Exclusive: Los Angeles’ CIO Preps for Potential $1 Billion Real Estate Sell-Off

Jonathan Gaabel

As much as $1 billion in assets may hit the real estate market as part of the Los Angeles County Employees’ Retirement Association’s (LACERA) review of its real estate portfolio.

There’s no event that’s prompting the potential sales, other than bringing core and value-added real estate strategies closer to their 7% target allocation, Chief Investment Officer Jonathan Grabel told CIO. “We’re not opining on individual properties, it’s just part of asset allocation, and these strategies happen to be overweight.”

“Subject to board approval, much of this could happen over the next 24 months,” Grabel added. However, despite the main goal of divesting to reduce the portfolio’s allocation, the pension still intends to execute a modest amount of new investment activity so that vintage year diversification can be maintained. In that case, LACERA’s investment staff sought board approval to allow up to $500 million to be invested by the fund’s existing separate account managers, Clarion Partners, Heitman, Invesco Real Estate, DWS, and Stockbridge.

According to Grabel, LACERA conducts structure reviews of its asset categories to optimize the implementation of each portfolio. The real estate structure review identified various initiatives including being a net seller during the 2019-2020 fiscal year, and states that for every $1 of new investment, $2 of sales should occur.

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The vacated space in the portfolio could be filled with LACERA’s other initiatives in its real assets outlet, including infrastructure, Treasury Inflation-Protected Security (TIPS), and natural resources, as well as its credit portfolio. The total real estate portfolio is currently valued at about $6.4 billion.

The sell-off is expected to include approximately $500 million worth of apartment assets. The full $6.4 billion real estate portfolio is illustrated below:

Source: LACERA

After the dust has settled, LACERA staff anticipates that at least 60% of the portfolio will be core real estate assets. They’re studying whether or not to gain access to office and retail exposure, since technological disruptions from online competition has “challenged mall holdings” in the past for other investors. They also intend to target niche, long-term strategies such as medical offices, senior housing, student housing, self-storage, and other investments.

Another key theme is for the pension to consider using more open-end fund vehicles, since they may improve liquidity, diversification, and have higher performance figures.

The $56 billion pension is in the midst of deploying its inaugural infrastructure strategy, part of which includes fulfilling a 2%, or $1.1 billion, target allocation.

Grabel joined LACERA in April 2017, replacing David Kushner, who resigned after a three-and-a-half year stint at the retirement system.

Tags: Jonathan Grabel, Los Angeles County Employees Retirement Association (LACERA), Pension, Real Estate

Bed Bath & Beyond announced a revamp of its board on Monday, which included an independent chair and directors, and the May 1 retirement of Co-Founders and Co-Chairmen Warren Eisenberg and Leonard Feinstein. Patrick Gaston, the current lead independent director, will become the independent chair.

The new board, which is 60% female and 40% minority, will form a committee tasked with reviewing the housewares retailer’s changes, strategy, and structure. It also will launch a new executive compensation model.

The activist investors that pressured the company’s changes include Legion Partners Asset Management, Macellum Advisors, and Ancora Advisors, collectively called the Investor Group. And the group has a shopping cart full of issues with Bed Bath & Beyond’s overhaul.

Its biggest complaint is that Steven Temares is retaining his role as the company’s chief executive officer. The activists said he “must be held accountable for the company’s prolonged poor performance and destruction of shareholder value.” The group has been trying to oust him via a proxy push since March.

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The activist group also said the changes lack “any detailed strategic vision for driving value creation at Bed Bath,” and that it will continue its crusade to “install fresh, experienced, and independent oversight and management at the company.”

The Investor Group said the new directors don’t have enough retail experience or the skills to turn the business around quickly. Each has at least four years of necessary experience, according to Bed Bath & Beyond, but the group wants independent directors with “deep retail experience at the highest levels.”

“The company’s track record in identifying additions to the Board in the past does not instill confidence,” the group said in a statement.

Shareholders also were underwhelmed by the revamp. Bed Bath & Beyond stock dropped 4.2% at the end of Monday. And research from corporate governance and responsible investment solutions provider Institutional Shareholder Services, shows they weren’t happy about his tenure at last year’s annual meeting (CIO is owned by ISS).

Source: Institutional Shareholder Services

The firm’s governance QualityScore tracker has Bed Bath & Beyond at an eight, which is considered high-risk.

Source: Institutional Shareholder Services

The Investor Group has a 5% total stake in the company. At the 2019 annual shareholder meeting, it nominated its own candidates to the board, including Macellum CEO Jonathan Duskin, whose first order of business would be to hire a new chief.

Bed Bath & Beyond said it has attempted to engage with the Investor Group, and was rebuffed. The company said it is still open to “constructive dialogue” with the group, and is expected to release its new business strategy in the coming days.

The Investor Group’s members could not be reached for comment. Bed Bath & Beyond representatives declined comment.

Tags: Activism, Activist Investors, Ancora Advisors, Bed Bath & Beyond, Legion Partners Asset Management, Macellum Advisors