If you can't beat 'em, join 'em.
Sam Zell's real estate investment trust wants to team up with the Utah State Retirement System in its bid for control of the Metric Institutional Apartment fund. But the Zell firm contacted Utah only after Zell decided not to pursue a bid on its own.
In a separate development, an undisclosed investor believed to a be a large pension fund entered the bidding for units of the Aetna Institutional Investors I L.P.
Both situations illustrate how the race for interests in real estate commingled funds is heating up. It may be only a matter of time before investors in the funds achieve the liquidity they desire, although some pension fund executives said they see no reason to sell at a price below net asset value given the current rebound in the real estate market. Both partnerships are due to liquidate properties in two to three years.
In the Metric deal, at the request of certain investors, Utah extended its tender offer to Dec. 20 from Dec. 6. It also revised its goal downward to a majority of units, from its original target of 66.6%. Utah's bid originally was 99.2% of the fund's net asset value as of June 30, according to sources; the second offer was revised to take into account distributions or income as of Nov. 30, said one consultant.
Liquidity Financial Advisors Inc., Emeryville, Calif., the adviser to Mr. Zell's REIT, Equity Residential Properties, sent a letter to investors the day Utah's tender offer was to have expired, expressing interest in the fund. A few days later, Liquidity wrote: "After reviewing all the available information, EQR has concluded that it will not be able to make an offer to purchase MIAF interests at a price equal to or in excess of the offer made by Utah/IPC Partners. Thus, there will be no offer forthcoming from EQR."
Ten days after the first letter, a Zell official contacted Barbara Cambon, president of Institutional Property Consultants, San Diego, Calif., whose affiliate - IPC Partners - is advising Utah, to talk about a cooperative effort.
Metric officials did not return calls.
But one executive at another REIT said the Metric fund is now being looked at by his REIT and others. He asked not to be identified.
Don Philips, chairman of Equity Institutional Investors, Chicago, a Zell affiliate, said: "We would have an interest in joining IPC and the state of Utah."
At least five pension investors already agreed to tender their units in the fund to Utah; the fund has assets of $80 million to $85 million. They are: the Employees' Retirement Fund of the City of Fort Worth (Texas); the Baltimore Retirement Systems; and the Massachusetts retirement funds of Middlesex County, Plymouth County and City of Lowell. These five funds, together with Utah, own 40.6% of the Metric fund.
Utah built into its offer a 20-day due diligence period for review of the properties after acceptance of the offer. Officials of the Fort Worth and Baltimore pension funds expressed concern that Utah might decide to abandon the deal.
'Friendly' Aetna bidder
In the Aetna deal, one source said the unnamed bidder is friendly and seeks 49% of the fund.
He said the bidder reached an agreement with the Utah fund and the Shell Oil Co. pension fund, which each own about 20% of the Aetna fund. The Alaska Permanent Fund Corp., which also owns about 20%, is not part of the deal, sources said.
The transaction would be the first completed via the Institutional Real Estate Clearinghouse, a secondary trading system for real estate commingled fund interests.
Officials of all three pension funds could not be reached for comment.
The new Aetna bid follows a tender offer for the units by Everest Properties, Pasadena, Calif. The Aetna fund, which expires in 1999, is valued around $90 million, with the real estate worth about $105 million and about $14.5 million in debt.
As with Metric, few investors knew about the new Aetna fund bid, and those that did said they have no idea who the bidder is.
Bob Kohorst, president of Everest, said: "There is apparently another bidder but I think they'll drop out. .*.*. We expect we will be the ultimate buyer of the units."
So far, no investors have agreed to tender their units to Everest. In fact, Everest lowered its original bid when it found out about debt associated with a Troy, Mich., property. "The second offer was net of debt," Mr. Kohorst said.
For now, Everest's bid is on hold. "We don't want to be competing against a phantom," said Mr. Kohorst.
New Everest bid too low?
Sam Dallas, director of trust investments for Michigan Consolidated Gas Co.'s $750 million employee benefit plan master trust, which owns 5% of the Aetna fund, said Everest's second offer was about 90 cents on the dollar relative to the net asset value. "When it was 90 cents on the dollar we felt it was not even a close question. The original offer was 97 or 98, as I recall.
"It's a good fund. There's a good yield on it. The properties have good occupancy. Why would I sell it at a fire sale price of 90 cents on the dollar?", Mr. Dallas asked. He hadn't heard about the second bid.
George Lang, vice president-portfolio management of The St. Paul Cos., St. Paul, Minn., whose $350 million pension fund owns 5% of the Aetna fund, agreed. He said a buyer "would have to pay a premium to book value or market value to get our attention."
One observer who asked not to be identified said an adviser acting on behalf of a pension fund might be willing to exceed an offer by an opportunistic buyer like Everest because they would take into account net operating income (revenue less capital expenditures such as leasing commissions) in the calculation of overall returns.
Buyers like Everest and Zell look at cash-on-cash yield. The difference between the two figures is small in apartment funds like Metric, where such expenses as commissions are very low. But it can be significant with other properties such as the diversified mix of properties in the Aetna portfolio.
The observer said the cash-on-cash yield of the Aetna portfolio is 6% while the total return including the income component is 9%.
The net operating income return is higher, some say inflated, because certain capital expenditures have not been deducted from the net operating income.