Maury Tognarelli has been with Heitman LLC for more than half of the firm's 38 years. The Chicago-based real estate investment manager was formed in 1966 to originate and service commercial mortgages for pension funds, life insurance companies, commercial banks and other institutions. In 1980, Heitman, now a subsidiary of South African insurer and investment firm Old Mutual PLC, created closed end, commingled funds for institutional investors. The firm counts the $114 billion California State Teachers' Retirement System, Sacramento, and $30 billion Public Employees' Retirement Association of Colorado, Denver, among its investors. Mr. Tognarelli started as a summer intern in 1981. After graduating from Indiana University in 1983, he joined the firm full time and proceeded up the corporate ladder, becoming part of the three-partner group that restructured the firm in 1998, president and chief operating officer in January 1999, and chief executive officer in January 2002. He is also a member of Heitman's board of directors and chairman of its investment committee. Since November, the firm launched the $150 million Heitman Value Partners LP, a value-added fund investing in residential, office, industrial, retail and specialty sectors in the United States; the $281 million Crescent Euro Industrial Fund, focused on distribution and warehouse investments in Europe; and two Nomura funds for Japanese individual and institutional investors in U.S. real estate investment trusts and equity real estate. Mr. Tognarelli spoke with reporter Arleen Jacobius about the firm's investment direction and the future of real estate investment for institutional investors.
Q What do you expect for real estate prices and returns for the rest of 2004?
AReal estate is an asset class and an investment that is here to stay. The attributes of income and the volatility profile make it attractive for institutional as well as individual investors. The asset class continues to produce competitive returns. ... That being said, you are looking at a market condition where a sizable amount of capital is looking to invest in real estate and that is creating competition and pricing and returns that are on the aggressive side for investors that are in it for the long term. There will be higher pricing and lower returns, in general.
Q Is real estate a riskier investment than it had been over the last couple of years?
A That's not been our experience. It is the transparencies in the public and private real estate markets that give everybody the tools to determine what pricing is appropriate and the risk. … We are very comfortable looking at strategies that produce a little more risk but that give a little more return to offset it. I think you will see that type of investment strategy continuing to evolve.
Q How interested are U.S. institutional investors in international real estate?
A On an indirect basis, many have exposure to international real estate through mandates that allow them to invest some of the fund's assets in international real estate. ... I do believe as real estate does produce competitive returns and allocations to real estate are increasing, they will look at international real estate as a diversification tool. That will happen as the European public markets evolve. What will trigger that evolution is more transparency, increasing information flow and developing capital markets.
Q I understand you started at Heitman as a summer associate?
A I was an intern when I was a sophomore in college. That was 22 years ago. When I began working full time, I was an analyst in an area responsible for new investments and debt origination. … For the first 10 years of my career I spent a lot of time understanding property-related issues and also demographic regions where property is located … I was grounded in the basic blocking and tackling where people make (investment) judgments. … It was a small group, close knit, who were working together in partnership to produce our result.
Q And then?
A In 1999, it was my time at the firm that allowed me to have a good grasp of what footprints I wanted to leave and what work environment I wanted to create. ... We have a 50% equity program for senior employees. I knew that would be important in retaining and maintaining existing talent and attracting new talent. We broadened participation in the governance of the firm. I wanted to draw on the experience of older partners to determine where to take the firm. One of the biggest things is we needed to reallocate some of the senior talent to clients, to reconnect to the client base. We acted in uniformity and in a cohesive group to improve the connection with clients and have a uniform approach. We centralized client service and marketing functions. Last but not least, I wanted to focus exclusively on real estate asset management. So we eliminated strategies like our property management and leasing business.
Q Why did you make these changes?
A I felt it was very important that senior management shared common values. … We wanted a client-focused business to dedicate ourselves to and we did not want any distraction from that focus. Everything came out of that. … That was the root of all the changes I made and tied into getting to the vision I have for the firm, that we are regarded as one of the best asset management firms … not the biggest, the best. That is my mantra.
Q What's the investment makeup of Heitman's assets under management?
A We are an investment management firm that makes direct investment in real estate. Sixty percent is direct investments in U.S. and Europe. Of the 60%, 80% to 90% is U.S. activity. We also invest in public securities, in REITs, and that is 20%. We arrange debt financing of commercial real estate around the country and that is another 20% of our business. That model has given us the opportunity to create some very innovative products. … We are working on two brand new funds right now that … will be in the office and residential sector. In Japan we are raising capital for U.S. public securities for Nomura Securities and Sumitomo Trust & Banking Co., Ltd. It's important for the growth of the firm that we broaden our access to capital from U.S.-only capital. … To do that, we need to raise capital globally for investment in the U.S. We raise in Europe, the Middle East and Asia. It's a reflection of the steps I took when I took over, to broaden the client base and recognize that the business would have to be a more global business.
Q Why have you been raising so many funds over the last several months?
A We were able to identify investment strategies we think make a lot of sense. … We identified inefficiencies in the marketplace. I think we are leading the pack in a lot of areas.
Q What are your goals for the business?
A One key objective was to broaden our client base and we have done that. … We are focused in the areas of real estate we want to be, which is direct investment, investment in public securities and originating debt. We're focused on what we consider the core of real estate property markets. …There is no reason to change. … It gives us access to information … information we can use to make us smarter. Ultimately, that should translate into performance.
