ATLANTA - Last year the Macomb County Employees' Retirement System, Mount Clemens, Mich., pared $30 million from its $190 million U.S. domestic bond portfolio and moved the money into private REIT funds.
"We were getting an 8.25% interest rate from the REITs, which made us real happy," said Tom Engel, executive director at the $760 million system. "We were only getting 2% from bonds."
Macomb initially put $7.5 million into Wells Real Estate Investment Trust Inc., Atlanta, and invested another $7.5 million in the REIT three months ago, Mr. Engel said. The system at the same time doubled its investment, to $15 million, with private REIT fund Inland Real Estate Investment Corp., Oak Brook, Ill. "In each case, we liked the returns, and there's also a possibility these REITs will go public at some point, which would bring us some nice gains."
Macomb needed to increase its cash flow after payments to retirees began to exceed inflow, Mr. Engel explained. "It made sense for us to add more real estate. We're allowed to go to 10% of assets and now have $60 million in real estate." He added that the system has been using the dividends from the REITs to pay benefits, rather than reinvesting, since it needs the cash. "But if they go public, we would take the money and invest it in more real estate."
That strong cash flow has been attracting a number of pension fund investors to the Wells REIT fund, an open-ended commingled fund that started three years ago, said Leo Wells, president of Wells Real Estate Funds Inc. The firm, which has $570 million in assets under management, has been running limited partnerships since 1984. The limited partnerships now have $400 million in assets under management and a mutual fund with $45 million in assets that invests in publicly traded REITs. Macomb also has $5 million invested in a Wells limited partnership.
Office and industrial
The limited partnerships and private REIT fund each employ the same strategy - investing exclusively in office and industrial properties that have been pre-leased to Fortune 500 companies, Mr. Wells said. "We use no leverage and pay cash for everything. Pension funds find these work very well for them. If they try to invest in real estate directly, they are often pressured by board members to buy property in their state. With the REIT, they avoid this kind of baggage and end up owning top real estate all over the country. And they just love that cash dividend."
The REIT fund now stands at $300 million. Mr. Wells expects it to take in $250 million this year and around $500 million next year. By 2003, it will add $1 billion a year, he predicted. .
General Retirement System of the City of Detroit, with $3 billion in assets, invested $10 million in the REIT fund in May. "We already had investments in opportunity funds and direct real estate investments," said Tom Sheehan, a trustee at the fund. "We were looking for a core commingled fund and this fit in well with our strategy." So far it's done well, Mr. Sheehan said. The fund's current real estate allocation is 7% of total assets.
Other investors in the Wells REIT fund include the $1.3 billion Wayne County Employees' Retirement System, Detroit, which invested $10 million in August 1999 and another $10 million in January, to add diversity to its portfolio, said Ron Yee, director.