BERKELEY HEIGHTS, N.J. -- Barely a year after AT&T Co. outsourced its $3.8 billion in private equity assets to J.P. Morgan, the giant pension fund is preparing to turn over its $1.6 billion real estate portfolio to the same firm.
Executives of AT&T Investment Management Corp., which oversees $30 billion in AT&T employee benefit assets, have notified J.P. Morgan Investment Management Inc., New York, they intend to outsource the fund's realty to Morgan, said AT&T spokeswoman Eileen Connolly.
"We haven't done a contract yet. We expect to have one in the next week or so," Ms. Connolly said last week.
"There are certain issues to be worked out, such as whether Joe (Russo, head of the real estate division) will go to J.P. Morgan."
Mr. Russo is one of five real estate staffers: three investment professionals and two administrators.
Sources familiar with the plan said AT&T has been searching for a firm to run its real estate portfolio for nearly a year. It considered as many as nine real estate advisory firms before narrowing the list to J.P. Morgan and Prudential Real Estate Investors. Neither is one of AT&T's five external real estate managers.
Knowledgeable sources said few, if any, of the ATTIMCO real estate staff would go to J.P. Morgan. Of the five, two already announced plans to leave and others could take early retirement or go elsewhere, said a person familiar with the matter.
"Since AT&T had been searching for a year, staff members had felt they wouldn't have much of a chance to use their expertise in real estate if they stayed," he said.
AT&T officials won't discuss the move until contracts have been signed.
Observers speculated AT&T is shedding the real estate operation because it would be more cost-efficient and would eliminate the problem of top talent getting lured away to higher-paying jobs at money management firms -- a situation pension funds face regularly.
The real estate transfer is being structured differently from the private equity deal, however.
When AT&T outsourced private equity last year, the seven-person private equity staff at ATTIMCO became employees of J.P. Morgan. J.P. Morgan didn't have a private equity division before.
But J.P. Morgan runs a sizable real estate investment unit -- with $12.7 billion in tax-exempt realty assets under management as of June 30.
The real estate portfolio is around 8%, or $1.6 billion of AT&T's defined benefit assets, which stood at $20 billion as of Sept. 30.
The real estate performance has been terrific, according to one observer, who estimated the portfolio yielded returns in the "high 20% range" last year.
Once the deal with J.P. Morgan is completed, AT&T's external real estate managers could be retained or terminated.
AT&T retained all of its private equity managers after transferring private equity assets to J.P. Morgan, according to someone with knowledge of the exchange.
Although the AT&T-J.P. Morgan contracts are supposed to be signed within the month, there are some complex issues the two entities must work out, said a source familiar with the negotiations. The deal could still fall apart if they can't agree, he said.
One issue: ATTIMCO manages some real estate holdings for pension funds other than that of AT&T -- such as BellSouth Corp., Warner-Lambert Co. and Lucent Technologies Inc., according to the source.