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CalSTRS loses $6.8bn in past year on real estate bets

The $123.8bn California pension plan took a 50% write-down in its value-added/opportunistic real estate investments in the year to 31 March 2009. The pension has completely written off its equity in some funds, while others are currently reporting IRRs of more than -100%.

California State Teachers’ Retirement System has written down its value-added and opportunistic real estate assets by half in the past year – helping to wipe out $6.8 billion from the portfolio’s overall value.

In a semi-annual performance review of its 274 fund investments, due to be debated next week, CalSTRS revealed that its overall real estate portfolio had returned -43 percent in the year to the end of March 2009.

Investments made at what now was clearly the peak of the market make up a significant portion of the [real estate] portfolio and will outweigh more favourable historical performance as well as more recent capital allocations.

The $123.8 billion pension plan’s core portfolio returned -29.5 percent in the past year, while “tactical” or non-core managers returned -50.3 percent. In the three months to the end of March, returns were -15.3 percent and -21.1 percent for core and value-added/opportunistic respectively.

The real estate portfolio is now valued at $12.9 billion – down from $19.7 million six months prior. The allocation to real estate is 10.9 percent.

CalSTRS was a prolific property investor during the height of the market. However the performance review of fund interests, conducted by The Townsend Group, shows that growth came at the wrong time. “Investments made at what now was clearly the peak of the market make up a significant portion of the [real estate] portfolio and will outweigh more favourable historical performance as well as more recent capital allocations,” the review states.

As a result, CalSTRS has seen IRRs in some of its real estate funds dwindle to zero.

According to a detailed list of time weighted returns, net of fees, CalSTRS has permanently written off its $100 million commitment to Tishman Speyer’s Peter Cooper Village, Stuyvesant Town Partners fund. The commitment was made in May 2007 but following the credit crisis, and problems deregulating the New York multifamily complex, the investment is now valued at “$0 as [its] impairment is considered to be a permanent condition”.

Funds where IRRs are currently at zero (or -100 percent or more) include CBRE Investor’s Strategic Partners Asia Fund II, formed in July 2007; MGPA’s Asia Fund III, formed in December 2007; Morgan Stanley’s MSREF V US LP and MSREF V CIP II funds, formed in July and October 2006; Cherokee Investment Partner’s Fund IV, formed in February 2006 and Pyramid Hotel Opportunity Fund II, formed in May 2006.

CalSTRS also invested in several land funds during 2005 to 2007, with Hearthstone Housing Partners’ Fund III, formed in June 2006, and Heritage Fields Capital reporting -100 percent IRRs as of 31 March, 2009.

Like the Peter Cooper/Stuyvesant Town deal, a $23 million investment with Morgan Stanley in MSREF IV Spencers Crossing, made in June 2005, has been permanently written down to $0. To read the full CalSTRS report, click here.