Dutch institution APG was behind one of the biggest deals in the US last year. Steve Hason talks to Richard Lowe about its strategy in the American market
APG, one of Europe's largest institutional real estate investors, has taken a positive view on the retail sector for some time, eyeing its potential defensive qualities during the global downturn. The Dutch pension fund asset manager is also somewhat keen on the US property market, with roughly a third of its global real estate investments located there.
These two broad themes combined at the end of last year to produce one of the largest real estate deals of 2011. The $1.5bn joint venture with TIAA-CREF to acquire interests in five ‘super-regional' shopping malls certainly served as a statement of intent, with APG providing 49% of the equity.
When the deal was announced, both APG and TIAA-CREF were keen to highlight the ‘dominance' of the five retail centres in their consumer markets of Kansas City, St Louis, Nashville, Houston and Bethesda.
Sitting in the New York office of APG Asset Management Inc - APG's US subsidiary - managing director Steve Hason again mentions the d-word. "You want to make sure you are buying the right centres in those markets," he says. "You don't want to buy the fifth or sixth centres, you want to own the dominant ones."
He adds: "Top-tier malls have been operating very well and very consistently even through the cycle. There was a dip in 2008 and 2009, but they have come back really nicely. Grocery-anchored shopping centres, offering necessity-type goods and services - we think that is a really durable sector with stable returns that will last throughout cycles."
Such assets are not always for sale and require investors with deep pockets. Hason says APG was positioned perfectly in this regard. "We are fortunate because of the size of our portfolio and we have the ability to be patient and wait for the right opportunities," he says.
APG's ability to be patient is helped by its strategy to invest in both private and public real estate markets. Hason is co-head of Americas real estate at the institution. His counterpart, Mary Hogan Preusse, heads APG's listed real estate markets in the region. "Because we have a really significant exposure and allocation to listed real estate securities, we have the ability to be invested at all times."
APG is one of a number of large institutional investors that has become associated with a rise in joint ventures and club deals in recent years. Hason says the institution does not rule out investments in pooled real estate funds, but he says APG's preference for significant co-investment and a difficult environment for launching pooled vehicles means the market is more conducive to joint ventures and club deals.
"I don't want to say we are indifferent to the type of investments we make in terms of structure," he says. "We are very focused on the types of investments we make in terms of asset class and location with some specificity. You can't always find the right partner who can write a significant cheque alongside us to do a joint venture or club - sometimes it may take the form of a fund - but what we are ultimately concerned about is having the right operating partner to execute a strategy on our behalf."
TIAA-CREF has taken a majority stake (51%) in the joint venture with APG. Hason says it is indicative of the sorts of investments APG will be targeting going forward. "Any time that we can do a deal with smart, sophisticated, well-aligned partners - that is always something we find attractive," he says. "To the extent that we continue to find transactions and executions that are similar to that, we would clearly consider them. That continues to be a big focus of our business."
Alignment of interests through co-investment is very important. "What isn't easy in this environment - on both the fund and JV side - is working with a partner that can match capital with us. And that is what we do focus on," Hason says. "We do focus on alignment and making sure that our partners have the same investment objectives and the same meaningful capital at risk that we do."
Hason clarifies what he means by meaningful capital. "Alignment doesn't always come in the form of an absolute value," he says. "We want to make sure co-investments by our partners are significant to them, so they are meaningful if they were to lose them. The best alignment of interest is where you come into work everyday and you have capital at risk."
The size of the TIAA-CREF joint venture was important as well. Hason admits there is a reason to be concerned about current pricing of core assets in the US at the moment. APG is therefore looking to higher-returning, strategic investment opportunities unless the size of the transaction - as with the shopping centre joint venture - plays to its advantage.
"We've seen core pricing move very high as there has clearly been a flight to quality," Hason says. "The prices have really been justified if you look at the asset returns versus the spread over treasuries, and because you can efficiently borrow to lever your equity. Core pricing has certainly increased. On the private side, it's probably not where we are focused unless our capital matters and translates into better pricing, which is really more likely in larger transactions.
"There is a difference between core assets and core markets. Core assets have really moved up in price, but there are still strong assets within core markets that you can buy at attractive prices. As you recapitalise these assets and invest additional capital into operations and leasing, you convert them back into core market assets - but you don't have to pay core pricing when you invest."
Opportunistic funds, however, are generally of less interest to Hason, mainly because of the higher leverage associated and their international allocator-type approach. "That's what we do," he says. "We want to be more specific on a global basis in terms of who we allocate capital to. And that is the ultimate benefit of having a global team."
Debt strategies, meanwhile, are definitely on the agenda. Hason says there is a need to avoid overlapping with the investment activity of APG's fixed income teams and therefore the focus is on debt strategies "where the returns are really driven by the real estate and potentially the performance of the underlying real estate".