ASB Allegiance Real Estate Fund Year-End Report

Transcription

1 ASB Allegiance Real Estate Fund Year-End Report 2008

2 At the end of the day, it s nice to know you built it. In 1984, ASB Capital Management launched an equity real estate investment product designed to provide qualified pension plans with an opportunity to participate in the development of income-producing properties, constructed with union labor. The investment objectives of the ASB Allegiance Real Estate Fund are to provide a competitive rate of return, stable and predictable income, increasing cash flows, potential for appreciation in value, a hedge against inflation, and meaningful portfolio diversification. By employing 100% union labor on its sites, Fund management believes that the highest quality construction is achieved; this helps to ensure the long-term success of each project. We thank our investors, past and present, and the countless union members and employers involved in the construction of the properties that have made the Fund a success. 25 In June 2009, the ASB Allegiance Real Estate Fund will celebrate its 25th year of successful investment in high quality, union-built real estate.

3 Asset values in all markets today are well below replacement cost and likely to fall further. However, real estate Robert B. Bellinger, CFA Dear Clients and Friends Last year at this time we expected the sub-prime mortgage values for Class A properties in healthy markets will eventually find their equilibrium at levels approaching the cost to construct those buildings. This downturn has been driven by an extraordinary reduction in global liquidity for both debt and equity capital. While the scale and duration of the downturn remain to be seen, ultimately, the recovery in real estate values will depend both on renewed investor confidence and sustained employment growth. meltdown and consequent turmoil in the capital markets to have a negative impact on the economy and our 2008 investment performance. However, we did not anticipate that the economy would deteriorate as quickly or severely as it did in The deepening recession has resulted in a historic period of volatility and uncertainty, including dramatic asset devaluations in every investment sector except U.S. Treasury bonds. Despite the negative near-term outlook, we believe that commercial real estate will continue to offer investors attractive diversification benefits, with greater price stability than most other asset classes. We will continue to focus on optimizing returns through leasing, strategic disposition of less attractive assets, and operational cost saving strategies that will maximize income and long-term value. We extend our thanks and appreciation for the continued support and confidence of our investors. We are committed to providing competitive investment returns with the added benefit of job generation for skilled union craft members and contractors. In anticipation of worsening conditions, the ASB Allegiance Real Estate Fund concentrated throughout the year on leasing up properties, selling less attractive assets, and cutting expenses throughout the portfolio. While we made notable progress on these fronts, we were not immune to the economy s significant challenges. Respectfully, Over the next 12 months, we expect financial strains in the broad economy to continue to challenge property fundamentals and real estate returns. Nevertheless, we are encouraged by the speed at which the markets appear to be reacting, and the relative scarcity of new supply, which could enable equity real estate to find a bottom more quickly than in the early 1990 s. Robert B. Bellinger, CFA Fund Portfolio Manager and President, ASB Real Estate Investments 1

