CalPERS' Decision To Buy One-Third of Bentall Kennedy for $100 Million Comes One Month After CalSTERS Acquires Multifamily Builder LCOR
One month after the second-largest U.S. pension fund acquired a controlling interest in a national real estate development firm and its portfolio for more than $800 million, the largest public pension fund in the U.S., the California Public Employees’ Retirement System (CalPERS), acquired one third of Bentall Kennedy, a real estate development and investment firm with properties in the U.S and Canada, for approximately $100 million.
Calling it a "new strategic move" for the pension fund, CalPERS acquired the ownership stake in the Seattle-based real estate firm formerly held by Ivanhoe Cambridge, the real estate investment subsidiary of another major institutional investor, Caisse de Depot et Placement du Quebec. The remaining two-thirds limited partnership ownership is evenly split between the British Columbia Investment Management Corporation (bcIMC) and Bentall Kennedy’s senior management.
The moves to take direct ownership in real estate firms mark a shift in strategy among the two major U.S. pension funds, which for decades have partnered with individual firms to establish and direct their real estate investments and manage their holdings. In fact, Bentall Kennedy or its forerunners have partnered with CalPERS through a number of investments over the past 15 years.
Observers see the new strategy of taking direct ownership in such firms partly as a bid to gain an edge in the competition among institutional investors for highly coveted core assets, those considered to carry lower risk and provide steady, dependable returns over an extended timeframe. The moves are also viewed as a way for the pair of deep-pocketed investors to participate in, and earn potentially higher returns from, future development of such assets.
"This relationship will allow our real estate team to further expand on trends and opportunities in real estate investment and management," noted said Rob Feckner, president of the CalPERS Board of Administration.
Prices for high quality core assets were the first to recover and escalated quickly over the past two years before cooling more recently, according to the CoStar Commercial Repeat Sale Indices (CCRSI). As a result of the recent run-up in prices for such assets, some investors believe that renovating or developing new properties may offer a better risk-adjusted return.
CalPERS, which administers retirement benefits for more than 1.6 million California state, local government, and public school employees, retirees, and their families, has more than $18 billion invested in global real estate - approximately 8 percent of the fund’s $228 billion investment portfolio.
The CalPERS investment follows last month's purchase of LCOR, a real estate investment, management and development company, by the California State Teachers' Retirement System (CalSTRS). The state pension fund paid more than $800 million to acquire a 90% interest in the Berwyn, PA-based firm from its previous owner, Lehman Brothers, following the Wall Street firm's bankruptcy.
LCOR specializes in developing mid- and high-rise urban properties, including large-scale multifamily, commercial and mixed-use properties. It manages more than 7,400 multifamily units, 7.7 million square feet of commercial space, and has a substantial development pipeline consisting of 16 million square feet of planned apartment, mixed-use and office projects in the northeast corridor between Washington, DC and New York City. The acquisition gives CalSTERS a channel for building its real estate portfolio through development.
Bentall Kennedy was formed in late 2010 after Bentall, a real estate advisory and services firm based in Canada, and Kennedy Associates, one of the largest independent real estate advisory firms in the U.S., formed a strategic partnership in 2006. The majority of properties in the firm's current U.S. office and industrial portfolios were either developed or redeveloped by Bentall Kennedy.
CalPERS has invested in real estate firms in the past with somewhat of a mixed track record. The pension fund received a 41% stake in a firm called Catellus Development Corp. when the company was spun off from Santa Fe Pacific Corp. in 1990, only to see the value of its stake decline during the recession of the early 1990s. Catellus later agreed to buy back most of CalPERS' shares. It later converted into a REIT and was acquired in 2005 by ProLogis.