CalSTRS Sends $47 Million to Apartment Fund
Submitted December 5, 2011, 6:12 PM
The California State Teachers’ Retirement System has approved a $47.2 million commitment to a new apartment investment fund being managed by San Diego-based Fairfield Residential Co. LLC.
The commingled fund plans to invest in properties in major markets throughout the United States, including the greater San Francisco Bay Area, which is considered one of the hottest apartment markets in the country. Fairfield is an active investor and developer in the region and currently has a large complex under construction in North San Jose.
Fairfield is still soliciting equity commitments for the fund and declined comment about it.
“CalSTRS believes that the investment strategy is sound given the market conditions for multifamily housing and the needs of CalSTRS,” Ricardo Duran, a CalSTRS spokesman, said in an email.
The pension fund made the commitment based on the recommendation of its independent real estate fiduciary, San Francisco-based Bard Consulting LLC.
A minor part of the fund’s strategy is to make direct investments in distressed existing debt on apartments with a long-term goal of gaining ownership.
Fairfield Residential is targeting a total capital raise of $250 million and expects to co-invest 5 percent of the total equity raised. CalSTRS anticipates a leveraged, net internal rate of return of 14 percent to 16 percent, Duran said.
Because the pension fund classifies the investment as a value-add play, its investment policy limits leverage on the commingled fund to 65 percent.
CalSTRS has invested with Fairfield in the past, including allocating $1.1 billion since 2002 to the Fairfield California Housing Fund. This fund, which pursues new development, is providing financing for The Verdant Apartments, a 498-unit project in North San Jose on Zanker Road and East Tasman Drive, where development started in September. Delivery of the first units is expected in the third quarter of 2013.
The $68 million project is to have 21,000 square feet of retail that will serve the renters in the complex. “Our expectation is that the retail will not be a grocery store but more likely a restaurant. Because of where we are in the project, we have not even begun to market the retail portion,” said Brendan Hayes, a vice president in Fairfield’s San Diego office.
Fairfield also controls land adjacent to the Verdant project where an additional 206 apartments could be developed. It is unlikely that this project will start until the third quarter of next year.
CalSTRS made the commitment to the Fairfield fund as one of two real estate investments made during the third quarter. The other investment was a $100 million bet on New York’s 575 Lexington Ave., an office property with 589,000 square feet. This capital will be used to pay down debt on the property.
The pension fund’s real estate portfolio was valued at $19.2 billion through September. The asset class makes up not quite 14 percent of the pension fund’s total plan assets of $139.2 billion. That is greater than the 11 percent of assets that the pension fund targets but still within the acceptable range of 9 percent to 15 percent.