4 Performance In 2008, the ASB Allegiance Real Estate Fund posted a gross return of -4.55%. Through strategic capital improvements and substantial leasing success, the value of a number of the Fund s assets were enhanced in 2008; however, these gains were overshadowed by more conservative valuation assumptions and 50 to 150 basis point capitalization rate increases on many other portfolio assets. Although this performance is disappointing, on a relative basis the Fund sheltered investors from deeper losses in public equity positions, which returned -37.0% for the year, as measured by the S&P 500 Index. The Fund also outperformed other open-end core equity real estate products, as measured by the NCREIF-ODCE Index, which had a gross return of -9.98% for the year. The Fund ended 2008 with $1.56 billion in net assets under management. This was down slightly from $1.58 billion at year-end 2007, as a result of the year s negative return. The Fund attracted 11 new clients during 2008, totaling $56.8 million in new-client investments, as well as $28.2 million from existing clients. During the year, the Fund paid out $44.3 million to investors looking to rebalance in the wake of write-downs in their securities and hedge fund investments. As of January 1, 2009, the Fund had total withdrawal requests of $108 million, which will be met as market conditions and prudent asset sales allow. Performance as of 12/31/08 3 Mos 12 Mos 3 Yrs 5 Yrs 10 Yrs Real Estate ASB Allegiance Real Estate Fund -6.39% -4.55% 9.24% 12.01% 10.74% NCREIF ODCE * % -9.98% 6.67% 10.75% 10.13% NCREIF NPI ** -8.29% -6.46% 8.11% 11.67% 10.48% Equity Indexes S&P % % -8.37% -2.19% -1.39% DJIA % % -4.41% -1.32% 1.58% Wilshire % % -8.45% -1.70% -0.63% NASDAQ Comp % % -9.85% -3.96% -2.80% Russell % % -8.30% -0.93% 3.03% MSCI EAFE % % -7.39% 1.64% 0.79% Bond Indexes Barclays Aggregate Intermediate Bond 3.57% 4.86% 5.49% 4.44% 5.46% Barclays 1-3 Gov/Credit 2.68% 4.98% 5.36% 3.81% 4.80% * NCREIF Open-End Diversified Core Equity Fund Index ** NCREIF National Property Index All Returns shown are gross of investment advisory fees through 12/31/08. Past performance is not necessarily indicative of future results. The advisory fees and any other expenses the Fund may incur in the management of its investment advisory account will reduce client returns. Part II of ASB Capital Management s Form ADV describes the investment advisory fees. 2

5 Automatic Lofts Chicago, Illinois Investment Summary Income Return 2.7% 4.3% 5.1% 6.0% Appreciation -7.1% 11.0% 12.4% 12.0% Total Return -4.6% 15.7% 18.1% 18.6% Net Asset Value $1.558 billion $1.592 billion $1.083 billion $606 million Unit Value $ $ $ $ Number of Investments All Returns shown are gross of investment advisory fees. Past performance is not necessarily indicative of future results. The advisory fees and any other expenses the Fund may incur in the management of its investment advisory account will reduce client returns. Part II of ASB Capital Management s Form ADV describes the investment advisory fees. The sum of income and appreciation returns may not equal total return due to the compounding of individual component returns to each other. 2 During 2006, the Fund modified how it counts investments. For example, if the Fund owns two different buildings that are the same product type and are located in the same park but were purchased 3 at different times, the Fund now counts the two buildings as one investment since the properties are leased and managed as a unit.

6 Highlights As of December 31, 2008, the ASB Allegiance Real Estate Fund had 63 investments in 202 properties in 25 major markets. Here are some of the Fund s important accomplishments during the year: A record 2.6 million square feet in new, renewal and expansion leases were signed across office, retail, and industrial assets. The office development portfolio is 75% pre-leased, and only 9.8% of the Fund s commercial leased space is due to roll over in 2009, the majority of which is expected to renew. Leasing is the Fund s number one priority and positive commercial leasing traction has continued in the face of negative national trends. Suburban office projects West*Quest, in the Baltimore only three suburban office properties, totaling only 3.7% of the Fund s net asset value. More than 40% of the portfolio is located in what the Fund believes will be the top four performing metro areas in the country over the next three to five years: Washington, D.C., Boston, San Francisco, and Los Angeles. Pacific region concentration increased to 21.5% and residential sector concentration grew to 20.1%, in line with the Fund s 2008 goals. The retail allocation, currently at 12.4%, continued to be underweighted, and the office allocation decreased to 39.7%. The Fund s student housing allocation, currently 9.4% of the Fund, has been an important diversifier as a result of favorable supply/demand characteristics and major barriers to entry. suburb of Linthicum, Maryland, and the Crosstown Corporate Center outside Minneapolis, Minnesota were sold, sharpening the focus on urban markets and markets less susceptible to declining valuation and leasing fundamentals. The portfolio currently has Fund Geographic Diversification (by net asset value) Pacific 21.5% Northeast 18.8% Mountain 11.4% Mid-Atlantic 11.8% West Central 11.5% Southeast 2.8% East Central 14.2% Southwest 8.0% 4

