SPECIAL REPORT: Back from the brink

News surfaced last month of AIG Global Real Estate’s ambition to become an active player again, initially via direct investments in the US. PERE Magazine May 2012 issue.

f you were working for AIG Global Real Estate (GRE), the real estate investment management division of American International Group, shortly after the stricken US insurance giant was forced to accept $182.3 billion of Federal Reserve bailout funds in 2008, you could well have been working yourself out of a job.

One former senior executive, who declined to be identified, recalls watching one asset after another being offloaded. “Nobody knew what was happening as things were being wound down,” he says. “We were working ourselves out of jobs as we were selling the portfolio around the world.”

The amount of outstanding assistance from the US government has been reduced by 75 percent…we are now ready to go back into an investment and acquisitions phase
Unnamed current AIG executive

The sale of AIG’s 66-storey New York headquarters at 70 Pine Street to developer Youngwoo & Associates followed the sale of its Tokyo headquarters to Japanese insurance rival Nippon Life as its $24 billion global portfolio was dismantled building by building. Indeed, a portfolio comprising more than 53 million square feet of retail, residential, industrial, office and hospitality properties across more than 50 countries was on the block.

“A lot of those investments got caught by the downturn,” the senior executive says. “They actually were very good pieces of real estate but, because the leverage overtook the valuations and the Fed was controlling the purse strings, everything was being sold, including fantastic buildings in Manhattan and Tokyo.”

Also destined for the door was AIG’s $12.4 billion real estate funds management platform, as Bank of America and Merrill Lynch – then still separate entities – were mandated to solicit interest for a takeover. It was a small component of AIG’s overall sell-off plans but, for global real estate investment markets, this was a major player taking its last breaths. That was 2009.

Last month, however, news surfaced of a seemingly unlikely comeback by the now-shrunken AIG GRE. Under the leadership of ex-AEW Capital Management veteran Robert Gifford – originally hired to oversee the platform’s wind-down – the insurer is making headway on plans to increase its exposure to commercial property once again. The platform currently manages $8.4 billion of real estate for clients and AIG companies – a far cry from its pre-credit crunch days.

Starting on home soil

AIG GRE would not comment on the strategic reversal, but one current AIG employee with knowledge of the matter tells PERE: “The amount of outstanding assistance from the US government has been reduced by 75 percent…we are now ready to go back into an investment and acquisitions phase.”

Whether related to its available resources or because of where it sees the best relative opportunities, AIG GRE’s early forays will be made stateside, particularly in the residential sector. According to a report in the Wall Street Journal, approaches already have been made to various developers in “major metropolitan areas” with a view to partnering on a direct and deal-by-deal basis. One example of the platform’s interest, cited by the WSJ, is a $100 million development project in Montclair, New Jersey. Little is known about the scale of AIG GRE’s ambition, but the newspaper cited people familiar with the matter, who said it intended to invest “hundreds of millions of dollars annually.”

AIG GRE also has residual capabilities in Europe. Led by former Van Eck Global Asset Management fund manager and Trammell Crow Real Estate Investors chief operating officer Kevin Reid, the platform’s European element has been limited to a handful of transactions of late, predominantly via a joint venture investment and development business with Dallas-based Lincoln Property established in 1997. As the current AIG employee notes: “There were a number of entities that were continued around the globe, including in Europe, where we still maintain that investment posture.”

Asia, on the other hand, is a different story. At the turn of 2011, PERE revealed how AIG GRE had sold most of its Asia business to Invesco Real Estate, increasing the Atlanta-based investment group’s exposure to the region twelvefold to $6 billion in assets under management. The $5.4 billion in assets under management relinquished by AIG GRE included six of its 15-strong stable of investment vehicles, including Japanese separate accounts and funds and two pan-Asia funds.

A lot of senior investment executives left between 2009 and 2010. After the Fed stepped in and starting restructuring AIG, we were no longer an investment house. We were a distressed seller of real estate assets

Unnamed former AIG executive

One of those funds, AIG Asian Real Estate Partners II, had only just closed on approximately $740 million of equity when AIG was bailed out. As a consequence, little of its capital was spent, thus making the Asia division an attractive proposition for a takeover. Once under the management of Invesco, it is understood that the investors in the fund, including the National Pension Service of Korea, the San Diego City Employees Retirement System and the investment office of Hong Kong’s Kwok family, approved an extension of the fund’s investment period, allowing the team, under the leadership of former Ayala International executive Cheng-Soon Lau, to put the capital to work.

