05/20/2009

Cash Hoard at Calpers Could Stem Fire Sales

Calpers, whose investments in residential land have gotten clobbered, has built up a sizable nest egg that should spare it from having to dump those holdings at fire-sale prices.

Because Calpers is one of the nation's largest owners of land slated for residential development, investors have been closely watching the pension system as a potential source of distressed assets. Owners of raw and partially developed land are particularly vulnerable to a debt squeeze because those properties don't produce income.

But thanks to its sheer bulk, Calpers could be the rare land player that can ride out the storm. Since last August, the pension system has more than tripled its cash reserves, to $12.4 billion on March 31 from $3.7 billion, by limiting new investments. That extra cash gives Calpers the means to pay down maturing loans or even plow more equity into faltering projects.

To be sure, there are plenty of other demands on that cash. Calpers has seen its asset base plunge by 29% since the beginning of 2008, to $178.4 billion, because of broad-based investment losses. Calpers faces commitment obligations this year across the spectrum of its investments. Real estate accounts for only about 11% of those assets - and residential land investments less than one-fifth of that. What's more, the system's board is eager to make back some of those losses by making fresh investments, whether in stocks, real estate or elsewhere.

Still, Calpers spokesman Clark McKinley said the system doesn't want to sell its distressed land holdings and believes that the value of many of those assets will rebound over time. While he wouldn't say that the system is committed to holding the assets, he noted that the cash hoard gives it the flexibility to do so.

The large pool of cash is a source of comfort to Calpers' partners in the land investments. "It doesn't make sense to sell into this market," said the operator of one land-focused fund in which Calpers invests. "These guys have the wherewithal to stay the course, and I'm glad to see they're taking some action to do that."

The pension system's residential-land losses last year included a $1.5 billion writedown on a joint venture with MacFarlane Partners and Weyerhauser called MW Housing Partners. MW sunk $900 million of Calpers money into a joint venture with Lennar Corp. that planned to build homes in Los Angeles County, Arizona, Texas and New Jersey. The partnership, called LandSource, filed for bankruptcy last June after it was unable to renegotiate billions of debt.

It's a scenario that Calpers says it doesn't want to repeat.

"If we don't have to sell, we don't have to see those losses," said McKinley. "Some of those [housing-fund investments] are in high-growth areas, and we don't expect those to go away."

Calpers has 35 investments totaling $3.6 billion in residential land and developments via two programs: the California Urban Real Estate Program, which invests exclusively in California, focusing on development projects in urban areas; and the Housing program, which makes similar investments throughout the country.

Most of the investments took large losses last year. Calpers used heavy leverage in some of the vehicles, putting it underwater in several cases. Seven investments ended the year with negative net assets, including the one with MW Housing Partners, which had a negative $300.3 million value at yearend.

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