7 Income In the last two years, the Fund signed 4.4 million square feet of commercial leases. These leases will generate more than $40 million in annual net rent, and should increase the Fund s income return by more than 200 basis points by An additional $12.5 million in annual income is expected as a result of new multi-family project delivery and leasing. Blue, in Minneapolis, was completed in November, is 55% leased, and is on schedule to achieve stabilization in In addition, 2040 Lofts Phase II in Milwaukee, and Station Landing Phase III and Peninsula II in Boston, are scheduled to open in the first half of ASB Allegiance Real Estate Fund income for 2008 totaled $44.3 million, down from $55.2 million in 2007, as older stabilized suburban product was replaced by higher quality development projects that had not yet begun to generate income. Although this strategy resulted in lower current income in the short term, it allowed sales of over $445 million in less attractive assets during the market peak. This helped to avoid significant depreciation in suburban office values and enhanced the overall quality of the portfolio. Blue Minneapolis, Minnesota going Green: During the year, the Fund completed Blue, the first-ever, privately-funded LEED certified apartment building in Minneapolis. The LEED certification, which recognizes Leadership in Energy and Environmental Design, promotes sustainable, environmentally-responsible design and is only awarded to projects that meet stringent guidelines. Currently more than 50% leased and ahead of financial projections, the project has been lauded by the Minneapolis real estate community for its innovative and sleek design, leading to several awards. These awards include Project of the Year from Hanley Wood, a national publication serving the housing and construction industries, in their Green and Marketing categories, as well as the Minneapolis Business Journal s Best Multi-Family Project. In addition to Blue, the Fund is seeking LEED certification at its Playa Vista development in Los Angeles, its Plaza 360 renovation in Oakland, California, and in tenant build-outs throughout the portfolio. 5

8 Leasing In 2008, the Fund leased 2.6 million square feet of commercial space, outpacing the 2007 total of 1.8 million square feet. New tenants leased 1.4 million square feet, renewing tenants leased 900,000 square feet, and expanding tenants leased 300,000 square feet. Even in the fourth quarter, during which the economy lost nearly 2 million jobs, the Fund signed 482,000 square feet of commercial leases, of which 70% were with new tenants. The improvement in income from our office leasing was partially offset by a reduction in residential occupancy. As a result of recessionary pressures and competition from new construction supply, occupancy in the Fund s multifamily portfolio dropped by 4%. The Fund s most significant lease was signed at the new Playa Vista project with Fox Interactive Media. At a total of 419,000 square feet, it was the third largest lease executed in the United States in 2008, and will provide more than $350 million in income over the next twelve years. The Capella lease at 225 South Sixth, which runs through 2015, will grow Capella s square footage from 203,231 square feet to 395,638 square feet, and represents a significant success for the property. The lease was executed at above pro-forma terms, and more importantly, stabilized occupancy at this important asset. The Fund made substantial progress leasing vacant space and renewing key existing tenants throughout the year, and signed the two biggest leases in its history at the Playa Vista development in Los Angeles and at 225 South Sixth in Minneapolis. 225 south sixth Minneapolis, Minnesota Real Estate Fund Lease Rollover Schedule Industrial 15.2% 6.1% 12.1% 4.3% 18.0% Office 4.1% 4.8% 4.9% 4.3% 6.6% Retail 3.9% 4.4% 4.6% 10.6% 9.2% Total 9.8% 5.4% 8.6% 4.9% 12.7% 1 Residential properties are excluded from the lease rollover analysis. Since rental apartments typically have one-year leases, rollover in this property type is essentially 100% each year. 6

