Pennsylvania’s Public School Employees’ Retirement System (PSERS) has earmarked $150 million for two value-added funds, committing $75 million each to AREA Property Partners’ AREA Value Enhancement Fund VIII and Cabot Properties’ Cabot Industrial Value Fund IV.
The two follow-on commitments reflect PSERS’ longer-term goal to increase its allocation to value-added real estate to between 40 percent and 50 percent of its property portfolio. Its current allocation to the risk strategy is 27 percent.
On behalf of Fund VIII, which has a $750 million target, AREA plans to invest in multifamily, industrial, hotel, retail and office properties in the US, with the goal of creating value through intensive asset management and selling once the business plan for the asset has been successfully completed. According to PSERS documents, the New York-based firm sees market opportunity in high-quality assets with deferred maintenance issues and the lack of credit available for assets in need of repositioning.
Fund VIII will target a 15 percent to 18 percent gross internal rate of return (IRR), 8 percent to 10 percent current yield and a 50 percent to 60 percent loan-to-value ratio, with a significant portion of the total return coming from current income.
AREA launched its Value Enhancement Fund series in 1993 and has since invested $3.6 billion equity in 172 transactions through those vehicles. AREA’s prior value-added fund, which raised $756 million in 2008, has achieved a 14.1 percent net IRR and 1.7x net multiple, according to the PSERS documents.
The pension plan previously committed $150 million to AREA Value Enhancement Fund VII, $150 million to AREA Real Estate Finance, $83 million to AREFIN Co-Investment and €100 million to AREA European Real Estate Fund III.
Meanwhile, Cabot’s Fund IV, which is seeking $650 million in commitments, will pursue the acquisition, development, redevelopment, operating, leasing and selling of industrial properties, primarily in the US. Up to 20 percent of the capital, however, may be invested outside of North America, including in the UK and the Netherlands. The Boston-based firm has a target net return range of 12 percent to 14 percent, and an average deal size of $13 million.
“As current economic conditions slowly improve, there are long-term demographics and observations that reflect the opportunity available in the industrial markets,” Laurann Stepp, a real estate portfolio manager at PSERS, wrote in her recommendation. “Three positive longer-term trends include: growing population, increasing domestic energy supplies and improving housing markets.”
PSERS’ relationship with Cabot dates back to 1998, when the pension plan exchanged directly held industrial properties for 5.5 million shares of the publicly-traded Cabot REIT. In 2008, PSERS committed $100 million to Cabot Industrial Value Fund III. That fund has generated a 13.8 net IRR to date, while the 2005 Fund II is producing a -2.7 percent net IRR to date. Fund I, a 2003 vehicle, has been liquidated and carries a proforma net IRR of 63.8 percent.
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