RREEF America III Investors A Long Way From Seeing Capital Returned
Submitted May 26, 2010, 2:15 PM
Pension funds and others who invested in RREEF America REIT III are unlikely to see their capital returned for as long as six years.
According to board minutes of the Sonoma County Employees’ Retirement Association, RREEF managers must first reduce debt to come in line with lender covenants. Leverage in the commingled fund is now at 83 percent.
RREEF Managing Director Frank Garcia, the lead portfolio manager for the fund, and Director Jay Miller, the Western region portfolio manager for RREEF, addressed the board. Sonoma County invested $54 million in 2005 in the RREEF fund. Even in the most optimistic scenarios, the pension fund does not expect to see full recovery of its investment, according to the minutes. The RREEF fund bought its first property in March 2003.
The RREEF fund has been front and center in the Silicon Valley and Bay Area. It acquired the former Peery-Arrillaga industrial portfolio with 119 Silicon Valley buildings measuring 5.3 million square feet for $1.1 billion in April 2006 in what was then touted as the largest sale ever in the region. It also owns San Francisco’s downtown Market Center.
During the go-go days of the commercial real estate boom, it also embarked on a huge renovation and expansion of the Sunnyvale Town Center, only to see the deal collapse in the economic downturn. The fund has defaulted on a $108.8 million note after pouring in $220 million in equity, according to public records.
Options for withdrawing from the fund are limited as RREEF is not currently paying out on withdrawal requests and has not since the summer of 2008. When RREEF decides to fulfill any redemption requests, it is expected to do so as part of a program to wind down the entire fund, according to the minutes.
RREEF has already begun to sell properties held by the fund, according to a first quarter report to investors and various market sources. That includes the sale of the 615-unit Summer House Apartments in Alameda, which it sold for $86 million, and the sale of the Sherwood Crossing apartment complex in Elkridge, Md., news of which broke on May 26. The complex, which has 634 units, sold for $72.3 million, according to published reports. The buyer could not be reached immediately. The fund is also completing the sale of a Kifer Court building in Sunnyvale, and Torrey Reserve West, a low-rise office property on Carmel Mountain Road in San Diego, as well as an Atlanta property.
The report does not give specifics on any property and RREEF declined comment for this story. However, 140 Kifer Court, a building originally part of the Peery-Arrillaga portfolio, is expected to close May 28 in a sale to Applied Weather Technology for $3.1 million or $153 a square foot. The building is 19,950 square feet, according to industry sources.
The net asset value of the RREEF portfolio dropped from $473 million to $436.4 million from the end of 2009 to the end of the first quarter of 2010, according to the quarterly report. The REIT reported revenue of $54.1 million in the quarter, or $3.36 a share, compared to revenue of more than $64 million in the same quarter a year earlier, when per share revenue was $3.97.
Managers also touted the execution of a new 256,000 square-foot lease with flash-memory card maker SanDisk Corp. within the Quantum campus of the Silicon Valley portfolio. The Quantum Business Park in Milpitas has more than 775,000 square feet. The lease “stabilizes a majority of the Quantum campus through 2013,” RREEF told investors. SanDisk would not comment on the report.
The fund also said it has a letter of intent for a new 25,000 square-foot lease with a national retail tenant at 631 Howard, an office building in San Francisco. Execution of this lease would bring occupancy in the property above 90 percent.
Jim Failor, investment officer for Sonoma County employees, said RREEF booked further property write-downs in the first quarter with an expected return in the range of -10 percent, according to the board minutes. The majority of the write-downs have been booked and RREEF expects the write-downs to end sometime later this year.
Sonoma County has 8,200 members in its pension fund. The total plan assets were $1.34 billion at the end of last year with $137.6 million invested in real estate, or 10.3 percent, below the 13 percent target.
