SPECIAL REPORT: Don’t call it a setback

AIG Global Real Estate (GRE) faced an uncertain future in the wake of parent company American International Group’s massive 2008 government bailout by the US federal government. Now, with key leaders gone, the property arm of the US insurer once again has been thrust into a period of uncertainty as it seeks to regroup and refocus.

In December, four executives at AIG GRE, including platform head Rob Gifford, were let go as part of a restructuring plan to cut 23 percent of AIG’s 1,400 senior management employees across divisions.

In addition to Gifford, AIG GRE also eliminated its head of US investments, Donald Huffner, and the group’s general counsel, Richard D’Alessandri. The real estate platform also phased out the head of Mexico real estate, Brooks Mohrman, as part of its plans to curtail foreign investments. For now at least, the cull appears to be over as sources said that any further company-wide restructuring will not affect AIG GRE.

In further reorganization, AIG is moving its Commercial Mortgage Lending arm back out of AIG GRE to report to AIG’s deputy chief investment officer as a standalone unit.

“It’s a loss,” Gifford told PERE of the staff reductions. “I’m not going to sugarcoat it, but we have a strong team to carry on.”

Doug Tymins, who ran AIG’s Affordable Housing unit since 2011, was tapped to take Gifford’s place as CEO.

Tymins said he benefitted from a multi-week transition period, when Gifford and others reached out to partners with the message that from AIG’s perspective, 2016 will be business as usual despite the executive changes.

“If anything, it’s really allowed some younger talent in the group to step up and take some responsibility,” Tymins told PERE.

One of these rising leaders, Tymins said, is Mark Hertz, a managing director who has been with AIG GRE for six years. Hertz’s role is expanding from overseeing transactions on the US’ East Coast to leading investments across the country. Additionally, Kevin Reid has been named chief operating officer and will assume a broader role in the overall management of AIG GRE. He will relocate to New York from London, where he was responsible for AIG GRE in Europe, the Middle East and Africa.

Personnel changes are not the only shift for AIG GRE. The firm plans to focus more on domestic investment, citing macroeconomic headwinds and market timing, not cost cutting measures, as the rationale. In Europe, Tymins said AIG GRE will continue to be active, but not at the same scale as its investment activity in 2015.

Overall, “I do think you’ll see us sell a few more investments in 2016 than maybe in 2015, but that doesn’t mean the overall amount of investment we have isn’t continuing to grow,” Tymins said. “We have a pretty big target set out for us by our CIO to really grow the platform over the next four to five years. We may sell down in a few markets where we feel things have become fairly fully valued, but we feel that’s just the natural pruning through of a successful real estate investment platform.”

From wind-down to turnaround

The platform did not always appear to be successful, especially in the years immediately following AIG’s $180 billion bailout by the US federal government. In fact, from 2008 through 2010, AIG GRE was in wind-down mode, selling about $4.4 billion of assets globally, shedding properties ranging from a Moscow warehouse to Scranton, Pennsylvania apartments, according to real estate data website Real Capital Analytics. In 2010, the firm also unloaded its Asia fund and asset management business, an arm that had about $5.4 billion of assets under management, to Invesco Real Estate.

Rob Gifford was brought in to lead this wind-down in August 2009 after 22 years at Boston-based AEW Capital Management, a real estate investment management advisor.
Speaking to PERE, he recalled that he joined AIG at a high point of tension for the real estate team and the firm as a whole, with every real estate decision subject to a steering committee comprising consultants and various AIG executives.

“That was a really challenging task – to keep people together, to keep people motivated,” Gifford said.

In addition to asset sales, Gifford consolidated some businesses under the AIG GRE umbrella, including AIG Affordable Housing, which now manages over 106,000 multifamily units across the US, Vermont’s Stowe Mountain Resort and AIG’s Commercial Mortgage Lending arm.

In an unanticipated turn of events, the real estate team began to shift from wind-down to turnaround as its parent company neared the completion of its debt repayments to the federal government, which was finalized in December 2012. In 2011, AIG GRE saw a significant drop in its disposition activity, down to $964 million in sales compared with $1.9 billion the year before. The following year, Gifford received the green light from AIG executives to look at new investment opportunities, rather than focus on selling legacy assets.

The team began its rebound with a multifamily strategy, starting with a few hundred million dollars in investments for US gateway cities. AIG GRE then quickly expanded the volume and scope of its investments, buying assets in 2012 ranging from a development site in Hyderabad, India to apartments in Tampa, Florida.

