CalSTRS buys majority stake in Fairfield Residential

The $233.9bn pension plan reportedly lost money on its initial entity-level investment in the multifamily real estate operator back in 2005.

The California State Teachers’ Retirement System has acquired a 65 percent stake in Fairfield Residential, a San Diego, California-based multifamily real estate operating company, from Brookfield Asset Management, PERE has learned.

Brookfield previously obtained its majority interest in Fairfield as part of the latter’s reorganization and emergence from Chapter 11 bankruptcy protection in 2010. Brookfield, along with Fairfield management and CalSTRS, invested approximately $29 million to recapitalize the company, with the Toronto-based alternative asset manager receiving a 65 percent stake in exchange for its investment. Additionally, Brookfield committed up to $150 million to help finance future investment opportunities.

Brookfield and Fairfield went on to raise three funds together, the first of which was Brookfield Fairfield US Multifamily Value Add Fund, which amassed a total of $323 million in commitments, surpassing its initial $250 million target, in 2013. Last year, the two firms held a final close on $1 billion for the third fund in the series, which targets the acquisition and renovation of existing apartment properties throughout the US, as well as ground-up development in coastal markets.

CalSTRS already owned a 25 percent stake in Fairfield Residential as of last fall. The pension plan, which had $233.9 billion in assets as of April 30, reportedly paid $25 million in equity for an initial 19.9 percent stake in the company in 2005, its first-ever investment in a real estate operating company. However, in the aftermath of the global financial crisis, that investment was initially a loss for CalSTRS, with a valuation of zero by the first quarter of 2009.

More than a decade later, CalSTRS is again buying a large stake in Fairfield during a late stage of the real estate cycle. PERE understands the pension plan owns a handful of interests in real estate operating companies, with the intention of creating greater alignment of interest, better dealflow and ultimately, enhanced real estate returns.

Fairfield Residential, which manages 38,300 apartment units across the US, is one of CalSTRS’ top 15 real estate managers by net asset value, representing $1.16 billion, or 4 percent of the pension plan’s overall property portfolio as of Q1 2018, according to CalSTRS’ August 2018 semi-annual real estate report, its most recent available.

Performance-wise, the manager fell in the middle among the 15 managers, generating a since-inception return of 7.5 percent. The best-performing manager of the group was Blackstone, with a since-inception return of 12.6 percent, while the worst-performing was Fortress, with a return of 2.6 percent.

CalSTRS could not be reached for comment and Brookfield declined to comment on the transaction.