CIM Group has the distinction of being one of the real estate firms that survived CalPERS' recent pruning of its external real estate managers despite hiring a placement agent, former CalPERS board member Alfred Villalobos, to market its funds when CIM Group was first starting out. Mr. Villalobos was implicated in a pay-to-play scandal that came to light in 2009 involving insiders marketing investments for fees to pension plans in New York, New Mexico and California.
The Los Angeles firm — along with real estate developer Harry Macklowe and co-investors — also has the distinction of developing a New York residential tower that will be one of the tallest in the U.S.
Are you expanding your investor base? Our first institutional (investment) fund was in 2000, comprised of two public pension funds in addition to one corporate fund. Our investor base now includes U.S. public pension funds, non-U.S. pension funds, endowments, foundations, and corporate funds. Most recently, we have added several sovereign funds as well as some high net worth individuals. We are very happy with this mix of investors, and plan to include more of these types of investors in the near future.
What about co-investments? Over the last few of years, we saw growing interest with our limited partners in co-investing, and we have had four or five large strategic co-investments. For example, for our 432 Park Ave. project in New York City (a 96-story residential tower in Manhattan that CIM is developing with Harry Macklowe), CIM contributed $300 million and our co-investors contributed $500 million. ... This gives our existing investors the ability to make specific add-on investment decisions and also allows us to continue to rely upon low leverage as a key attribute of our discipline.
What is the most appealing type of investment that you are seeing lately? We are looking at assets that are changing or will change. Stable assets are trading for very, very high values; everyone is looking at stable assets in the best markets and they want to achieve the best returns. They want stable assets with some upside. The issue is, how can you achieve that? You have to do more than review brokers' packages. It's a great time to create stable assets in certain markets. We are building apartments that will achieve a 7% return on cost by the time we finish. ...
For us, it is a time to get paid very well for that level of risk. We are also repositioning assets. We buy apartment buildings that need improvement, we stabilize the asset and sell the stabilized asset. Where we see very, very good opportunities today is in creating core assets.
How did you survive the economic downturn? Since we started the firm in 1994, our focus has always been to take advantage of relative value opportunities, with a focus on creating and adding value. We improve the underlying real estate itself, rather than simply hoping the real estate market or the value of the assets we were acquiring would increase.
We started by focusing on densely populated communities because these districts had a higher potential for positive growth. We sought to gaina deep knowledge and understanding of the communities in which we invest, analyzing historical trends of the last 20 years, including the volatility of sales volume and prices.
Since our founding, we have continued to build a broad team of professionals, including investment, development, leasing, property management, legal, and accounting professionals, which greatly enhanced our sourcing and operating capabilities.
Fundamentally, we invest in assets in improving communities where we believe the risk we are taking is low, relative to our expected returns. Every asset we underwrite is done on an unleveraged basis. How would it behave if we don't deploy leverage? If the transaction does not work without leverage, we move on. As a result, a bank should be willing to give us a loan without additional collateral. It was true when we started, and it is true today.
Just like all real estate investors, 2007 and 2008 were really a stress test on our discipline. Those years tested how we underwrote the value of assets and use of leverage. These were things we were focused on all along, but our discipline wasn't stress-tested this harshly until then. When we look back on 2008, our assets and funds performed better than national averages.
Between 2004 and 2012, you dropped the leverage of your portfolio to 30% from 50%. Why? Very simply, we did not sit down and say, “Let's lower leverage levels.” This drop in leverage was due to the fact that we are not willing to provide guarantees tied to our funds or cross-collateralize between assets, as banks and lenders were requiring at the time.
As a result, we did not have foreclosures or workouts on loans with the banks.
Please explain your community-based approach to investing. The thing that is important from the beginning is to qualify multiple communities for investment. If one community is overheated, we can invest in another community where the relative benefit is greater. We are constantly assessing. We are constantly evaluating and looking where investments are and how we can benefit from their structure. We are always looking for investments that have reliable, predictable cash flow.
Stabilized assets in one community will perform better than similar assets in another community where improvements are being made to the district in which the asset is located.
We are looking at communities that are changing and in a state of flux ... in communities that are improving. We are looking at communities that are contiguous to the best communities. Then we look at the best asset in that market.
Tell me about your relationship with CalPERS. CalPERS is the same as every other investor, because our goal is to be the best manager of their capital in each of our asset classes. CalPERS is invested in most of our funds, and one of the main reasons why is that we do what we say we are going to do—we stick to our investment discipline. Early on, we said we would invest in certain types of asset classes including retail and office. As a result, our returns met or exceeded expectations.
We didn't stop there, and offered complete transparency. Also, we continue to offer to help its investment staff meet any of its needs, whether it relates to one of our investments or one of its others. This is the same kind of help we make available to all of our investors.
We firmly believe that investors evaluate managers not just on performance, but on service and how good a partner you are. The results have been very good for both of us.
This article originally appeared in the April 15, 2013 print issue as, "A straight shooter tells it like it is".