DJ New GM Trust To Invest In Real Estate With Pension Plans
06/11/2003
Dow Jones News Services
(Copyright © 2003 Dow Jones & Company, Inc.)
By Arden Dale
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--General Motors Corp. (GM) is starting a trust to let other companies' retirement funds invest with it in real estate ventures.
The goal is to grow business for General Motors Asset Management, a unit of the auto maker that now manages a total of about $100 billion in pension assets for Delphi Corp. (DPH), Xerox Corp. (XRX) and GM itself.
GMAM, which announced the trust this week, is the largest private pension investor in the U.S. Assets in the automaker's own retirement plans alone equal about $60 billion.
GMAM wants to use the new trust to partner in real estate deals with companies that sponsor defined-benefit pensions, traditional plans that guarantee a fixed benefit to retired workers. Likely partners are small companies that wouldn't normally have the resources to do the deals themselves.
"We generally focus on larger, more complicated transactions, and that will enable smaller investors to participate in transactions they wouldn't normally have access to," said Tom Dobrowski, a managing director at GMAM.
The trust will invest in office buildings, retail shopping centers, industrial property, and multi-family properties, and GMAM will put up at least 50% of the equity required for the deals, according to Dobrowski. These types of investments tend to be more stable than other real estate ventures, offering a moderate rate of return of between 11% to 14%, he said.
GMAM already has about $6.5 billion invested in real estate, $3.5 billion of which is in properties of the kind the new trust will seek.
"Compared to stocks and bonds, real estate is a good bet for a number of reasons," said Dobrowski. "Rents are lower than they had been, but real estate cap rates, which are an important factor in valuing real estate, are far less volatile than other financial indicators. This means that if the value of financial assets were to decline, real estate values are likely to decline less."
A potential benefit for companies that invest through the trust is that GMAM will be putting such a big stake into each deal.
In general, real estate holds growing interest for a number of institutional investors who regard it as more stable than the challenging equity markets, according to William F. Wechsler, a vice president at Greenwich Associates, a consulting firm.
Typically, though, equity real estate has supplied a relatively small portion of large institutional investors' assets, Wechsler said. A Greenwich study conducted last year found that larger, rather than smaller, funds are more likely to invest in real estate, and that public funds and endowments are more likely to embrace it than are corporate funds.
Meanwhile, GM's pension troubles at home will make it harder for the company to reach its overall financial targets, GM's chief financial officer John Devine told analysts during a conference call on Tuesday.
Devine said it will be harder for GM to reach the $10 earnings per-share target the company has set for mid-decade because its pension expense has risen sharply. The target remains in place, however.
Like most private and public pension funds, GM's defined-benefit plans became underfunded last year, due to a combination of a bear market that eroded assets and low interest rates that require a sponsor to put away more to cover future benefit obligations.
Ford Motor Co. (F), Delta Air Lines (DAL), and International Business Machines Corp. (IBM) were among many that revealed pension shortfalls last year.
GM's own U.S. defined-benefit plans were short by $19 billion at the end of 2002. Standard & Poor's downgraded the company's credit rating late last year due to concerns about its pension funding. Since then, the auto maker has contributed $1 billion of its own stock into the plans.
Plan assets have also rebounded by 7% due to an improved stock market, Devine said on the conference call this week. But he added that if GM had to mark its pension obligations to market right now, they would be $6 billion to $8 billion greater now than at the start of the year, due to falling interest rates.
"It's still a significantly underfunded plan and that's a major factor in our thinking as we assess the credit," said Scott Sprinzen, a managing director at S&P. |
