ATLANTA - Lend Lease Real Estate Investments, the nation's largest institutional real estate money manager, is suffering from staff defections, client terminations and requests to withdraw from its flagship open-end fund.
Top portfolio managers Steve Walker and Laler DeCosta and senior marketers John Faust and Kevin Norton quit.
Big pension fund clients - including the $23 billion Los Angeles County Employees Retirement Association - terminated Lend Lease, while others have stepped up their monitoring or put the firm on probation. Also, several participants in Lend Lease's $1.7 billion Prime Property fund are redeeming their shares after consultant Frank Russell Co., Tacoma, Wash., advised clients to sell.
At the same time, pending deals to purchase some of the firm's U.S. businesses are creeping along and have yet to be finalized.
Morgan Stanley deal
In March, Morgan Stanley Investment Management, New York, said it might buy a stake in Lend Lease's U.S. real estate advisory business. Lend Lease is an Australian company that acquired its U.S. real estate investment management arm when it purchased Equitable Real Estate Investment Management Inc. in 1997. It had also acquired Yarmouth Group in 1993.
Morgan Stanley spokeswoman Judy Hitchens said: "Our talks with Lend Lease are ongoing and constructive. We remain excited about the opportunity." She would not say when a deal might be completed.
In addition, GMAC Institutional Advisors LLC, Atherton, Ga., is said to be planning to acquire some of Lend Lease's mortgage and debt businesses. Kelley deSantis, GMAC spokeswoman, said the firm never comments on transactions until the documents have been signed. And MuniMae Midland LLC, Baltimore, is reportedly buying the tax credit business, although spokesman Whit Clay said he couldn't comment.
Jonathan Miller, principal at Lend Lease, said he expects the Morgan Stanley deal to happen soon. He wouldn't comment on the status of the negotiations for the other businesses.
Meanwhile, trustees at Pasadena, Calif.-based LACERA voted on April 24 to terminate Lend Lease, which managed $442 million in a core strategy, said Gloria Gil, senior investment officer, real estate. But for now, Lend Lease will continue to manage the system's $250 million hotel portfolio, which is on watch and under review, Ms. Gil said. The firm had been on probation for underperformance and management instability since October 2001. In January, Lend Lease fired its three top U.S. executives and named David Ross chief executive officer of U.S. operations, the third CEO in three years.
Lend Lease's Mr. Miller said: "We're disappointed about LACERA's decision but appreciate the long relationship we have had with them and are pleased to retain the hotel portfolio. We anticipate working closely with the LACERA staff to make a smooth transition of their investments."
Officials at the $90 billion California State Teachers' Retirement System, Sacramento, have been quietly asking existing real estate managers to bid on the properties managed by Lend Lease, according to sources. The firm manages $1.02 billion in a core strategy for CalSTRS.
Sherry Reser, spokeswoman for CalSTRS, would not confirm pending changes, saying only: "We're gravely concerned about the turnover at the top at Lend Lease, and are having frequent dialogues with them." She added Lend Lease is still working on investing $75 million in an urban apartment project for CalSTRS.
Kansas PERS' concerns
The $8 billion Kansas Public Employees' Retirement System, Topeka, issued an RFP earlier this month for a $300 million core portfolio managed by Lend Lease. Trustees had put the firm on probation in February because of the management shakeup.
"The board became concerned about the account after Fred Pratt's (former CEO) departure. There was also concern because Steve Walker, portfolio manager since inception, left," said Robert Woodard, KPERS chief investment officer. Messrs. Walker and DeCosta joined INVESCO Realty Advisors, Atlanta, earlier this month as portfolio managers, both new positions.
This is the first time the Kansas fund has issued an RFP for core real estate since hiring Lend Lease 10 years ago. "It seemed like a good time to reassess, given all the changes," Mr. Woodard said.
Lend Lease's Mr. Miller said the company believes its performance for KPERS has been strong, and that the firm has been encouraged to rebid.
The $78 billion Florida State Board of Administration, Tallahassee, reportedly transferred management of one of its Lend Lease properties to L&B Realty Advisors Inc. Dallas, while it reviews its portfolio with Lend Lease. Neither Florida CIO Coleman Stipanovich nor L&B spokeswoman Victoria Grissom returned calls seeking confirmation.
Other Lend Lease pension clients putting the firm on watch or re-evaluating it include the $8.3 billion Ohio Police & Fire Pension Fund, Columbus; the $3.5 billion Municipal Employees' Retirement System of Michigan, Lansing; and the $23 billion Tennessee Consolidated Retirement System, Nashville.
As for the Prime Property Fund, Russell put a sell rating on the fund in January because of lagging performance during 2002. Performance has since improved, sources said. The fund returned 5.3% for 2002, compared with the NCREIF Property index, which returned 6.8%.
A Russell spokeswoman said Russell doesn't discuss strategic information on specific money managers.
They want out
The $68.2 billion New York State Teachers Retirement System, Albany, and the $2.9 billion pension fund of Rohm & Haas Co., Philadelphia, have asked to redeem their shares, a source said. A NYSTRS spokesman said he couldn't comment. Robert Worthington, manager of corporate finance at Rohm & Haas, did not return several phone calls.
Participants in Lend Lease's close-end Value Enhancement Funds are having a tougher time because they are invested for the 10-year life span of the funds. Fund IV has performed dreadfully. It was forced to write off $125 million last year because of a disastrous investment in a mixed-use building complex outside Bellevue, Wash., resulting in a return of -43% in 2002, according to a source who did not want to be identified.
The Value Enhancement Funds had a difficult 2002, Mr. Miller said. Fund II returned -7.2% for the year, but its annualized return since its 1996 inception is 9.7%.
Fund III returned -0.4% for 2002 and an annualized 12.4% since inception in 1998. "Three of the four funds have been doing well and, as markets recover, we expect to recoup much of the value lost in Fund IV, which has another four years to go," Mr. Miller said.
REITs doing better
The $9.5 billion Los Angeles Fire & Police Pension System has around $65.7 million invested in three of the Value Enhancement Funds, said CIO Tom Lopez. "We just hope we get our money back," he said. "We invested $40 million in Fund IV. We did very well on the earlier ones ... "
Clients invested in the firm's debt and real estate investment trust vehicles seem more upbeat but concede they could change their tune if their portfolio manager were to leave.
Said Dick Picket, senior investment officer for fixed income at the $9.7 billion San Francisco City & County Employees' Retirement System: "Their performance has been spectacular, and we don't want to pull the plug on something that's doing so well."