Letting go: insurers increasingly are turning away from direct ownership of real estate. (Industry Strategies: Asset Management).In November 2002, John Hancock Financial Services The examples and perspective in this article or section may not represent a worldwide view of the subject.
Please [ improve this article] or discuss the issue on the talk page. Inc. announced that it was selling three key home-office complexes in Boston, but expected to lease back the office space it was using from the new owners. By making this move, Hancock said it was following the lead of some other publicly traded financial-services companies in opting to lease space for its corporate headquarters rather than own and manage the property.
Although the transaction obviously would raise capital for the company, that wasn't the primary motivation, an official said. John Hancock, like other newly public companies, understands that the equity markets don't look favorably fa·vor·a·ble
1. Advantageous; helpful: favorable winds.
2. Encouraging; propitious: a favorable diagnosis.
3. on real estate holdings. That knowledge, coupled with recently increased regulatory charges on these investments, has prompted some companies to retool re·tool
v. re·tooled, re·tool·ing, re·tools
1. To fit out (a factory, for example) with a new set of machinery and tools for making a different product.
2. their investment portfolios.
"As companies have demutualized, equities in general have become something that is not attractive to hold on a demutualized balance sheet," said Deborah McAneny, executive vice president in charge of real estate at Hancock, which provides a variety of insurance and investment products and services. "Publicly traded companies publicly traded company
A company whose shares of common stock are held by the public and are available for purchase by investors. The shares of publicly traded firms are bought and sold on the organized exchanges or in the over-the-counter market. like stable, predictable operating income Operating Income
The profit realized from a business' own operations.
This would not include income from things such as investments in other firms. Also referred to as operating profit or recurring profit. , and asset classes like equity real estate that have, over time, created good capital gains are not valued as much."
There's "pressure and logic" behind the 10-year-long, industrywide in·dus·try·wide
adv. & adj.
Throughout an entire industry: sales that have decreased industrywide; industrywide cooperation. trend of exiting from direct ownership of real estate, said Bernard Winograd, president of Prudential Investment Management and chairman of its real estate investment advisory business, Prudential Real Estate Investors A real estate investor is someone who actively or passively invests in real estate. An active investor may buy a property, make repairs and/or improvements to the property, and sell it later for a profit. . Prudential Investment Management is Prudential's asset management business, which provides a range of investment products for institutional and retail clients, along with Prudential's general account.
"The kind of investment returns that you recognize from investing in real estate are not particularly advantageous for a public company," he said. "The accounting is unfortunate. The return consists of your current income, less depreciation, and the markets do not tend to give you credit for the capital appreciation component of real estate investing Real estate investing involves the purchase of real estate for profit. Profits are accumulated slowly by renting out properties in a cashflow method, or are generally improved and resold for a capital gain. , which is a very large part of where the return comes from."
As a result, many insurers have sold the bulk of their equity real estate portfolios shortly before or soon after demutualizing--that is, converting from a mutual insurer into a publicly traded company, McAneny said. For example, Hancock began selling nearly $2 billion worth of real estate holdings in New England New England, name applied to the region comprising six states of the NE United States—Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, and Connecticut. The region is thought to have been so named by Capt. and elsewhere as soon as it began the process of demutualization Demutualization
The process of changing corporate structure from a mutual fund company to some other form, such as a limited liability or corporation.
This means mutual/life insurance companies convert from policyholder companies to stock companies. in 1998. These sales included an office complex in Long Beach, Calif., for $20 million, and another in Phoenix for $5.1 million. "We just reinvested the proceeds from the sale of our equity real-estate portfolio in more stable, predictable, fixed-income vehicles that were more attractive as a publicly traded company," she said.
Hancock decided to sell the Boston properties Boston Properties, Inc. (NYSE: BXP) is a self-managed real estate investment trust (REIT) based in Boston, Massachusetts. Its primary focus is "Class A" office space which it acquires, develops, and manages in the major markets of Boston, New York City, Washington, D.C. that included the 62-story downtown office tower that has carried the company's name for three decades. The Boston Globe put the asking price for that at more than $1 billion. The two other Boston buildings that Hancock put up for sale included its former headquarters, as well as a building on Berkeley Street, which is topped by a landmark weather beacon A weather beacon is a beacon that indicates the weather forecast in a code of colored or flashing lights. Often, a short poem or jingle accompanies the code to make it easier to remember. .
