Florida SBA invests in Extended Stay debt

Despite reporting -10.15% returns for the state’s largest pension fund, the Florida State Board of Administration says the asset class is performing significantly better than the benchmark.

Florida State Board of Administration has acquired a $50 million mezzanine debt slice in the Extended Stay Hotel deal just as it eyes improving returns for its real estate portfolio.

The $142.7 billion plan, which manages 26 different pensions and separate accounts from across the state, said it bought the mezzanine loan in the secondary market during the last quarter through its strategic investment/hedge fund portfolio.


The hotel group emerged out of Chapter 11 bankruptcy protection last month following a $3.9 billion recapitalisation plan led by The Blackstone Group, Centerbridge Partners and Paulson & Co. The trio acquired the hotel business by investing $1.5 billion of equity and raising $2.7 billion of debt, including a $2 billion senior loan and $700 million of mezzanine loans, split into two tranches, people familiar with the matter told PERE.

In reporting its annual returns to the end of June, Florida SBA said its largest mandate, the $118 billion Florida Retirement System Pension Plan, had returned negative 10.15 percent return for its property investments compared to an overall investment gain of 14 percent.

That compares with private equity returns of 21.4 percent over the same period, and a 28.9 percent return for strategic investments, which include mezzanine debt investments and hedge fund investments. The FRS Pension Plan outperformed all its alternative benchmarks, though, with the real estate, private equity and strategic investment benchmarks set at -12.14 percent, 20.2 percent and 10.86 percent, respectively.

The SBA suggested though that those returns would be boosted when year-end returns were calculated saying that the FRS Pension Plan had benefitted from a late surge in investment gains, increasing in value by more than $9 billion between the end of June and this week.

As of the end of September, Florida SBA had an actual allocation to real estate of 6.3 percent against a target of 7 percent, with the portfolio valued at $7.4 billion. The private equity portfolio stood at 4.07 percent against a target of 4 percent, and was valued at $4.8 billion.

In relation to real estate, the pension system said in its quarterly report to trustees that while there were “signs of a levelling off” in the industry, “the consensus is that getting rents and occupancies back to where they were three years ago will be a slow process”.

Private equity deal activity in the third quarter, it added, had also “showed signs of life”, with more deal flow in the first nine months of 2010 than in the whole of 2009.