Calpers Takes Hit on Land Deal
[FONT=Times New Roman,Times,Serif]In a Rare Misstep, Pension Fund Trips On Real-Estate Bid[/FONT]
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[FONT=times new roman,times,serif]By MICHAEL CORKERY and CRAIG KARMIN
May 1, 2008; Page C1[/FONT]
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The nation's largest pension fund is involved in one of the biggest land deals to fall victim to the housing bubble. It is an unusual position for the investor, which has a reputation for avoiding such blowups.
The deal involved a $970 million investment by an investment entity that included the California Public Employees' Retirement System in a venture that owns thousands of acres of undeveloped residential land north of downtown Los Angeles. Now, due to the downward spiral of the housing market, Calpers may find itself having to relinquish the well-located land to creditors and possibly lose much of its investment.
Pension funds have been players in the property market stretching back to at least the 1970s and have recently pursued more-complex real-estate investments. Land investment remains rare among these large institutional investors.
Calpers, a $244 billion fund, did its first undeveloped land deal in 1994 and today has seven partners for such deals and investments in more than 12 states.
"Land is the riskiest form of speculative real estate," said Paul Puryear, a housing analyst at Raymond James & Associates. "That's why you have such huge swings in value." Selling land to home builders can yield huge profits. But when demand from builders stall, land can lose value quickly because there are few other ways to generate income from it. "Maybe you can put cattle on it and wait until people can afford to buy houses again," Mr. Puryear said.
At the time of Calpers's investment, February 2007, the venture was appraised at $2.6 billion. The value of that venture, whose backers included the builder
Lennar Corp. and LNR Property Corp., a unit of Cerberus Capital Management, is now much less.
The venture, LandSource Communities Development LLC, had assets valued at $1.8 billion as of the end of February, according to a filing with the Securities and Exchange Commission, but debt of about $1.24 billion. LandSource also is under siege by debtholders. The venture is running low on cash and may have to file for bankruptcy in coming weeks, according to a person involved in the venture. Still, while creditors could take ownership of LandSource's land and other assets, they have little other recourse against Calpers, LNR or Lennar.
The deal could prove a rare public misstep for Calpers, which had nearly $21 billion of real-estate investments at the end of September, or about 8% of its total assets, and is one of the largest land owners in the country.
Calpers's investment in the LandSource deal represents less than 1% of its total assets, and the rest of its real-estate portfolio has performed well, with a 12.4% nominal return after fees for the 12 months ending Sept. 30.
In that portfolio, some deals have suffered deep losses. M/W Housing Partners III LP, which includes the LandSource investment, had a return after fees of negative 53.6% for the year ending in September. Another deal, Hearthstone Housing Partners II LP, lost 40.2% in that period.
Rob Feckner, Calpers board president, said for a portfolio as big and diverse as the fund's, some losses were to be expected. "Real estate is a very cyclical business, especially right now," he said in an interview.
Details of the soured land deal are emerging amid upheaval in Calpers's executive suite. The chief executive, Fred Buenrostro, said this week he planned to step down. Last week, Russell Read, the chief investment officer, announced his resignation. People familiar with Calpers said the moves don't appear to be related to the LandSource deal.
The venture is structured similar to dozens of deals that were popular ways for builders like Lennar to buy highly leveraged land during the boom years and reduce the risk of owning the land outright. They would buy the land with partners in off-balance-sheet entities that would borrow money while limiting the builders' exposure to the debt. Many of these deals are unraveling.
The LandSource deal has the twist that the Calpers investment vehicle took a significant stake in the venture, amid the slowing housing market and months before real-estate values plummeted. MW Housing took a 68% stake in LandSource in February 2007, while Lennar and LNR reduced their exposure, each taking a 16% stake and each receiving $660 million after bringing MW Housing into the venture.
MW Housing was co-managed by MacFarlane Partners, a veteran manager of Calpers money, with $11.7 billion in real-estate assets under management. In recent years, MacFarlane has invested as much as $4 billion from Calpers in real-estate projects, such as the Time Warner Center and the Tribeca Green, a 24-story apartment building, both in New York City.
LandSource's California assets are prime real estate. They include some of the only undeveloped acreage in the greater Los Angeles area, about 15,000 acres known as Newhall Ranch lands.
MacFarlane recommended the deal because the land was located in an area with "long-term growth prospects" and investors would realize returns over 12 to 15 years, according to a person familiar with the matter. At the time, MacFarlane anticipated a slowdown in the real-estate market and obtained an independent appraisal of the land as part of its due diligence.
Shortly after Calpers made its investment, Barclays Capital arranged about $1.5 billion in loans for LandSource, which were snapped up by more than 100 investors. The March 2007 offering was oversubscribed.
LandSource's plan was to sell hundreds of ready-to-go house lots to builders to generate cash to service the debt, while the Newhall land was prepared for development, which could take years.
Once the credit crunch hit, demand for the lots evaporated, and the venture was left with less income than it expected.
Negotiations over debt restructuring between LandSource and its lenders are continuing. LandSource recently pulled back from a proposal to contribute several hundred million dollars of additional equity.
LNR didn't respond to a request to comment.
Lennar's chief investment officer, Emile Haddad, who is a managing member of LandSource, said the builder has an "excellent" relationship with Calpers. "These are tough times for all of us," he said. "It's during these times that relationships get tested."