In preparation for the sale, Hancock relocated re·lo·cate
v. re·lo·cat·ed, re·lo·cat·ing, re·lo·cates
To move to or establish in a new place: relocated the business.
v.intr. back offices and moved many home-office tenants to different buildings. Space on numerous floors of the roughly 1.6 million square-foot tower was rented to outside tenants. In 1998, Hancock was leasing 54% of the office space in the tower, but by last fall,] that was down to 20%.
Then, in 2002, the company took advantage of the red-hot market in commercial real estate. The very volatile equity markets in the third and fourth quarters of that year saw a great inflow in·flow
1. The act or process of flowing in or into: an inflow of water; an inflow of information.
2. of capital into hard assets, with investors increasingly reallocating funds from the stock market into real estate, McAneny said. "Well-located trophy office buildings in strong long-term markets have been a huge recipient of that capital," she said. In this market, John Hancock felt its Boston buildings were well positioned, with excellent lease structures and long-term tenants in place. "So we said, 'Now's a good time-- there's a lot of capital coming in, there's a lot of capital looking for Looking for
In the context of general equities, this describing a buy interest in which a dealer is asked to offer stock, often involving a capital commitment. Antithesis of in touch with. this type of an asset. They are premier office buildings in the great city of Boston,"' McAneny said.
Completion of these real estate transactions will leave Hancock with only a couple of small Boston properties that it has chosen not to sell for now, McAneny said.
Prudential Financial's insurance company, The Prudential Insurance Company of America, is another insurer that has divested itself of major real estate holdings in recent years. Through the mid-1990s, Prudential was a big investor in equity real estate, both wholly owned and through joint ventures. In fact, the insurer once owned the Prudential Center This article or section is about a planned or proposed arena.
It may contain information of a speculative nature and the content may change dramatically as the construction and/or in Boston, as well as a stake in the Empire State Building. But starting in 1997, the company launched a real estate sales program, which de-emphasized direct real-estate investments and was a precursor precursor /pre·cur·sor/ (pre´kur-ser) something that precedes. In biological processes, a substance from which another, usually more active or mature, substance is formed. In clinical medicine, a sign or symptom that heralds another. to demutualization in late 2001.
In its S-1 form filed with the Securities and Exchange Commission, Prudential reported that from Jan. 1,1997, to Sept. 30, 2001, it reduced the book value of its real estate and real estate-related holdings from about $3.4 billion to around $500 million. the company said it used the proceeds from these real estate sales to invest in public and private fixed maturities and shares in real estate investment trusts.
Prudential still invests in property, but through the vehicle of Prudential Real Estate Investors, which now treats the insurer's general account as any other client. More than 90% of PREI's revenue comes from third parties, Winograd said. "We advise on investing in real estate in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. and around the world--about 20% of the business is overseas," he said. Prudential has been in this business since 1970 with the formation of its first product giving pension-fund investors a commingled vehicle that allowed them to invest in a diversified set of commercial real estate properties. Now, it's grown to be a multiproduct offering that invests in a wide range of commercial real estate activities throughout the world, all of them equity related, Winograd said. An overwhelming majority of investors are pension funds, either in the United States or abroad, he said.
These days, Prudential Insurance also invests in commercial mortgage loans through Prudential Mortgage Capital Co. As of Sept. 30, 2001, Prudential held about 12% of its general-account portfolio in mortgage loans, essentially unchanged from Dec. 31, 2000, and 1999, the company reported to the SEC. As of Sept. 30, 2001, Prudential's portfolio held about 1,100 commercial mortgage loans with a carrying value Carrying Value
Also know as "book value," it is a company's total assets minus intangible assets and liabilities, such as debt.
This is different than market value, as it can be higher or lower depending on the circumstances. of $13.1 billion and $2.1 billion of residential and agricultural loans. Those values are gross of a $178 million mortgage loan-loss reserve, the company said.
The 5-year-old Prudential Mortgage invests in full loans on behalf of Prudential Financial's general account. But it also originates loans packaged and sold into the securitization Securitization
The process of creating a financial instrument by combining other financial assets and then marketing them to investors.
Mortgage backed securities are a perfect example of securitization.
May also be spelled as "securitisation. market, and it originates loans for housing agencies such as Fannie Mae Fannie Mae: see Federal National Mortgage Association. . "What we try to do is offer the borrower the opportunity to comparison shop in one place, with different terms depending on what kind of loan they want," Winograd said.
In terms of real estate ownership, Prudential Financial still owns its half-million square foot headquarters in Newark, N.J., as well as some other buildings used for home-office functions. Aside from properties used for the international division and Prudential Securities' operations, the company owns 16 properties and leases 21. It recently bought a building in Korea to house Prudential Life Insurance Co. Ltd. (Prudential of Korea). Also, Prudential has purchased an 80% beneficial interest in a 38-story office, residential and retail development that recently was opened as the home of Prudential of Japan and Gibraltar Life.
