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PSERS commits $150m to two debt funds

The $51 billion pension system has agreed to contribute $75 million each to LEM Real Estate High-Yield Debt and Preferred Equity Fund III and Latitude Management Real Estate Capital III.

The Pennsylvania Public School Employees’ Retirement System (PSERS) has resolved to commit a total of $150 million to two real estate debt funds. Documents from the $51 billion pension system show that its board agreed to invest $75 million in LEM Real Estate High-Yield Debt and Preferred Equity Fund III and $75 million in Latitude Management Real Estate Capital (LMREC) III. These contributions were based on the recommendations of its consultant, Courtland Partners.

Through LEM Capital’s Fund III, the Philadelphia-based firm will purchase and originate US real estate structured finance investments, which primarily consist of preferred equity, mezzanine loans and first mortgages. The value-added commingled vehicle also will consider B notes, joint venture equity and entity-level investments in real estate operating companies.

Individual investments on behalf of LEM Fund III generally are expected to range between $5 million and $20 million in size, with an average investment size of $8 million. LEM Capital anticipates completing 12 to 24 deals per year, depending on the size of the fund, which is targeting $300 million in equity commitments, with a hard cap of $500 million.

LEM Fund III will invest preferred equity mostly in multifamily assets, but it also may invest in office, retail, industrial and hotel properties. The investments primarily will be made on the East and West Coasts, the Southeast, metropolitan Chicago and in select markets in Texas. PSERS previously invested in LEM Fund II in 2006.

Meanwhile, the investment strategy of Los Angeles-based Latitude Management’s LMREC III is to originate short-term, floating-rate first mortgages and bridge loans on transitional value-added commercial property. Latitude's niche is defined by its focus on smaller sized assets—$5 million to $25 million—located in primary and secondary markets in the West, Southwest and Southeast. The property types are limited to multifamily, office, industrial, hospitality and grocery-anchored retail. LMREC III is expected to raise about $550 million in equity.

This will be PSERS’ third investment with Latitude, which formerly was known as Legg Mason Real Estate Investors but changed its name in April 2009 when Legg Mason exited the business.  PSERS invested $57.6 million in Legg Mason Real Estate Capital I in 2002 and $100 million in Legg Mason Real Estate Capital II in 2005.

PSERS has been a fairly active investor in funds in 2012. In June, it resolved to contribute $200 million to Brookfield Asset Management’s latest global opportunistic real estate vehicle, Brookfield Strategic Real Estate Partners. In March, the pension system agreed to commit $75 million each to three real estate funds: Angelo, Gordon & Co.’s AG Core Plus Realty Fund III, Exeter Property Group’s Exeter Industrial Value Fund II and Bell Partners’ Bell Institutional Fund IV.