Five tax-exempt investors pumped $93 million into a co-investment apartment fund that uses a limited liability company, a vehicle new to pension fund realty investing.
The $15.5 billion Alaska Permanent Fund, Juneau, invested $18.2 million; the $14 billion Public Employees' Retirement Association of Colorado, Denver, invested $24.2 million; the $6.3 billion Utah Retirement Systems, Salt Lake City, invested $27.1 million; the $4 billion School Employees Retirement System of Ohio, Columbus, invested $15 million; and Deseret Mutual Benefit Association, the pension fund for the Mormon Church, invested $8.5 million.
Phoenix Home Life Mutual Insurance Co., Hartford, Conn., sold a portfolio of 12 apartments to the partnership, known as CASA-I. (CASA stands for Commingled Account of Selected Apartments.) The insurer retained a 10% interest in the $108 million fund, according to James Carter, executive vice president of Phoenix Realty Advisors Inc., a subsidiary and the manager of the fund.
The investors expect a 9% return after fees.
The limited liability structure only recently became available in many states, according to Mr. Carter.
The CASA-I deal took most of 1993 to complete, much longer than traditional pension fund real estate deals take.
The structure's appeal is it offers pension funds more control and alignment of interest with their real estate advisers. It provides the limited liability of a corporation with partnership tax treatment. To date, most co-investments have been structured as limited partnerships, which limits the pension funds' control as limited partners.
By contrast, pension funds have had to sue to gain control of illiquid commingled funds.
"We don't view involvement as a lot of day-to-day (management)," said Devon Olson, portfolio manager, real estate for the Utah Retirement Systems.
"It's more on a macro basis, such as budgeting and disposition.
"If something went wrong and we became uncomfortable with the adviser, we could have them removed," said Mr. Olson.
"You can mix and match corporate entities," meaning more than one kind of investor may invest in a deal; in commingled funds, only pension funds may invest.
This mix and matching "allows for alignment of interest," said Paul Saylor, president of Atlanta-based Saylor Property Capital, a consulting firm that handled the due diligence for CASA-I.
"The whole concept of shareholder rights is alive and well in this," said Mr. Saylor. "And liability is limited to the (value of) the investments.
"It's an entity everyone found appealing," he said.
Although the apartments in the CASA-I portfolio came from the general account of Phoenix Home Life, the incentive was not to reduce the insurer's exposure to real estate, according to Mr. Carter. The National Association of Insurance Commissioners has instituted risk-based capital guidelines that force insurers to hold reserves against certain assets, or to sell those assets.
"The No. 1 motivation is the desire to grow institutional assets under management," said Scott Noble, president of Phoenix Realty Advisors.
Although not a newcomer to pension fund real estate investment management, Phoenix has undertaken an initiative to grow the business, according to Mr. Carter.
"Secondly, we wanted to build relationships with a few respected plans in the industry - a group that has the capability to do more transactions in the years to come," Mr. Noble said.
The Phoenix Home Life portfolio had a high number of apartments, which made them candidates for the advisory firm's re-entry into the markets, said Mr. Carter. "We picked the best to put into an account, and sold it."
Apartments were one of the most popular property types for pension fund investing last year, and prices have risen and yields dropped. Messrs. Carter and Noble insist, however, the investors did not overpay.
"With respect to pricing, two sets of appraisals were involved," said Mr. Noble. "We had two completely independent views of the values.
"The aggregate prices were within 5% of each other."
"With respect to Phoenix Home Life's motivation, the reason we wanted to stay in the portfolio is because we saw upside," he said.
"It's an alignment of interests," said Mr. Carter. "The investors see that we have a vested interest like theirs."
Mr. Olson of Utah Retirement Systems noted the price of the portfolio was set in June 1993 and the deal closed at the end of the year, at the earlier pricing, even as prices continued to rise.
"We honored the handshake agreement," Mr. Carter said.
"Phoenix hung in there," said Mr. Saylor. "They could have sold this at any time during last year at a higher price."