Like Hancock, Northwestern Mutual Life Insurance Co. capitalized on the robust commercial real estate market in 2002 to sell a number of its real estate holdings. Unlike Hancock, however, Northwestern Mutual remains firmly committed to an active role in real estate ownership. For one thing, mutual insurance companies such as Northwestern don't have to weigh the opinions of stock analysts when it comes to their equity real estate holdings, conceded con·cede
v. con·ced·ed, con·ced·ing, con·cedes
1. To acknowledge, often reluctantly, as being true, just, or proper; admit. See Synonyms at acknowledge.
2. Mason Ross, executive vice president and chief investment officer for Northwestern Mutual, headquartered in Milwaukee.
But another reason many insurers might be better off divesting themselves of their properties, Ross added, is that many stock companies and some mutuals sell more variable products than they do general-account products, and variable products usually are backed by publicly traded investment instruments that can be valued every day. When a policyholder Policyholder
An individual who owns an insurance policy. cashes out a policy or moves it from an equity pocket to a fixed-income pocket, it can only be done if a company has publicly traded assets Publicly traded assets
Assets that can be traded in a public market, such as the stock market. in those different pockets, he said. So as these companies increasingly enter the variable business, equity real estate won't fit the bill, he added.
Northwestern Mutual, whose products include investment, life and disability products, sells mostly participating policies. "We're a little unique that way, in that we're not as skewed skewed
curve of a usually unimodal distribution with one tail drawn out more than the other and the median will lie above or below the mean.
skewed Epidemiology adjective Referring to an asymmetrical distribution of a population or of data to the variable as others are and thus there's a better fit to have commercial real estate in our portfolio than other companies may find for themselves," Ross said.
Equity real estate offers solid cash flow compared with other kinds of equities that provide a return only when sold, he said. Real estate also tends to smooth investment performance. It has "a negative correlation Noun 1. negative correlation - a correlation in which large values of one variable are associated with small values of the other; the correlation coefficient is between 0 and -1
indirect correlation with other asset classes, so when other things are going down, real estate may be going up and vice versa VICE VERSA. On the contrary; on opposite sides. ," Ross said. For example, over the past five years, Northwestern Mutual's real estate equity portfolio has shown a return of about 11.9%, while over the same period, the return of the Standard & Poor's 500 stock index was 1.4%.
Having a good surplus and long-term policy owners allows Northwestern Mutual to invest funds for a long period of time. "Real estate is the kind of thing that you do generally stay with for a long period of time because you can't trade in and out on a daily basis, and it adds an element of performance to the portfolio that individual policy owners can't get on their own," Ross said.
He said that his company is among the most active in the insurance industry in real estate equity transactions. Real estate plays a "very significant role" in his company's portfolio, Ross noted. For one thing, the company views it as a valuable fixed-income investment. Northwestern Mutual, like many other mutuals and stock insurance companies, is an active commercial mortgage lender, with mortgages representing about 25% of its fixed-income holdings.
Real estate equities also form a critical piece--about 6.5% to 7% of invested assets-in Northwestern Mutual's general-account investment portfolio, Ross said. Properties are acquired or developed through a network of company staff. "We have eight offices around the country that do real estate equity and real estate mortgage work," Ross said.
The company focuses its ownership on three major property types: office, warehouse and apartments. "In terms of equity ownership, we've been most interested the last six or seven years in apartments and warehouses because they have more predictable cash flow and, unlike office buildings, require less capital to be reinvested in the business each year," Ross said. "We've generally shied shied 1
Past tense and past participle of shy1.
the past of shy1 or shy2 away from new investments in retail over the last six or seven years, because that's been a difficult area--retailers have had a tough time, the concepts change from year to year and we're just not very enthused about it.
"What it does is give us diversification of our equities in a way that's not correlated cor·re·late
v. cor·re·lat·ed, cor·re·lat·ing, cor·re·lates
1. To put or bring into causal, complementary, parallel, or reciprocal relation.
2. with other equities available for purchase such as common stock," Ross said. "They are real assets Real assets
Identifiable assets, such as land and buildings, equipment, patents, and trademarks, as distinguished from a financial investment. as opposed to financial assets--they do perform differently than financial assets Financial assets
Claims on real assets. and there's less volatility of return with owned real estate than there is with public common stock or even private stock. So it does a lot of really good things for the portfolio."
