Texas Pension Fund Commits $75MM to Stockbridge

By Jon Peterson

The Texas Municipal Retirement System has approved a $75 million commitment to the Stockbridge Value Fund, a commingled real estate investment vehicle managed by San Francisco’s Stockbridge Capital Group.

The targeted equity raise for the fund is $250 million for which Stockbridge plans a variety of investment strategies, including the acquisition of fully or partially vacant buildings, distressed equity acquisitions, preferred equity investments, rehabilitations and property repositioning. The maximum leverage will be 65 percent of property value

The fund manager will consider major property types including apartments, offices, industrial buildings and retail space. The San Francisco Bay Area is one targeted market.

Before the commitment from Texas Municipal, Stockbridge had raised $65 million for the fund. The targeted return for investors is 12 percent to 15 percent a year on a gross basis before asset-management fees.

Stockbridge plans to co-invest its own equity at a ratio of 2 percent of total capital commitments, up to a $5 million limit, according to documents presented to the pension fund board.

The fund already owns one San Francisco Bay Area asset, the 300,000 square-foot Central Park Plaza office complex at 2860 Zanker Road in North San Jose, which it acquired last year with Emeryville-based Harvest Properties. The campus includes six, two-story multi-tenant buildings constructed in 1985. It underwent renovations in 1996 and further improvements in 2008, when the previous owner undertook $2.5 million in upgrades. The seller was BlackRock Inc.

The fund paid $44.2 million, or $147 a square foot, and there is 50 percent debt on the property. The deal was completed at a projected unleveraged internal rate of return of 11 percent and a levered IRR of 14.1 percent. At purchase, the property was 71 percent leased. Stockbridge invested another $5.1 million for a total project cost of $49.3 million, or $164 a square foot.

The price represented a 63 percent discount to the estimated replacement cost of $118 million, or $392 per square foot, according to the board memorandum. Stockbridge plans a five-year hold and projects a sales value in 2016 of $68.5 million, or $228 a square foot.

Stockbridge has executed 14 new and renewal leases totaling more than 87,000 square feet since the complex was acquired.

The Texas Municipal commitment is the second major commitment the pension fund has made to Stockbridge. Last spring, it committed $100 million to a new open-ended commingled fund that Stockbridge was forming to invest in low-risk real estate.

The $75 million commitment was based on the recommendation of Cleveland-based ORG Portfolio Management, a real estate consultant. Neither Stockbridge nor ORG responded to requests for comment.

Stockbridge had 28 million square feet of properties valued at $4.48 billion under management at the end of 2011.

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