Oregon commits $200m to Lionstone

The Oregon Public Employees’ Retirement Fund has agreed to invest $200 million in Lionstone Real Estate One, a joint venture vehicle with Lionstone Partners. The commitment represents a follow-on investment to an existing joint venture with the Houston-based real estate investment firm.

Oregon began its relationship with Lionstone in June 2002, when it became the firm’s first institutional investor with a $75 million commitment to the Cash Flow Office One (CFO One) joint venture, a venture between the firm and the pension fund which has been used to buy offices in high growth markets. It invested an additional $50 million to CFO One in January 2005. The joint venture’s portfolio currently comprises 17 office assets across 11 US markets with a total gross asset value of $623 million.

The LORE One vehicle will be an update of the CFO One joint venture. Similar to CFO One, LORE One will focus on office properties in high-growth markets. In one departure from the central strategy, however, it also will allow for up to 20 percent of the capital to be invested in non-office sectors such as multifamily or retail. 

Like its predecessor, the new joint venture also will be evergreen in nature so that capital and income distributions from the joint venture may reinvested into the partnership. However, LORE One’s geographic focus has been expanded to include “internationally competitive markets,” while its target returns and incentive fee structures have been revised to a two-tranche portfolio structure with an overall lower risk profile than the predecessor vehicle, which had targeted a 9.5 percent annual net cash-on-cash return.

The first tranche will encompass all new acquisitions and LORE One’s value-add strategy. This tranche will include Oregon’s $200 million commitment, as well as three existing assets transferred from CFO One. The first tranche has been designated a net levered return target of 11.25 percent with a seven-year promote that will be paid only after the vehicle’s performance beats a customized benchmark and preferred return hurdles.

Meanwhile, the second tranche is intended for properties that will be considered long-term core holdings for OPERF, including assets that are transferred from the first tranche. For tranche two, the firm will target net levered returns of 8 percent with a reduced management fee and promote structure and be seeded with nine assets from the CFO One portfolio.

In its documents on the commitment, the pension plan also disclosed that Dan Dubrowski, one of the co-founders of Lionstone and portfolio manager for its core, core-plus and value-add strategies, intends to transition out of portfolio management over the coming years. Oregon said it considered Dubrowski and fellow co-founder Glenn Lowenstein to be “the primary drivers of Lionstone’s success.” The firm, however, had not yet identified a successor for the role. Mitigating the key person risk, however, was the fact that the pension plan will retain rights to cease new investments and to approve Dubrowski’s successor.