Wisconsin Pension Fund, Essex Bet $175MM on Parkmerced
Submitted January 15, 2012, 3:06 PM
The State of Wisconsin Investment Board and Palo Alto's Essex Property Trust Inc. have made a seven-year, $175 million preferred-equity investment in Parkmerced, a 3,221-unit, rent-controlled apartment complex in San Francisco.
The Wisconsin pension fund contributed $87.5 million of the shared investment, according to a spokesperson.
Essex did not disclose the Wisconsin fund's investment in the Lake Merced Boulevard property in its announcement. Essex’ portion of the investment was funded with the issuance of common stock and asset sales.
The deal dramatically increases Essex' exposure to the San Francisco multifamily marketplace, though mostly because its presence beforehand was so small. The public real estate investment trust has pushed aggressive expansion in the last several years, targeting the Bay Area and especially Silicon Valley. It is both developing and redeveloping multiple Bay Area projects, investing for its own account and through joint ventures and investment funds.
At the end of the third quarter, the company owned more than 27,000 apartments and held another 1,633 at some stage in the development pipeline. All of its apartments are on the West Coast in the Los Angeles, San Diego, Northern California and Seattle regions. Santa Clara County is the company's Bay Area epicenter.
Representatives for the multifamily real estate investment trust did not respond to calls seeking comment. A news release announcing the transaction said Essex intended to release greater financial detail about the transaction in its 2011 annual report to the Securities and Exchange Commission. The company has scheduled a conference call Feb. 2 to discuss its performance. It did say that the investment would "positively impact [2012] funds from operation" by approximately 12 cents per share. FFO is a common REIT measure.
The company calls out three other "preferred equity interest investments" in its most recent quarterly filings, with anticipated returns touching 15 percent in one case. However, the investment sums involved in these transactions are each less than $13 million and the underlying properties much smaller. The investments are secured by the underlying real estate.
Wisconsin and the REIT have established a joint venture, Wesco II LLC, to make the Parkmerced investment and are its only two partners. Each entity has a 50 percent interest, and Parkmerced is the only property owned by the JV, a spokesperson for the Wisconsin pension fund said in an email message.
Parkmerced is controlled by subsidiaries of New York City-based Fortress Investment Group. Fannie Mae provided a $450 million senior mortgage loan at the same time as the preferred equity investment was completed.
The Parkmerced complex is slated for wide-scale redevelopment under a controversial agreement approved last year in which the City and County of San Francisco designated the 116-acre enclave a "special use district" to allow greater development density and relaxed height and other development restrictions, according to public record.
