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Los Angeles Pension Fund Focuses on Property Sales, Citing Slower Appreciation

Return Expectations Slow From Last Year, Fund Adviser Says


The Los Angeles County Employees Retirement Association most recently sold the St. Regis Princeville Resort & Golf Club in Princeville, Hawaii. Photo: CoStar

The Los Angeles County Employees Retirement Association is planning to sell a lot more commercial properties than it buys in the next couple of years, a major sign of U.S. investors expecting lower appreciation.

The association, known as Lacera, approved an update to its real estate investment strategy this month that calls for it to invest only $1 in real estate for every $2 it sells, according to documents from the association's latest Real Estate Committee meeting.

The updated strategy addresses the market environment, according to Lacera documents. Townsend Group is advising the pension fund on its real estate strategies for a market that's following a U.S. economy approaching its longest stretch in history, a point it is poised to reach in July if conditions hold. The nearing record has investors, owners and lenders seeking indicators of changes in property return fundamentals to set strategy.

"In 2018, U.S. private real estate markets continued their positive run for the ninth straight year," Townsend reported, but added, "midrange return expectations for real estate have decreased since last year."

The NCREIF Property Index total return has significantly declined since 2015, almost entirely because of lower appreciation. Further declines in the return are forecast in 2019-2021, according to Townsend.

In such a market environment, Townsend recommends Lacera consider direct asset sales and portfolio sales.

The pension fund, which manages about $56 billion in assets, has already put at least 10 U.S. properties up for sale, which they have not specifically identified. However, the list includes: two apartment properties - one each in the South and West - valued at a combined $228 million; three office properties in the South and West valued at about $60 million combined; four industrial properties in the West valued at about $36.2 million; and one retail property in the Midwest valued at about $6.6 million.

Under the updated strategy, the association has just two deals pending in its acquisition pipeline: an apartment building in the West valued at about $48.8 million; and an industrial property in the West valued at about $46 million.

"Although a main initiative for the 2019-2020 fiscal year will be to reduce the exposure to real assets to get closer to the allocation target (i.e. sell assets), a modest amount of the new investment activity is proposed so that vintage year diversification can be maintained," according to Lacera's Real Estate Structure Review Update. "Accordingly, approval is sought for up to $500 million to be invested by the fund’s existing separate account managers."

Most of that new investment would go into commingled funds rather than individual assets. Half of that $500 million investment is being allocated in advance of anticipated sales in its pipeline. The other half would come only when more than $1 billion in sales have occurred.

In investing in funds, the recommendations call for investing in from one to three international funds annually, increase commitments to industrial funds and decrease allocations to apartment funds.

That $1 billion in future property sales would match what the association has sold from the start of 2017 through the end of the first quarter of this year. Most recently, Lacera sold the 251-room St. Regis Princeville Resort & Golf Club in Princeville, Hawaii, in November 2018 to Starwood Capital Group for $224.1 million.

That sale dropped the value of its total real estate holdings to about $6 billion.

Lacera's 10 Largest Real Estate Assets of 12/31/2018 Type -- Location -- Gross Asset Value ($mil) Apartment -- New York -- $444.2 Hotel -- New York -- $407.0 Apartment -- Los Angeles -- $332.7 Apartment -- Marina del Rey, CA -- $294.5 Industrial -- Compton, CA -- $240.6 Student Housing -- College Park -- $233.7 Retail -- New York -- $230.0 Retail -- Collegeville, PA -- $212.3 Retail -- Cranston, RI -- $194.0 Apartment -- Los Angeles -- $184.8

Article by Costar

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