Boston - Last month we gave you some insight into Aldrich Eastman & Waltch's deal flow. Soon after that item appeared, New England Investment Companies (NEIC) acquired AEW and positioned it with its own Copley Real Estate Advisors to form AEW Capital Management, L.P. The new entity now has more than $7,6 billion in assets under management. And it marks NEIC's third major acquisition in 1996 after it acquired Houston-based Vaughn, Nelson, Scarborough & McConnell, L.P. and Jurika & Voyles of Oakland. Now NEIC has more than $95 billion in assets under management.

NREI caught up with Joe Azrack, the new president and CEO of AEW Capital Management, for an exclusive interview and a look into what the world can expect from this new entity. (Peter Aldrich and Joseph O'Connor will serve as non-executive cochairmen.)

NREI: Why was AEW acquired?

Azrack: We're in a mature stage of the cycle. (For owners/operators) the demographics are such that there is not a lot of real growth in the system, and what that is doing is driving firms to increase their market share. And also to provide broader services for one's clients and to be very cost-effective in the provision of those services.

From the pension funds, point of view, our clients are increasingly interested in reducing the number of managers that they have, having more limited and larger relationships so that they can leverage their own internal staff. We looked at these forces in the industry and looked at our capabilities, and we determined that we've got a strategy that we think makes a lot of sense and is being extremely well received in the market. Having scale, critical mass in order to have a bigger position in the real estate market working with owners and operators across different property types and in order to provide the broader services that our clients require you just need a larger scale of assets under management and depth of people resources.

Copley and AEW people have known each other for a long time, being in the same town. We've been friendly competitors. We both philosophically always relied on picking the best local developers or entrepreneurs to be our onsite partners or partners. On the other hand, Copley has been particularly strong in the industrial and single-family property markets, particularly on the West Coast. We at AEW had more of a national diversification in our portfolios with an emphasis on retail and office. So in terms of the real estate experience, expertise and market presence that we can offer our clients and the real estate owner/operator relationships, it's really complimentary in that regard.

We both saw the ability to improve the returns and the liquidity that Copley currently holds by applying some of the techniques that AEW has already been using on our own portfolios.

NREI: Is this a continuation of the consolidation trend in the industry?

Azrack: The real estate industry as a whole is at the early stage of two fundamental trends. One is consolidation because of the economic forces, and we expect that to continue certainly through the end of the decade. Secondly, we see continued rapid growth in the public market for real estate, the securitization of what are now privately held assets. That will occur through everything from the acquisition of individual properties by publicly held companies, the REITs, the trading of private market real estate investments in exchange for public securities, which is what we're doing for several of our clients right now, and the continuation of IPO and secondary offerings by public companies.

If you have a public REIT market today that's around a $60 billion market cap, our expectation is that will easily double over the next three years. What AEW has done is to position itself to be at the forefront of that. Our corporate strategy is focused on investing in public and private operating companies, entity-based investing, and in providing real estate securities options for our clients, both equity REIT securities as well as commercial mortgage-backed securities.

NREI: Will you adopt other business lines?

Azrack: The third one is what we call an advisory or portfolio enhancement business, which is really applying those skills to our existing private market portfolios. Most of our clients today are interested in having greater liquidity and a greater alignment of interest than they've had just by owning real estate. We found that by exchanging real estate for securities, by forming operating entities with good solid local real estate operators is the kind of thing we and Copley did independently, working with Steve Evans and Keith Withycomb we formed the Evans/Withycomb residential REIT back in 1993. Those types of relationships, where we have very strong real estate talent and our capital market's expertise we think can be a win-win for the real estate entrepreneur and the institutional investor, and that's fundamentally the corporate strategy for AEW Capital Management.

If I look at it just as a real estate deal, I can't think of any portfolio of assets that I'd rather acquire in a sense. It's predominantly West Coast, it's predominantly industrial R&D and residential and we've been buying everything we can get our hands on in California for the last several years. We see the fundamentals out there as being very positive and have been looking for ways to increase our clients' exposure.

NREI: How did the deal ultimately come about?

Azrack: Joe O'Connor and I get together two to three times a year, and one of those discussions about a year ago led to the deal. We asked ourselves where we saw the trends going.

We both recognized that in order to be successful and to grow our respective firms it was going to be important to have both broader client relationships and distribution capabilities on the client side as well as more in-depth real estate and capital markets expertise. Over the next six to nine months one thing led to another and it looked like a good fit.

NREI: What happens to all of the funds, portfolios as they mature or turnover in the next few years?

Azrack: We've developed a major part of our business in helping our clients find ways to liquidate some of the illiquid, pooled-fund interests. This is our portfolio enhancement area. There are about $35 billion in institutional funds in the U.S. Most of those funds were formed from the early-'80s to the late-'80s, with life expectancies of anywhere from 10 to 15 years. So they are increasingly beginning to come up toward the end of that term and the advisers and the investors are faced with a decision as to whether to sell the assets, whether to restructure their funds into more of a late-'90s type of vehicle like a private REIT, whether to trade the assets for interests in publicly traded securities, etc. We've been getting a tremendous amount of new business by providing our clients with advice as to what the best execution is for their interests in real estate. Most of our clients, and most of Copley's clients, don't want to get out of real estate. On the contrary, they're under-allocated in real estate. One of their major frustrations is that they haven't been able to hit their target allocations over the last 10 years.

What they're really interested in is how we can help them take what is an illiquid interest in some of the funds and where there's not the kind of alignment of interests between the adviser and the investor or the operator and the investor, and convert that into something that has a little more liquidity, has a better alignment of interest and is in a position to do better than your average piece of real estate by creating some franchise value through an entity investment.

If you look at how many of the larger, better-managed public real estate companies are trading today, they're trading at in excess of a 10% premium over their underlying net asset value. That's a significant premium relative to holding individual assets, and one of the things that we're doing is helping our clients to realize that multiple pickup.

The new company is going to be very focused strategically. It's going to follow the strategy that AEW has adopted focusing on entity-based investments in relationship to the public and private market real estate securities and an enhancement approach to managing our clients, portfolios with an objective of increasing liquidity and alignment of interests.

We think there is tremendous opportunity remaining in the market as the industry consolidates in order to create and grow operating franchises with experienced real estate owners and operators. The outlook for the real estate markets in general over the next three to five years is very positive and there is a tremendous number of opportunities for us to put our clients' capital and our capital markets expertise together with both Copley's and AEW's relationships with owners and operators.