US NEWS: Growth through diversity

Last month, USAA Real Estate made a splash by acquiring a non-controlling interest in Square Mile Capital Management. In exchange for an approximately 49 percent stake in the New York-based real estate investment firm, USAA Real Estate will invest an undisclosed amount of capital in Square Mile upfront, as well as make a substantial commitment to invest in future vehicles.

While the move may be seen as bold by some in the private equity real estate industry, for USAA Real Estate, it was just part-and-parcel of its overall expansion efforts. In fact, over the past six years, the real estate arm of the San Antonio, Texas-based financial services firm has nearly quadrupled in size, growing from $3 billion in assets under management six years ago to $6 billion three years ago and approximately $11 billion today.

Furthermore, USAA Real Estate expects that expansion to continue through continued investment both on its account, on behalf of its institutional clients and through expansion of its fund and co-investment offerings. In fact, deals like the one with Square Mile and its investment in Admiral Capital in 2010 are other ways that the firm is expanding its footprint in the real estate space.

USAA Real Estate’s president and chief operating officer Len O’Donnell has been quick to point out that the growth the firm is experiencing has been the natural by-product of diversifying its portfolio and expanding its reach beyond its core competencies, not merely the result of trying to reach a target size. “Our focus is not on growth for growth’s sake, but rather on a disciplined approach to diversification of our investment portfolio, as well as the variety of opportunities we can offer our investor clients,” he told PERE.

Indeed, since helping to form Irving, Texas-based private equity real estate firm Cobalt Capital Partners in 2002, USAA Real Estate has been moving beyond its comfort zone of core real estate, expanding its operations and dipping its toes into opportunistic and distressed strategies. Other transactions that have helped grow and diversify the firm’s business include committing $50 million to Admiral Capital’s Admiral Capital Real Estate Fund, which seeks commercial real estate opportunities across the US; expanding its Government Building Fund to take further advantage of the consolidation of the Federal government into new buildings under long-term leases; the development of multifamily projects in urban, transit-oriented locations; and actively acquiring value-added office properties throughout the US.

These transactions and initiatives stem in part from USAA Real Estate’s desire to expand its offering to its institutional clients. According to O’Donnell, the firm has been — and intends to continue to be — on the lookout for new opportunities in which to invest capital, whether that is direct real estate, investment funds or real estate platforms. And the strategy appears to be paying off.

“We’re not on a growth mission per se,” O’Donnell reiterated. “It’s a by-product of being more efficient and a desire to diversify our portfolio.”