RREEF America fund could get offer from Stockbridge

A US real estate fund managed by RREEF might receive an approach from San Francisco-based Stockbridge Capital Partners to take over the management of the vehicle. Meanwhile, two other RREEF-managed closed ended real estate funds are coming under pressure from stockholders.

RREEF’s management of a real estate fund could be usurped by San Francisco-based Stockbridge Capital Partners.

According to a report in the Wall Street Journal, Stockbridge is considering a bid to take over the management of RREEF America REIT III, a private REIT which has 92 investments.

“We're not discouraging any offers,” DeWitt Bowman, manager of the fund told the newspaper. “We'll take a look at any reasonable offer and evaluate it, and hopefully try to preserve as much of shareholders' value as we can.”

Earlier this year, RREEF America REIT III warned investors that it may be forced to seek bankruptcy protection given that any loan default greater than $30 million would trigger a default on the fund's $150 million credit line.

The firm has been in talks with lenders and has presented plans to recapitalize the fund.

Stockbridge is a firm staffed by former RREEF personnel. In 2007, Stockbridge hired 10 professionals including Steven Steppe, former managing partner and chairman of RREEF North America, Dwight Merriman, former managing director of RREEF, in charge of RREEF’s development and value-added investment opportunities in North America and Sol Raso, who was former RREEF global client relations group head until 2007.

PERE reported in December how the west coast firm was seeking to raise it first value added fund targeting IRRs of 14-16 percent and an equity raise of $600-$800 million. It has also been in the market raising its third opportunistic vehicle, Stockbridge Real Estate Fund III, targeting $3 billion, according to proprietary data from PERE magazine.

RREEF, which is the alternative asset management division of Deutsche Bank, is also coming under pressure from investors in other managed real estate funds.

On Monday the company said DWS RREEF Real Estate Fund and DWS RREEF Real Estate Fund II, which invest in shares of real estate companies, had taken measures to protect and enhance stockholder value. These include a “significant” reduction of management fees a fixed rate of 0.55 percent of average daily managed assets. RREEF is also intending to give stockholders the chance to vote on liquidating the funds at an annual meeting later this year.

The future of these funds has been in the air this year given a previous proposal to liquidate the assets did not get the required number of votes at a special meeting on 20 May.

The Susan L Ciciora Trust, the largest shareholder in DWS Real Estate Fund II with 5 percent, opposed the idea and has been pushing to replace RREEF as the manager with the Horejsi Group. In a statement on 11 May, Stewart Horejsi said liquidation was not in the best interests of stockholders. He also said management decisions so far “had not made sense”.

As the war of words escalated, on 7 August, the Susan L Ciciora Trust said other stockholders had communicated to the trust their “continued frustration with Deutsche Asset Management and the board of directors for “continued delay” in holding an annual meeting. Horejsi, who is described as a spokesperson for the trust stated: “Stockholders have also informed the trust that they are anxious for change and cannot understand why the fund’s board of directors has not acted in the best interest of the fund’s stockholders.”

He added: “The only action we have seen from the fund’s board of directors are changes to the fund’s bylaws which make it harder for stockholders to submit proposals and otherwise act on behalf of their own fund. In fact, these changes as enacted by the board of directors are contrary to the fund’s own corporate governance standards on how it views other funds’ corporate governance.”

In a parting shot, he added: “Stockholders have already defeated the board of directors’ previous attempt to liquidate the fund; why is the board continuing to ignore the stockholders for proactive, and we believe, positive change?” 

Three days ago, RREEF hit back. Paul Freeman, independent chairman of the board of each fund, said in a statement: “While we are clearly disappointed with the performance of the funds, we also believe that the Horejsi group has demonstrated a course of dealing with other closed-end funds that makes it clear that their primary motive is to seek personal financial gain by taking and operating them in a self-serving manner. We do not believe that they truly have the best interests of stockholders at heart, and we will continue to oppose their efforts to achieve control. Thus, we have taken steps to limit their ability to control the outcome of stockholder votes at the upcoming annual meetings.”

He added that if the liquidation proposals again failed, the board would consider making a tender offer in early 2010 to give at least some stockholders the opportunity to exit the fund at a price close to net asset value.
DWS RREEF Real Estate Fund II is a closed ended vehicle investing in real estate securities whose net asset value has fallen 92 percent in a year.

In the fund’s annual report, the firm says REITS were hit by unprecedented and intense volatility in October and November arising from the investor fees related to the worldwide credit crunch. But the fund also says leverage of 39.7 percent of the fund’s total asserts exacerbated the fund’s poor performance.

See September’s issue of PERE for more on investors trying to replace GPs.