Financial services company Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF) and global asset manager Henderson Global Investors announced this morning the creation of a ‘new powerhouse’ in real estate investment management called TIAA Henderson Global Real Estate, with a combined $19.8 billion of assets.
Henderson and TIAA-CREF have agreed to contribute their existing real estate asset management businesses outside North America to the new real estate investment management business. Separately, TIAA-CREF is buying Henderson’s North American real estate investment business and has agreed to a one-off option to acquire an additional stake of up to 15 percent of TIAA Henderson Global Real Estate at a later stage.
TIAA-CREF will make a cash payment of $176.6 million to Henderson, valuing the firm's property business at 8.8x EBITDA for 2012, and will own 60 percent of TIAA Henderson Global Real Estate, with Henderson owning the remaining 40 percent.
The deal, assuming it clears any regulatory hurdles, will expand TIAA-CREF's total real estate assets under management from $44 billion to $63 billion, including the assets of the new global alliance. Henderson currently manages $19 billion.
The new firm will be headquartered in London with offices in Europe, Asia and North America. Although it starts with $19.8 billion of assets, it already anticipates deploying $1.5 billion of capital from TIAA-CREF in real estate in Europe and Asia over the next “few years.”
Announcing the deal, the firms said the formation of TIAA Henderson is expected to complete in the first quarter of 2014 and was not conditional upon the sale of Henderson's North American real estate business to TIAA-CREF. That deal also is expected to complete in the first quarter of 2014 but is conditional upon the successful launch of TIAA Henderson Global Real Estate.
Upon completion of the deal, the firm’s joint board will be overseen by Tom Garbutt, currently head of global real estate at TIAA-CREF, who will become chairman and James Darkins, currently managing director of Henderson's direct property business, who will become chief executive officer of TIAA Henderson Global Real Estate. On the board of directors, there will be five directors, three of whom will be TIAA-CREF representatives and two of whom, including Andrew Formica, chief executive of Henderson, will be Henderson representatives.
Andrew Formica, chief executive of Henderson Group, which owns Henderson Global Investors, said: “Henderson has long recognized that its property business would benefit from greater scale and access to capital to accelerate its future growth. We are delighted to have a financially strong and ambitious partner in TIAA-CREF that shares our absolute commitment to serving clients' needs. With their added expertise and resources, I am confident that our clients and shareholders will benefit from this relationship.” To this point, the platform has grown to become one of the larger European real estate businesses, with $19.2 billion of assets under management and about 350 institutional investors on its books.
Henderson insisted it “always has been and continues to be very supportive of its direct property business” and believes that the business had performed well historically. However, it explained: “This transaction is a specific response to the changing nature of the property investment landscape. In recent years, scale and access to capital have become increasingly important factors to success in real estate asset management, particularly as investors have become ever more sophisticated in the way in which they invest in the asset class. There is an increasing expectation on the part of investors for the investment manager to demonstrate an alignment of interest through co-investment or seeding.”
“While Henderson has a strong direct property investment team in an increasingly attractive asset class, capital and regulatory constraints prevent Henderson from committing the amount of capital we believe is necessary to fully exploit the growth opportunities which we see over the medium term.”
Roger Ferguson, president and chief executive officer of TIAA-CREF, explained: “This partnership enables TIAA-CREF to further diversify our investments into new markets as we continue to expand our asset management business globally. Real estate has been a key part of our investment platform since 1934. We are pleased to partner with Henderson as we launch this venture, and together seek new opportunities on behalf of our clients.” TIAA-CREF has invested approximately $8.9 billion in direct property and commercial mortgage debt over the last two years but has, for its part, grown an appetite to expand its holdings outside of North America.
James Darkins, who will become chief executive officer of the new TIAA Henderson Global Real Estate, described the tie-up as the formation of a “powerhouse” and said: “Between us, we have the scale and capital resources to serve the real estate investing needs of our existing clients, as well as create exciting new opportunities to co-invest alongside them around the globe.”
As part of the deal, TIAA-CREF's North American Real Estate business and TIAA Henderson Global Real Estate have entered into reciprocal arrangements where TIAA-CREF's North American real estate business will provide North American real estate management services to TIAA Henderson Global Real Estate, and TIAA Henderson Global Real Estate will provide exclusive distribution and servicing to TIAA-CREF's North American institutional real estate clients. In the announcement, the firm stated: “Capitalizing further on the new relationship and their respective expertise and capabilities, Henderson and TIAA-CREF have agreed to explore other strategic investment opportunities beyond the real estate sector. For example, select Henderson US mutual funds are currently available through TIAA-CREF's institutional retirement and retail brokerage platforms, complementing Henderson's global expansion strategy.”
TIAA-CREF’s option to acquire an additional stake of up to 15 percent of TIAA Henderson Global Real Estate can take place between the third and the seventh anniversary of the transaction's completion. The additional stake percentage is dependent on TIAA-CREF's level of seed and co-investment capital committed to TIAA Henderson Global Real Estate up to the exercise date. The maximum additional stake of 15 percent will be subject to the $1.5 billion investment plan by TIAA-CREF in TIAA Henderson Global Real Estate's funds or products.
The purchase price payable by TIAA-CREF to Henderson for the additional stake will be a cash payment equal to the percentage of the stake acquired multiplied sevenfold by TIAA Henderson Global Real Estate's 12-month trailing EBITDA at exercise.