UTIMCO’s Zimmerman: Real estate is ‘very situational’

Real estate is an asset class to which many institutional investors want to increase their exposure, but many such investors favor property investments that involve less-targeted strategies.

For example, the University of Texas Investment Management Company (UTIMCO), which oversees investments for The University of Texas and Texas A&M Systems, plans to invest $1 billion to $1.5 billion in real estate over the next two years, at a pace of $500 million to $750 million per year. The manager of the largest public US endowment already has expanded its holdings in private equity real estate to approximately $1 billion over the past seven years. Although UTIMCO plans to continue to grow that portfolio, it is not necessarily targeting a specific geography or sector within the asset class.

“What we do like are specific situations,” said Bruce Zimmerman, UTIMCO’s chief executive and chief investment officer, speaking at the Pension Real Estate Association’s Institutional Investor Real Estate Conference in Los Angeles yesterday. “We like good companies and good assets with bad balance sheets. We like stressed sellers that have gotten themselves illiquid and need to sell. It’s very situational.”

Zimmerman added that UTIMCO’s business model is partner-focused. “In particular, what we like to do more and more is be a very substantial partner,” he said. For this reason, the endowment has favored smaller funds, which he viewed as offering more flexibility, less competition, more under-the-radar opportunities and better returns.

“We want to partner with people early in their career as they spin out from companies – big firms where they’ve had good training – and help put them in business,” Zimmerman said. “That’s a model that we’re doing more of across our asset classes and investment styles.”

Zimmerman’s fellow panelists included Mark McGoldrick of Mount Kellett Capital Management and Mitchell Julis, co-founder and co-CEO of Canyon Partners. Mount Kellett, an investment firm focused on distressed, special situations and opportunistic investing, also has adopted an operating partner model, particularly with its real estate business. The firm currently manages $8.5 billion in assets, of which 40 percent is in real estate special situations.

“Real estate to us is one asset class where you can do off-market trades,” said McGoldrick, co-founder and global chief investment officer at Mount Kellett. “It’s local, and the reality is operating partners typically have a wedge or angle in to get control of an asset.” As a result, his firm doesn’t participate in auctions, favoring negotiated deals instead.

One opportunity that Mount Kellett has not yet pursued is real estate debt. “I wish we had a mortgage fund because I think the risk reward in that business is tremendous,” McGoldrick said. Firms such as Apollo Global Management and Starwood Capital Group “are making great risk-reward bets at extraordinary yields because banks really only come in and finance something that is fully leased.”

Meanwhile, Julis of Canyon Partners, a Los Angeles-based investment management firm, said the importance of a real estate lending business to Canyon was the ability to offer a variety of products to investors. With the real estate debt platform, which includes preferred, mezzanine and senior loans, the most important factor is putting transactions into structures that are appropriate for a retail or institutional investor. “It’s not just location, location, location,” he said. “It’s design, design, design in today’s world.”