9 225 south sixth Atrium 7

10 Real Estate Fund Occupancy Rates 1 total Rentable SF SF Leased % Leased Industrial 5,833,787 4,409, % Office 3,718,039 3,298, % Residential 3,267,648 2,830, % Retail 1,055,878 1,003, % Total 13,875,352 11,540, % Another notable transaction was the renewal of Equinix at the Dallas Infomart. This 56,551 square foot lease, signed in December, addresses the bulk of 2009 expirations at the property, at terms far superior to pro-forma. This lease renewal will result in $1.27 million in additional net income to the property and will add approximately $15 million in value to the asset. An additional 217,000 square feet of leases were signed at this project during Excludes non-operating investments, such as investments under construction. At Two Financial Center in Boston, KPMG committed to 115,000 square feet, in a transaction that brought the building to 54% pre-leased and paved the way for additional tenant leasing. Faces of the ASB Allegiance Real Estate Fund joe hall, President, Dallas Building Trades The Infomart has 1.2 million square feet. It is a large, large building, and the most technologicallyadvanced in Dallas. Bank of America has two full floors there, which they have almost completely reworked. The project has employed hundreds and hundreds of our people, and our contractors see it as a way to show their stuff. My job is to coordinate all the crafts to make sure projects run smoothly. I also make sure that project costs are in line and owners like ASB get the bang for their buck. ASB is a great company. Anytime I have a question or potential issue, I get a response right away, and that means a whole lot. ASB s representatives bend over backwards to try to help us. the dallas infomart Dallas, Texas 8

11 Mike Monahan, Business Manager, IBEW Local 103 Our members are proud to work on ASB projects. Two Financial Center is a Class A property in a great spot. Peninsula I and II are also attractive properties. People are drawn to them because of their waterfront location and views. You re not just money people. ASB understands construction and how local unions and subcontractors work with general contractors. ASB is very responsive whenever we have questions or ask for help. It s much different from dealing with most corporations, where you can just end up in voic world. ASB s investments have been wonderful to work on. We never have an issue with ASB. icing on the cake: On July 18, 2008, Two Financial Center had its topping off party. Team members from ASB Allegiance Real Estate Fund, Lincoln Properties and Suffolk Construction were on hand to celebrate the placement of the building s final iron beam. It was an eventful year at this property, which also enjoyed the execution of a 115,000 square foot lease with KPMG, the anchor tenant. The property is currently on budget and is expected to deliver in 9 mid-2009.

12 Property Sector Diversification With respect to property type concentration risk, the ASB Allegiance Real Estate Fund maintained a balanced sector allocation in The highest concentration is in the office sector, which ended the year at 39.7%, down from 49.4% at the end of At its current level, the office allocation remains modestly overweight relative to NCREIF, and is expected to stay near its current levels or increase moderately as the Fund s two new urban office developments are completed. In 2008, the Fund increased its residential portfolio allocation by 3.0% for the second consecutive year. The current residential allocation is 20.1%. Fund Property Type Diversification (by net asset value) Retail 12.4% Cash 0.2% Industrial 22.1% Residential 20.1% Land 5.5% Office 39.7% Project Acquisitions The Fund s transaction activity for the year included three new investments that the Fund had committed to in 2007, totaling $195 million in equity. In an effort to conserve liquidity, no new equity investment commitments were made in The Fund s investment strategy has been geared to in-fill urban markets in the East, Midwest, and West regions in markets where demographic trends and supply demand balance should lead to above-average rental growth. Investments are being avoided in markets like Las Vegas, Phoenix, Atlanta, Charlotte, and Orlando, which have few barriers to entry and lack substantial zoning and development controls. 10

