CalPERS Endures $4.2 Billion Quarterly Loss in Real Estate

By Jon Peterson

The California Public Employees’ Retirement System lost $4.2 billion of value in its real-estate portfolio during the second quarter of 2009, according to new data released in anticipation of a Nov. 16 meeting of its investment committee in Sacramento.

At the end of March, the pension fund placed a net-asset fair-market value on its real estate holdings of $17.6 billion. Three months later, the retirement system said the value had fallen by nearly a quarter to $13.4 billion.

Clark McKinley, investment officer for CalPERS’ Office of Public Affairs, said the system is evaluating its real estate managers and may decide to sever some ties.

“We are committed to our real estate assets. We’ve redesigned our real estate policy and process for better future performance. We’re evaluating manager relationships and are taking appropriate action, including maybe ending some relationships,” McKinley said.

McKinley attributed the systems’ real estate losses to more aggressive investments near the top of the recent commercial-property boom.

“The vast majority of the real estate commitments that figure in these declines in our portfolio were made during the 2005 and 2006 market peak,” McKinley wrote in an email response to a reporter’s query. “Our real estate was structured more aggressively than the benchmark. This was done mainly in housing, land, development and leverage.”

McKinley noted that since these losing investments were made, the pension fund has hired a new chief investment officer and a new senior investment officer for real estate. In January, the board announced that Joseph Dear, the former executive director of the Washington State Investment Board, would become its new chief investment officer. The former CIO was Russell Read, who left in the spring of 2008. In November 2006, Ted Eliopoulos was named the senior investment officer for real estate. He replaced Mike McCook.

“We’re systematically restructuring the portfolio, reducing risk and leverage and reporting the results of independent appraisals that were required,” McKinley said.

Among the pension fund’s biggest losses were those in five separately managed accounts targeted at a mix of property types. One of the biggest losses was in its CalEast Global Logistics holdings. The portfolio began the quarter with a value of $3.8 billion. By the end of June, it had fallen 60 percent to $1.52 billion.

CalEast is a core real-estate account separately run by LaSalle Investment Management out of its Florida office. It invests in industrial properties in the eastern part of the United States.

A portfolio previously managed by San Francisco-based MacFarlane Partners lost more than half its value, dropping from $854 million at the start of the quarter to $395 million by midyear. California Urban Investment Partners LLC was managed separately by MacFarlane and was conceived as a vehicle to buy and own central-city retail projects in underserved neighborhoods. The account is now managed by Stockbridge Capital Partners.

National Office Partners LP, a CalPERS venture with Houston-based Hines, also saw its asset values fall by nearly half. The portfolio began the second quarter with a value of $869 million. The final value for the quarter was $459 million. The account buys office buildings primarily in the eastern United States and in some select areas in the West. In July, after the quarter’s close, this account relinquished three Emeryville office buildings in the Watergate complex to San Francisco’s Pacific National Bank, defaulting on a $152 million loan. The bank was taken over by federal regulators Oct. 30, as first reported by The Registry.

Institutional Mall Investors, which is managed by Illinois-based Miller Capital Advisory Inc., started the quarter at $1.75 billion and ended at $1.3 billion, a loss of over a quarter of the value. Several assets were given back to lenders after the end of the second quarter. The account invests primarily in regional malls.

New York-based BlackRock Realty Advisors runs the BlackRock Western Multifamily LLC account for CalPERS. The account buys high-quality apartments across the country. Its value as the quarter began was $1.45 billion. It ended the quarter at $1.1billion, a 24 percent drop.

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