CalPERS' housing portfolio drops $3.2 billion


New member
By Dale Kasler

Published: Thursday, Nov. 13, 2008 | Page 1A

CalPERS disclosed a $3.2 billion decline in its housing portfolio Wednesday, the latest major setback for the big pension fund.

The California Public Employees' Retirement System said an exhaustive appraisal of CalPERS-owned homes and lots across the United States revealed a 35 percent drop in value in a few short years, testament to the horrific collapse in the nation's housing market.

The 288,000 lots and homes, spread across 20 states, are owned in partnerships with some of the nation's leading developers and builders; 59 percent of the properties are in California, epicenter of the real estate crash.

"No one, including CalPERS, escaped the fall in housing," said Ted Eliopoulos, the fund's senior real estate investment officer.

Although the $3.2 billion decline represents just a sliver of the $184 billion in investments controlled by CalPERS, it's another symbol of the turbulence that has gripped the big fund as the economy sinks and the financial markets slump.

Just three weeks ago, amid a review of its battered stock portfolio, CalPERS warned it might have to demand higher pension contributions from the state, municipalities and other government entities that rely on it for their pensions. The higher payments wouldn't come until July 2010 at the earliest, however.

CalPERS' overall portfolio has fallen 23 percent since it stood at $239 billion on July 1.

CalPERS said the drop in its investments from housing, the stock market and other sources won't imperil pension benefits. And it said it has the wherewithal to ride out the slump in real estate.

"We are a long-term investor with substantial capital and assets," Eliopoulos said. "That allows us to hold the great majority of these assets for long-term success. It allows us to hold and wait for the markets to recover."

CalPERS will have to be patient.

"It's anybody's guess, but it's going to be a long while before we see these values again," said Jim Radler, senior marketing consultant with land broker Park Place Partners Inc.'s Roseville office. "It could be 10 years. We've fallen off a cliff here."

Eliopoulos said CalPERS is bailing out of a few of the properties, but he wouldn't identify them. CalPERS also is working to rework some of its $5.5 billion in housing-related debts and is overhauling some of its partnership agreements.

A staff report says CalPERS' combined real estate portfolio ? which includes office buildings, apartments, overseas holdings and more ? fell 13 percent in the most recent quarter. That was slightly worse than the entire CalPERS portfolio, which dropped about 11 percent.

Historically, though, real estate has been a star performer for CalPERS. Even with the recent downturn, the fund's real estate portfolio has earned a nearly 20 percent return the past five years. That's more than double the return of the entire CalPERS portfolio.

CalPERS' investments include the site of developer John Saca's ill-fated twin tower condominium project in downtown Sacramento. CalPERS, after spending $25 million, took over the property when the project faltered last year.

But the first sign of major trouble in the real estate portfolio came earlier this year, when a CalPERS partnership filed for Chapter 11 bankruptcy protection while struggling to develop a master-planned community near Los Angeles. The bankruptcy of LandSource Communities Development has imperiled $947 million CalPERS invested.

Eliopoulos declined to say how much might be salvaged from that investment.

CalPERS said it began taking the measure of its real estate problems well before the LandSource bankruptcy filing. Sensing trouble, CalPERS last year hired an Irvine consulting firm, Le Plastrier Development Consulting, to assess its real estate program.

Last November CalPERS directed 461 appraisals of its lots and houses in 20 states. It was the first time since CalPERS got into the housing business in the early 1990s that such an effort had been conducted, Eliopoulos said. Before then, CalPERS felt there was no need to appraise the properties because the lots and homes were selling quickly.

The appraisals showed that $9.36 billion worth of real estate had shrunk to $6.08 billion as of March 30. Because of the heavy debt load, CalPERS' equity in those properties totals only about $581 million.

Asked if it's likely the values have dropped even more since March 30, Eliopoulos said, "We don't know, we don't speculate."

But Radler, the land broker, said it's very likely that CalPERS' properties have continued falling. "It remains to be seen how much further we have to go," he said.

Eliopoulos said the land and homes will be appraised every year from now on, with the next appraisal coming in March.

Although CalPERS has been investing in housing since the 1990s, the bulk of its funding came between 2004 and 2006, consultant Le Plastrier said.

The report said 80 percent of CalPERS' housing investments are in California, Arizona and Florida, where land values have been hit especially hard.

"It's a concentration in those scariest markets," said Dean Wehrli, vice president with market researcher Sullivan Group Real Estate Advisors. "California, Florida and Arizona are the places that are the most worrisome right now."
Calpers Rocked by 'Pay-to-Play'

Calpers said a former board member had reaped $50 million in fees for arranging investments that could saddle state taxpayers with hundreds of millions of dollars in losses.

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