Terminations Can’t Keep Real Estate Managers Down

Many real estate investment managers aren’t letting large-scale terminations by some pension funds keep them from gaining new business — in some cases for the same investment strategy.

For example, the $146.8 billion California State Teachers’ Retirement System, West Sacramento, in February committed $250 million to BlackRock (BLK) Inc. (BLK) for a new multifamily real estate mandate, less than two years after the firm lost $100 million of the pension fund’s money co-investing in the Stuyvesant Town-Peter Cooper Village apartment deal in New York.

BlackRock acquired the apartment complex for $5.4 billion in 2006 through a partnership with Tishman Speyer Properties and with the help of capital from co-investors including CalSTRS, the $235 billion California Public Employees’ Retirement System and the $156.8 billion Florida State Board of Administration. On that deal, CalPERS also lost $500 million and Florida, $250 million.

Still CalSTRS gave BlackRock more money, while Sacramento-based CalPERS terminated the manager, transferring the apartment portfolio to GID Investment Advisers LLC.

While this is the example most talked about in the industry, it is not the only one.

In May, the $89.9 billion system New York State Teachers’ Retirement System, Albany, hired RREEF America to manage a $389.9 million real estate investment trust portfolio. However, just a few months earlier, the Massachusetts Pension Reserves Investment Management Board, Boston, had terminated RREEF America REIT, citing Deutsche Bank’s late 2011 decision to sell RREEF, its real estate money management subsidiary.

Some industry observers fault due diligence by pension funds on the managers, that they say doesn’t dig deep enough. Others say performance can vary among real estate teams at some of the larger real estate management firms. What’s more, one investor may be happy with a real estate firm that manages a separate account in which the investor has some control over the investments while another institutional investor may be less than delighted in a commingled fund managed by the same investment firm.

For CalSTRS, the answer is simple. Despite the loss on its investment in Stuyvesant/Peter Cooper Village, overall, BlackRock’s multifamily real estate portfolios have been big performance winners.

“BlackRock is CalSTRS’ oldest and largest dedicated multifamily investment firm with total equity of roughly $1 billion,” said Michael Sicilia, CalSTRS spokesman, in an e-mail. CalSTRS has had a relationship with BlackRock since 1993. As of March 31, BlackRock’s performance since inception was 9.4% gross, according to CalSTRS spokesman Ricardo Duran.

CalSTRS’ newest BlackRock allocation is for “build-to-core” real estate investments, in which investors buy properties, make changes to stabilize the properties and then hold them for a long period of time, Mr. Sicilia said. This strategy has been “very successful over the last three years,” he wrote.

“CalSTRS retains discretion over each individual additional asset/development,” Mr. Sicilia added.

BlackRock executives declined comment, according to Farrell Denby, spokesman.

Scott Farb, managing principal in the Los Angeles office of the real estate consulting and accounting firm Reznick Group, said that “overall good companies can make mistakes, but that doesn’t necessarily mean that they’re no longer qualified or have the knowledge, expertise and infrastructure to deploy capital.”

“Investors have one set of criteria and due diligence in hiring real estate managers and a different set of criteria for terminating them and they are not necessarily related,” Mr. Farb said.

Not all of the investors in the Stuyvesant/Peter Cooper Village deal have terminated BlackRock as a real estate portfolio manager. While the Tallahassee-based Florida state board has not made additional investments with BlackRock’s real estate team, it hasn’t terminated the firm, either. Florida SBA wrote off $266 million — its original $250 million investment plus fees —on the Peter Cooper Village investment in July 2009, John Kuczwanski, the board’s communications manager, said in an e-mail.

Florida has three other real estate investments with BlackRock: a $60 million commitment in BlackRock’s Retail Opportunity Fund it made in November 2007; a $100 million commitment to BlackRock’s Diamond Property Fund, made in August 2006; and a $150 million commitment to BlackRock’s Granite Fund, made in September 2003, Mr. Kuczwanski said.

While he declined to say whether the Florida fund’s officials are happy with these investments, he would say the fund’s $266 million loss would not affect future investments with BlackRock.

“All potential investments are evaluated in a thorough due diligence process with input from both internal staff and external consultants with the goal of selecting the best investment to meet our needs,” Mr. Kuczwanski wrote.

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