley spokeswoman, said their firms don't comment on market rumors. No one at GMAC returned calls seeking comment.
Industry observers are dubious that anyone will buy the firm, comparing the situation to what happened with PMRealty Advisors Inc., Newport Beach, Calif. - even though it managed $2.2 billion compared to the $38 billion in U.S. assets managed by Lend Lease. When its parent put PMRealty up for sale, turmoil followed. Three senior managers left, and at least one big client terminated the firm. PMRealty was shuttered when no one would buy it.
"People have learned from the PMRealty disaster. Why would anyone buy them (Lend Lease) if they can get the business for free? Clients will transfer to other managers, and the managers won't have to pay a premium to get the accounts," said one observer, who requested anonymity.
Another said many large clients are already talking to other managers.
Others in the business say Lend Lease has grown too unwieldy to sell as a whole. And executive recruiters say many Lend Lease executives have left in recent years, and others are shopping their resumes. "The mood in Atlanta is very tense these days. If too many top people go, the company could just implode," one recruiter warned.
Other observers think performance has been disappointing, as have net new business gains.
Lend Lease's flagship Prime Property Fund, an open-end core commingled fund, returned 1.27% for the year ended Sept. 30, according to the Pensions & Investments' Performance Evaluation Report. That's well below its 5.7% NCREIF Property index benchmark. The fund was in the 9th decile among the 11 products ranked in PIPER.
Lend Lease took in $1.6 billion in net new U.S. business in 2002, up from $920 million in 2001, a gain of 7.4%, according to spokesman Jonathan Miller. One consultant, who did not want to be identified, said this would mean that the company had a banner year but questioned how accurate the numbers were.
Lend Lease, founded in Australia in 1958, began buying up U.S. real estate businesses in 1993, starting with its acquisition of Yarmouth Group, New York. It bought Equitable Real Estate Investment Management Inc., New York, in 1997; Boston Financial Group in 1999; and the commercial debt business of AMRESCO Inc. in 2000.
Some clients are voicing concern about the latest executive shuffle. Kansas' Mr. Schau said a company automatically goes on probation whenever there are changes in management. Lend Lease manages $350 million in a core strategy for the pension system. Officials at other pension fund clients, including the $68.2 billion New York State Teachers' Retirement System, Albany, and the $92 billion California State Teachers' Retirement System, Sacramento, say they are watching closely.
But Tom Milne, chief investment officer at the $22.3 billion Tennessee Consolidated Retirement System, Nashville, said: "It hasn't affected our account. We're just monitoring them. When Sheryl Pressler was terminated, it didn't disrupt what we were doing with them." Lend Lease manages around $110 million for the fund.
Said Dick Picket, senior investment officer for fixed income at the $9.8 billion San Francisco City & County Employees' Retirement System: "They manage around $130 million for us in a high-yield CMBS fund for us. It's done extremely well. We were assured that there wouldn't be any changes on that team, but we're keeping an eye on it. We're not too upset, though."