LANSING, Mich. - The State of Michigan Employees' Retirement Systems contributed $200 million in cash and apartments to purchase 80% of a new real estate company.
The $25 billion pension fund is the major shareholder in a limited liability company that will be the general partner in the new company, Simpson Housing L.P., according to J. Robert Love, Michigan's trustee to the new company. Simpson Housing Corp., Denver, a developer and manager of apartments in the western United States, owns the other 20%.
Michigan contributed 3,414 apartment units it owns in the western United States.
Simpson contributed assets valued at $250 million, bringing the total size of the new entity to $450 million. Simpson's contribution includes 5,044 apartment units located in Colorado, Oregon, Texas, Arizona and Washington, and 2,100 apartments under development in many of the same states.
Few pension funds have bought a public or private real estate operating company. Real estate professionals could only recall two pension funds executing a somewhat similar transaction: the $55 billion General Motors Corp. pension fund and the $35 billion IBM Corp. pension fund.
The two corporate funds were partners with Minneapolis-based General Growth Properties - then a private shopping center developer but now a public real estate investment trust - in many of its shopping center developments. But IBM and General Motors did not own the real estate company.
Similarly, a report earlier this year for the $88 billion California Public Employees' Retirement System done by its consultant, PCA/Kenneth Leventhal & Co., recommended the fund buy all or a percentage of a real estate management company or real estate operating company; create a captive private real estate company owned by the retirement system; or enter into joint ventures with one or more firms to create economic relationships that mirror an ownership relationship of the firm.
"I think there are opportunities that plan sponsors need to explore outside of the traditional vehicles," said Kevin Lynch, consultant with The Townsend Group, Cleveland. "If they (investing in a real estate operating company) add value, they need to do it."
Time, however, is an important element in these types of transactions, and most pension funds don't move quickly, said Mr. Lynch.
In addition to gaining economies of scale by having most of its apartments managed by a sole entity, the acquisition enhances Michigan's ability to get liquidity either by offering a meaningful stake to a private investor or by going public with sizable assets, according to Mr. Love.
Apartments make up $640 million of Michigan's $1.9 billion real estate portfolio, said Bobbie McKennon, special assistant to the Michigan state treasurer. Mr. Love said there is "no question" Simpson will "wind up" managing much of those properties.
The retirement system's apartment advisers are: Raymond James, Atlanta; L&B Multifamily Advisors, Dallas; Kensington Realty Advisors, Chicago; and Sentinel Real Estate, New York. Ms. McKennon said the retirement system has no intention of ending its relationship with these advisers.
Simpson Housing Corp. attempted to go public last year, but the offering was postponed when the market's appetite for REIT initial public offerings became satiated.
Simpson Housing Corp. was founded in 1948 by Harold Simpson. Donald Simpson, the founder's son, will serve as chairman and chief executive officer of Simpson Housing L.P.
The Simpsons will use the money received from Michigan to buy out its limited partners in the partnerships that comprised Simpson Housing Corp. and to repay debt, said Mr. Love. The Simpsons are not taking their capital out of the company, he said.