Compared with a decade ago, even the real estate portfolio at Northwestern Mutual has shrunk shrunk
A past tense and a past participle of shrink.
a past tense and past participle of shrink
shrunk, shrunken shrink a bit, Ross said. "It goes up and down over time as we find the market either a good time to buy or a good time to sell," he said. "We're real enthused about it and when we look around the landscape, we don't find too many other people that are doing it, for a lot of reasons," he said. "But it works for us."
The promising market for attractive, leased properties has been the driving force behind property sales for many insurance-company investors of late. In fact, Northwestern Mutual has just come off a very large sales year, Ross said. "It's not like we're getting out of the business," he said. It's just been a good time to sell and there will be a good time to get back in. So we've had a pretty active year ourselves in 2002."
Winograd said his crystal ball, like that of so many others in the real estate investment industry, is "unusually clouded" regarding the potential for profitability, economic activity and growth in 2003. For the first time in a long time, he noted, office-vacancy rates are rising due to a sharp drop in demand.
"That's an unusual situation in the history of the U.S. real estate market-- historically, the rises in vacancy have been driven by overbuilding rather than a sudden contraction of demand," Winograd said. "In fact, building has been falling and the amount of new construction being started is relatively small, with the exception of the apartment market. As a consequence, restoration of the markets to a healthy balance between supply and demand is waiting for something to happen that we in the real estate industry don't often have to wait for, which is an increase in demand for the product that is dependent upon the level of economic activity."
But two bright prospects are developing on the horizon, Winograd noted. One is the very low level of interest rates, which has left many real estate investors with strong cash flow in excess of their interest expense. Another is that with building contracting so sharply, as soon as there is a rebound in demand, the vacancy will be taken up pretty readily, he said. "So it's a cautious picture. It's not wonderful at the moment, but there are a lot of things that suggest that it will be turning around, and when it turns around, it will come back comfortably," Winograd said.
RELATED ARTICLE: Leasing, Not Buying
Many insurers choose to lease their corporate headquarters space corporate headquarters space rather than own.
* The MONY MONY Mutual of New York (Insurance - Syracuse, NY) Group Inc.
* Lincoln Financial Group
* John Hancock Financial Services
* Nationwide Financial
A Lesson Learned.
Demutualization has spurred mutual insurers to sell off their real estate holdings as they take their companies public. But another impetus has been higher risk-based capital requirements Risk-Based Capital Requirement
A stated requirement of liquid reserves placed upon banks and institutions that deal in risky ventures.
These requirements exist for the protection of investors who hold an interest in these types of businesses. on equity real-estate investments, said Bernard Winograd, president of Prudential Investment Management and chairman of its real estate investment and advisory business, Prudential Real Estate Investors. Industry regulators imposed those capital changes after the liquidity difficulties in the real estate markets in the late 1980s and early 1990s.
The industry had only to look to the case of Newark, N.J.-based Mutual Benefit Insurance Co., which was seized by New Jersey regulators in July 1991 when questions about its real estate holdings caused a "run on the bank" by policyholders. Mutual Benefit had assets then valued at $13 billion and liabilities near $1 billion. The company was the nation's 18th-largest life insurer, and its insolvency insolvency
Condition in which liabilities exceed assets so that creditors cannot be paid. It is a financial condition that often precedes bankruptcy. In the context of equity, insolvency is the inability to pay debts as they become due; insolvency under the balance-sheet ranks as the largest bankruptcy of a life insurance company in U.S. history.
After a court-approved rehabilitation rehabilitation: see physical therapy. plan was put into effect, the company, along with the National Organization of Life and Health Insurance Guaranty As a verb, to agree to be responsible for the payment of another's debt or the performance of another's duty, liability, or obligation if that person does not perform as he or she is legally obligated to do; to assume the responsibility of a guarantor; to warrant. Associations and a group of reinsurers, rebuilt its capital base and changed its investment profile from a high concentration of real estate-related assets to investment-grade corporate bonds. Mutual Benefit's business and assets were acquired by SunAmerica, which was later acquired by financial services giant, American International Group
American International Group, Inc. (AIG) (NYSE: AIG; TYO: 8685 ) is a major American insurance corporation based in New York City. .
A major part of the problem, critics said at the time, was that insurance companies had become far more complex than they had been a decade earlier. While insurers were always invested in real estate, the introduction in the 1970s of variable-rate life insurance, variable-rate annuities and other savings vehicles--in which the interest credited to a policyholder's account was tied to market rates-- forced insurers to seek higher returns themselves by investing in higher-risk real estate.