The financial press, including PERE, called 2012 AIG GRE’s turnaround point, predicting that the firm could come roaring back. The following year turned out to be its most acquisitive year since the global financial crisis, with a jump from $55 million in acquisitions in 2012 to $504 million in 2013, according to Real Capital Analytics. RCA data has shown significantly lower global investment volumes for AIG RE since then, however, with an aggregate $116.8 million for 2014 and $142 million for 2015. Tymins said the firm has increased its allocations to real estate every year since 2012, but did not provide specific figures.

Other concerns

AIG has also faced other worries beyond its investment activities, one being the exact impact of regulation on the real estate business. In 2013, US regulators deemed AIG, along with non-banking peers Prudential Financial and GE Capital, a systemically important financial institution (SIFI), a tag that typically leads to tighter capital rules as the government tries to ensure that the businesses will not require bailouts in case of financial emergency.

AIG chose not to fight this designation, as GE did, but Gifford said that the SIFI label did not have a major impact on the real estate team’s investment activities, and instead has more directly affected AIG’s internal analytics and enterprise risk management.

“When it comes to the day-to-day of making real estate investments, as long as we’re within internal risk management guidelines, we’ve been very responsive to the market and have been able to make commitments on a very timely basis,” Gifford said.

More recently, AIG also has been challenged by activist investors. Some shareholders – most notably activist investors Carl Icahn and John Paulson – have pushed AIG executives to shrink the firm, saying AIG’s current size interferes with profitability. Since the fall, Icahn has written multiple open letters to AIG, directing management to split the firm into three companies or otherwise reorganize so the government will drop its SIFI designation. Icahn said the firm is “too big to succeed” and has pressured AIG to ramp up its cost-cutting. At press time, the insurer had scheduled a meeting at the end of January to draw up a plan to address the activists’ concerns.

The activist investors have made no public mention of real estate, but given the recent executive cuts, AIG GRE already has felt the pain of company-wide expense reduction efforts thus far.

A more overarching concern, however, has been industry perception of AIG GRE. The platform, after all, has not drawn much attention for its recent property transactions, including the acquisition of an office portfolio in Charlotte, North Carolina and five Aloft hotels under the Starwood brand across southern US last year. The lack of headline-grabbing deals led one real estate investor, who has not worked with the firm, to ask PERE if AIG was even in the real estate business at all. Another executive expressed surprise that the firm has been acquisitive, telling PERE she thought AIG GRE had continued to operate in wind-down mode.

As Tymins rallies his team and adjusts to his new title, he might do well to show – not tell – the real estate world that his firm is not only still in the business, but is indeed on a path.

Q&A with Rob Gifford

The former CEO led AIG GRE through its darkest period, reshaping the once-beleaguered business. He shared his victories and regrets from more than six years at AIG with PERE, and plans going forward:

PERE: What milestones mark your tenure at AIG?
Rob Gifford: The wind-down process ended up being far more successful than anticipated. At the end of the day we’ll return billions of dollars of cash from the legacy portfolio to the parent company. I am very proud of the billions of dollars of new equity investments we’ve originated since 2012. In 2009, there was a lot of tension; there was a real sense of crisis. There wasn’t much trust. Now, we have a great culture where folks are encouraged to speak their mind, to produce high quality work, but do it on their terms and have fun doing it. It’s the whole cultural turnaround – I’m really most proud of that accomplishment.

PERE: Do you have any regrets about your leadership?
RG: The only regret is that I didn’t fully understand the degree of cost reductions that were required and the urgency with which they had to be done. I’m not second-guessing the decisions that were made, but I would’ve liked the opportunity to make the tough decisions, even if they involved me.

PERE: How did you try to set the real estate team up for success after your departure?
RG: The head of US investments, Don Huffner, and I built a great team, so I think that in of itself is the foundation for success. Beyond that, Don and I worked hard to be very positive and constructive during the transition to new management.

PERE: What is AIG’s greatest challenge in 2016 and beyond?
RG: There’s a lot of capital in the marketplace and we’re later in the cycle. Finding attractive development and value-added deals gets to be more challenging.

PERE: What are your plans post-AIG?

RG: I’ve been on the road for nearly seven years, so I’m looking forward to sleeping in my own bed a bit more frequently. I am committed to the real estate investment and development business, and intend to remain very involved, be it in a full-time position or a combination of board and advisory activities, entrepreneurial investment and civic opportunities.