AIG GRE, meanwhile, was left with offices in India and Korea, from where it is managing assets from an India opportunity fund, which closed on $282 million in June 2008, and a single-building entity in Korea called AIG Real Estate Opportunity X – South Korea. That vehicle manages an investment in the development of Seoul’s International Finance Centre, a 5.4 million-square-foot, mixed-use property.

No funds (yet)

It is understood that AIG GRE’s current ambitions do not include the launching of new funds. For now, the fund division represents something of an asset management entity with properties held by various closed-ended funds and one Frankfurt-listed entity called AIG International Real Estate. Its most recent closed-ended funds are the aforementioned India opportunity fund and AIG European Real Estate Partners II, which closed on €211 million in 2008.

The reasons for not considering further fund launches are not yet clear, although the former AIG GRE executive suggests that one reason might be a lack of appropriate personnel. “A lot of senior investment executives left between 2009 and 2010,” he says, recalling how AIG GRE became “a very different animal” once the Federal Reserve took control. “After the Fed stepped in and starting restructuring AIG, we were no longer an investment house. We were a distressed seller of real estate assets.”

Specifically on AIG GRE’s funds business, the former executive adds: “You never know, but I can’t see them launching another fund. A lot of the infrastructure for fund administration and management has either resigned or has been sold off.”

Previously, AIG member companies would commit, on average, a minimum of 10 percent of AIG GRE’s fund equity. If the firm were to ultimately return to real estate funds, it would need to reconcile with conditions enforced on financial institutions by the Volcker rule, which limits equity participation in funds to just 3 percent. “We weren’t set up for those regulations when I was working there,” adds the ex-staffer.

Good sense

Whether AIG GRE can be the force it once was remains to be seen, but outsiders do not doubt it is making the right call in contemplating a return to the marketplace. With residually high levels of distress in the US market, coupled with rebounding property values, the logic seems sound.

Furthermore, AIG itself has not just been able to repair its balance sheet considerably since taking government aid, it has become profitable as well. After posting net income of $17.6 billion in 2010, partly thanks to property sales, the group posted net income of $16.6 billion for 2011. Reporting its fourth quarter 2011 performance in February, president and chief executive Robert Benmosche described how the company could again “stand proud as a market leader” and “is worthy of investor confidence.”

“Two years ago, skeptics – and even some supporters – thought it inconceivable that we would be in a position to post our second consecutive annual profit,” Benmosche said. “We have a high degree of confidence in our future earnings prospects.”

Looking forward, AIG GRE will be expected to contribute to these earnings, even if the group’s initial steps will be polarised to making select, direct forays from its balance sheet on home soil. Regardless, the mire of uncertainty surrounding the one-time heavyweight has started to clear.

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AIG’s people person
Robert Gifford, head of AIG’s real estate group, has been widely praised for his people skills, both with colleagues and investors.

Robert Gifford, president and chief executive officer of AIG Global Real Estate, is understood to have contemplated retirement before a bailed-out AIG appointed him in August 2009 to succeed Jeffrey Hurd, a senior vice president temporarily placed in charge. Having gleaned 22 years experience at AEW Capital Management, Gifford was considered the right man to help the group divest “certain holdings in its real estate business and reduce its global footprint,” according to the announcement of his hire. He has now become the man to lead its growth once again.

In Gifford, AIG has a man recognised for his management credentials and relationships with investors. He is particularly well respected for being a “people person,” according to one former senior executive of the platform. “He worked hard to hold folks together and fought hard to keep enough money in the coffers to compensate folks,” he recalls.

This sentiment was apparent to his senio rsas well. Paula Reynolds, AIG’s then-vice chairman and chief restructuring officer, praised Gifford in the announcement of his hire as having “an outstanding reputation for earning the confidence of investors, even during challenging real estate market conditions.”

During his time at AEW, which he joined in 1986, Gifford was involved with a wide variety of assignments and portfolios. These include the restructuring and $1.5 billion sale of Westcor Realty to Macerich, the $1 billion sale of interests in a portfolio of super-regional shopping centers to The Mills Corporation and the raising of $700 million in client capital for investment in REIT private placements and income securities, according to one conference resumé.