ALBANY, N.Y. -- The $110 billion New York State Common Retirement Fund is about to close on two joint ventures with REITs, said Martin S. Levine, chief real estate investment officer.
The two deals are valued at $1.12 billion.
Speaking at the NAREIT 1999 Institutional Investor Forum in New York last week on a panel about investors' perspectives on REITs, Mr. Levine said the pension fund expects to close a deal with Lexington Corporate Properties Trust, New York, in two to three weeks, and another deal with a large warehouse and industrial REIT at the end of July. He declined to name the second REIT until the deal closes.
When these deals are complete, the system will have nine joint ventures, seven of them with real estate investment trusts, said Mr. Levine, who added he is in discussions with other REITs for at least two more joint ventures.
In addition, the system two weeks ago closed a deal with privately held Taconic Partners, New York, on the old Port Authority building in New York City, which is valued at $450 million.
"The strategy in this partnership is to acquire opportunistic office buildings in New York City and on the Eastern Seaboard," Mr. Levine said.
The Port Authority building fits because there are fiber-optic cables running up and down Eighth Avenue, where it is located, which makes the site attractive to telecom and high-tech tenants, such as MCI WorldCom Inc., which occupies 90,000 square feet in the building.
The Lexington venture will involve "buying single-tenanted, investment-grade office and industrial properties around the country," Mr. Levine said. The system is committing $100 million and Lexington is committing $50 million, but the two parties will have equal voice in major decisions on sales, investments and refinancing.
"The key here, as with all these programs, is to team up with partners who can continue to add equity and purchase properties on behalf of the joint venture. And Lexington is expert at that," Mr. Levine said. He valued the deal, which is 65% leveraged, at $425 million.
The other REIT deal, valued at $700 million, will invest in industrial properties in various markets.
Mr. Levine said he is in talks with a major developer of central business district properties about teaming up and also wants to do a joint venture with a specialist in multifamily housing.
In late April, New York State Common announced a joint venture with Kimco Realty Corp., New Hyde Park, N.Y., to launch the Kimco Income REIT, which will acquire high-quality retail properties. New York State contributed $117 million in equity, while Kimco contributed 19 retail properties with an equity value of $105 million plus $12 million in cash.
Kimco and the New York fund "believe this program can grow to several million dollars of neighborhood strip, community and power centers," Mr. Levine said. The plan is to take the new entity public.
Partnerships between pension funds and REITs have become an important trend in the past year, as share prices of REITs have sagged, making it difficult for them to expand or raise cash on their own. They have turned to pension funds seeking capital and a number of deals have been struck.
In recent months, the Ontario Teachers' Pension Plan Board, Toronto, teamed up with Macerich Partnership LP, Santa Monica, Calif., to buy five regional shopping malls in the United States for $75 million. And the $157 billion California Public Employees' Retirement System, Sacramento, made a deal with Burnham Pacific Properties Inc., San Diego, to buy 28 shopping centers for $663.4 million from AMB Property Inc., San Francisco. Burnham and CalPERS created BBP Retail LLC to buy 5.1 million square feet of shopping centers. CalPERS holds an 80% stake in the venture while Burnham has 20%.
However, New York State Common has been doing joint ventures with REITs since 1995, when it teamed up with General Growth Properties Inc., Chicago, to buy Homart Development Co.'s portfolio of 26 regional shopping centers. There are now 23 centers in the portfolio, which is capitalized at $1.6 billion. New York State's initial investment in the venture was $265 million in equity. Mr. Levine said he migh do a second venture with General Growth, in which both partners would contribute properties.
The system has committed $1.5 billion to these joint venture programs to date, Mr. Levine said, noting they have been very successful.
The strategy is a good one for the pension fund because it allows the fund to align its interests with high-quality partners that are making sizable equity contributions, he said.
Because the pension fund operates with a real estate staff of seven investment professionals, the joint venture arrangement allows Mr. Levine to defer the day-to-day management of properties to the partner, leaving his staff available for other tasks. Mr. Levine also has been able to structure the deals with lower than normal fees to the outside advisers by negotiating.
The ventures also offer multiple exit strategies, which give the fund options. "We can take them public, or we can convert our stake into stock in the REIT, or use the traditional buy-and-sell strategies," Mr. Levine said.
A 3-year-old joint venture with AMLI Residential Properties Trust, Chicago, in which the system committed $75 million, was so successful that Mr. Levine asked for an additional allocation of $100 million to expand the program of developing garden apartments in AMLI's seven targeted markets. So far it has developed projects in Aurora, Ill.; Fort Worth, Texas; Indianapolis; and Overland Park, Kan.
Another joint venture with Hines, Dallas, a privately held international real estate firm, that began two years ago and involved a $250 million commitment, has already produced four investments, Mr. Levine said. Two have closed and two are under construction, but already are fully leased. One, scheduled to be completed in August, is Cedar Court, a 430,000-square-foot, four-building office complex in Redmond, Wash. It is located directly across the street from Microsoft Corp., which has leased the entire complex.
The other is a building in the Dallas Galleria, which has been leased by Tenet Healthcare.
