Lend Lease Corp. took a major step toward executing its 10-year-old global real estate strategy when it signed a definitive agreement last week to buy Equitable Real Estate Investment Management Inc. for $400 million.
Lend Lease, a broadly diversified financial services company based in Sydney, Australia, will pay New York-based parent The Equitable Cos. Inc. $300 million in cash and $100 million through an eight-year note.
The purchase price works out to a little more than seven times pre-tax earnings of $56 million, according to Matthew Banks, chief executive officer of the new real estate money management entity.
Various real estate watchers said real estate money managers are trading between eight and 10 times earnings before interest and taxes.
ERE posted after-tax operating earnings of $31.4 million for 1996, an increase of 32% from the $23.7 million reported in 1995, according to annual financial statements of the parent. It contributed 5% to Equitable's pre-tax operating earnings, said a spokeswoman.
ERE raised more than $1 billion in new pension fund money in 1996, said Joseph J. Melone, president and chief executive of The Equitable Cos.
Lend Lease plans to merge ERE with Yarmouth Group, a Lend Lease real estate money manager subsidiary, creating a $14 billion real estate pension fund adviser. The new company will be called ERE/Yarmouth for the time being, said Mr. Banks.
ERE already was the largest pension fund real estate money manager, with $16.1 billion under management as of Jan. 1, 1997, according to Pensions & Investments' investment adviser rankings.
Yarmouth has $2 billion under management, according to the P&I ranking.
The sale is subject to regulatory review.
George Puskar, chairman of ERE, will serve as chairman of the new company; ERE President Douglas Tibbetts will be president. Daniel MacEachron, Yarmouth president and chief investment officer, and Paul Dolinoy, ERE senior executive vice president, will be co-heads of funds management.
James Quille, a senior official with Lend Lease, will be the chief operating officer.
ERE's pension fund business is only one division acquired by Lend Lease as part of a multifaceted deal with The Equitable Cos. The transaction includes Compass Management and Leasing and Compass Retail, which are property management companies; Mortgage Investors Group, which makes loans and buys mortgages in the secondary market; ERE Rosen, manager of real estate investment trust securities; and the Equitable General Account, which invested in mortgages and real estate.
ERE/Yarmouth will continue to manage general account real estate assets, and Equitable now becomes Lend Lease's largest customer.
Mr. Puskar said the decision to sell ERE was made jointly by the real estate unit and the parent.
"We were proactive in initiating the strategy," said Mr. Puskar. "We wanted a buyer with a common vision of the future which includes an international strategy and a parent/owner with the capability for new product development and the capacity for co-investment and further alignment of interest with clients in these products."
Equitable Cos. was unlikely to co-invest with ERE clients in real estate, which is a growing requirement among pension funds.
"The sale (of ERE) also is consistent with our previously announced strategy to reduce our investment in real estate and concentrate resources on growing Equitable's core insurance and annuity businesses," Mr. Melone said.
Lend Lease's purchase of ERE might finally be the entree to the United States that it has been seeking for the past 10 years.
"This is part of our global strategy," said Mr. Banks. "Lend Lease has always seen real estate as one of its core skills. We now have a large network in the United States to complement Europe and Asia, which we have been in for 25 years.
"We are now covering the three major economic regions of the world," Mr. Banks said.
Lend Lease began its foray into the United States in 1987 with little success.
The first attempt involved the management of a publicly traded REIT that eventually was taken private and is still managed by Yarmouth.
A more ambitious plan had a three-pronged strategy: global real estate securities; direct property investments in the United States; and co-investment in real estate operating companies.
Offices were opened in San Francisco, New York and London to execute the strategy. But the effort was abandoned in the early 1990s. Mr. Banks said the timing was not good. "It (the strategy) was ahead of its time," he said.
Lend Lease acquired Yarmouth in 1993, and it "gave us a deeper foothold in the United States and was really a springboard" for the ERE acquisition, said Mr. Banks.