13 Project Dispositions During the year, the Fund sold four assets and made a partial disposition of one of its industrial assets for an aggregate price of $128 million. Park Central, a land parcel in Richmond, was sold because it did not fit the Fund s 24-hour market strategy. Laraway Land, an industrial land parcel in the Chicago suburb of Elgin, Illinois, was sold in order to reduce the Fund s Midwest region allocation. Mira Loma, an industrial asset located outside of Los Angeles, was sold in order to redeploy capital and capture the value created after the investment had been fully leased. Crosstown Corporate Center, an office building located outside of Minneapolis, was sold because of its suburban location and tenant rollover exposure. West*Quest, an office asset outside of Baltimore, was sold as a result of its age and suburban location. With this sale, the Fund now has only three suburban office assets, comprising 3.7% of the portfolio. Fund Dispositions Sales Price Property Name use MSA Sell Date (Millions) Park Central Land: Industrial Richmond 2/15/2008 $1.2 Laraway Land Land: Industrial Chicago 8/21/2008 $4.2 Mira Loma Cantu Galleano Building Industrial Los Angeles 12/23/2008 $14.5 Industrial Total: $19.9 Crosstown Corp Center Office Minneapolis 4/29/2008 $10.6 West*Quest Office Baltimore 9/5/2008 $97.6 Office Total: $ Total: $128.1 Fund Acquisitions total ASB Equity Square Commitment Property Name Use MSA feet (Millions) Fortune Data Center Industrial San Jose 36,000 $54.4 Station Landing Mixed-use Boston 740,000 $87.3 Playa Vista Phase II Office Los Angeles 480,000 $53.5 Total 1,256,000 $

14 Portfolio Strategy The ASB Allegiance Real Estate Fund is an open-end, commingled real estate fund managed by ASB Real Estate Investments, a division of ASB Capital Management, LLC. Chevy Chase Trust Company, an affiliate, is the Trustee for the Fund. The Fund is comprised of premium-quality, income-producing properties, which are diversified by product type, location, and lease exposures. By providing stability and diversification to its investors portfolios, the Fund helps to reduce the volatility of overall portfolio returns. The Fund s investment philosophy is rooted in three key investment strategies: 1) Focus on core, Class A real estate investments with competitive advantages that can push rent growth above national averages; 2) target proven, in-fill urban locations with substantive barriers to entry; and 3) utilize moderate leverage to minimize the negative impact of cyclical swings. The Fund seeks to achieve the highest quality construction by employing 100% skilled union labor and contractors, which helps to ensure the long-term success of its projects. By maintaining these high standards, the Fund s cash flow is enhanced through lower ongoing repairs, maintenance expenses, and capital refurbishment costs. The Fund invests in partnerships with experienced and successful local real estate operators with proven investment track records in their local markets. They enhance the Fund s competitive advantage because of their knowledge, skill, and experience in identifying and executing value-creation strategies. Through strategic asset selection, active hands-on asset management, and prudent risk management, the Real Estate Fund s investment objective is to generate superior risk-adjusted returns for its clients. The Fund targets investments in which it can protect and preserve clients capital, while at the same time generating acceptable income returns and capital appreciation. Labor Matters: The Fund is committed to quality union construction. In 2008, the Fund generated more than $275 million in union-built improvements across its operating portfolio, including $99 million in improvements/upgrades and $176 million in development costs. 12

15 COMMUNITY Matters: The ASB Allegiance Real Estate Fund team made a positive impact on the Washington, DC Real Estate community in 2008, through active participation in the Urban Land Institute, the DC Real Estate Group, and Commercial Real Estate Women (CREW). During the year, CREW recognized ASB Vice President Mandi Wedin with its Rising Star Award for her diligent efforts to promote professional and business opportunities for women in commercial real estate. 3

16 ASB Real Estate Investments 7501 Wisconsin Avenue Suite 200 East Bethesda, MD (240) asbrealestate.com ASB Allegiance Real Estate Fund is a registered mark in the U.S. Patent and Trademark Office This report is published by ASB Real Estate Investments, a division of ASB Capital Management LLC. Information and statements contained in this issue are based on data obtained from sources we believe to be reliable, but are not guaranteed as to accuracy and do not purport to be complete. ASB Allegiance Real Estate Fund is an open-end, commingled equity real estate fund that focuses on the Taft-Hartley market. For more information, please contact Judy K. McCoy, Managing Director at (240) or visit our website at asbrealestate.com.