The Bay Area Real Estate Journal
San Francisco Employee Pension Fund Loses $645MM on Real Estate
Submitted October 19, 2009
Count the 22,000 active retirees of the city and county of San Francisco as the latest victims of the commercial real estate bust.
As of June 30, the value of the pension fund’s real estate portfolio stood at $1.275 billion, down from nearly $2 billion at the same time in 2008, according to information distributed Oct. 13 to the system’s board during a semi-annual review by its real estate consultant The Townsend Group.
Micolyn Yalonis, a principal with Cleveland-based Townsend who heads the company’s San Francisco office, is the lead Townsend executive on the San Francisco pensioners’ account.
The heaviest declines in value were during the fourth quarter of 2008 and during the first quarter of 2009. It is expected that the rate of losses will slow during the rest of this year and level off in the first half of 2010.
San Francisco City and County has invested 10.8 percent of its $11.84 billion in total assets in real estate. The pension fund targets 9 percent to 15 percent of total assets for real estate.
The most significant unrealized net-asset value losses occurred in three portfolios managed by three well-known pension fund money managers: RREEF, AMB Property Corp. and Capmark Investments LP.
No real estate manager oversees a larger portfolio for the pension fund than RREEF. It manages assets totaling $615.8 million, or 48 percent of the pension fund’s real-estate portfolio. RREEF recently announced it would get out of the property management business and would cut its employee count by nearly half to 700. It also has been dealing with the troubled RREEF America REIT III, a commingled real estate investment fund with more than $2 billion in assets. The San Francisco pensioners are not invested in the America III fund. The board determined that its investments with RREEF should not be affected by these two developments.
The RREEF account, a dedicated fund managed solely for RREEF and the San Francisco pension fund, has fallen by $246 million, or 32 percent, since the end of last year. The fund invests in core, stable assets in the United States across the four main property types: apartments, offices, industrial buildings and retail properties. The portfolio was valued at $538.2 million at mid-year.
Meanwhile, the pension fund’s investment in the AMB Institutional Alliance Fund III has lost $189 million, or 45 percent, since the end of last year. The fund invests in industrial properties across the country. The pension fund’s holdings are now worth $242 million.
There also was a 50 percent drop, or a $94 million loss, in the pension fund’s investment with Capmark. Capmark pursues a variety of debt and equity investments in the four main property types across the country. The loss assumptions are based on projected lower net operating income of the real estate and investor demand for higher yields on real estate, known as capitalization rates, when the properties are sold compared to acceptable, much lower cap rates during the boom. When cap rates rise, values fall, all else being equal.
Despite the losses, the pension fund may invest new capital into real estate between now and the end of June 2010. One plan is to allocate an additional $50 million into global real estate investment trusts. The plan for now is for the pension fund’s investment staff to continue to monitor the global REIT sector and to allocate the capital some time in the future. The pension fund plans to invest through its existing REIT managers, European Realty Investors and ING Clarion Real Estate Securities.
The other major real estate investment initiative is to selectively allocate up to $200 million to the fund’s non-core, or more risky portfolio of investments, including funds dedicated to either valued-add or opportunistic real estate buys. So far the pension fund investment staff has made no investment recommendations to the board for this capital.
The fund also has $121.1 million in unfunded commitments to several high-return portfolio managers. Those commitments could be called at any time. Pension fund executives told the board that these managers are waiting to capitalize on opportunities from the current changing market conditions.
The largest of the unfunded commitments in the high-return sector is for $47 million to CIM Real Estate Fund III. This is a commingled fund with a nationwide urban investment strategy.
A second commitment is a $30 million allocation made for a so-called “bridge pool” investment. This money is set aside by the pension fund so it can take advantage of any market opportunities that arise suddenly and require an immediate capital deployment. The money has been set aside for a decade, however, and never used, said Don Holcher senior investment officer for San Francisco City and County pension fund.
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