Second Quarter 2009 Returns
Gross Return, Second Quarter Gross Return, One Year Net Asset Value -8.01% -26.00% $1.22 Billion
25
“ We are proud of the ASB Allegiance Real Estate Fund’s 25-year record.
And we could not have achieved it without the confidence and loyalty of our participating Taft-Hartley pension plans.”
ASB Allegiance Real Estate Fund Second Quarter Report
ASB ALLEGIANCE REAL ESTATE FUND 25TH ANNIVERSARY
The Third Quarter of 2009 marks the 25th Anniversary of the ASB Allegiance Real Estate Fund. Since its inception, the Fund has served participating Taft-Hartley pension plans well, growing to become one of the bestperforming real estate funds in the United States. A constant for the ASB Allegiance Real Estate Fund throughout its 25-year history has been its focus on providing competitive performance. Another key characteristic has been its all-union construction policy, which has resulted in a high-quality real estate portfolio and the creation of millions of job hours for organized building trades workers and contractors. ASB Capital Management was spun out of American Security Bank in 1983, to house the institutional investment management business of its trust division. Established almost 100 years before, American Security Bank was an old-line Washington, D.C. bank with a rich history. At its formation, several pension plans affiliated with the International Brotherhood of Electrical Workers
were equity and fixed income investors with ASB Capital Management. The ASB Allegiance Real Estate Fund, formerly known as the ASB Collective Investment Trust Employee Benefit Real Estate Fund, was launched in 1984, when leaders of these pension plans asked ASB to create an investment vehicle for IBEW and other building tradesaffiliated pension plans to make real estate investments. Initially, the Fund invested exclusively in newly-developed projects, most of which were in the Washington, D.C. metropolitan area. However, the Fund adopted a national profile in 1990, and began making investments in most major U.S. markets. In 2000, in order to capitalize on attractive renovation and repositioning opportunities, the Fund also began investing in existing real estate projects across the country. “We are proud of the ASB Allegiance Real Estate Fund’s 25-year record,” said Robert Bellinger, President of ASB Real Estate Investments. “And we could not have achieved it without the confidence and loyalty of our participating Taft-Hartley pension plans.”
ASB Allegiance Real Estate Fund Quarterly Update
The Fund’s operating assets were almost 85% leased at the end of the second quarter, an increase of almost 200 basis points in one of the toughest leasing environments on record. Despite the fact that leasing activity at the national level turned negative in the third quarter of 2008, the Fund has continued to achieve positive net absorption of portfolio space. Overall net leasing gains since September 30, 2008 have been more than 708,000 square feet during three difficult quarters for the economy. The Fund’s leasing success speaks to the quality of the ASB Allegiance portfolio as well as the ability to attract leases. Tenants are increasingly underwriting building owners’ financial standing and their ability to meet tenant improvement obligations and capital calls before signing lease commitments. In the second quarter, the Fund delivered four new projects and significantly reduced its development exposure to only 3.4% of the Fund’s Net Asset Value. Two Financial Center, a 214,000 square foot office
200 POWELL STREET —
San Francisco, CA
Comparative Performance Since Fund Inception Growth of $10 Million
80
ASB Allegiance RE Fund
tower in Downtown Boston, delivered in June and is currently 45% pre-leased to KPMG. Phase V of Station Landing Apartments, a transit-oriented, mixed-use project in Medford, Massachussets, and Phase II of Peninsula Apartments in Boston’s Dorchester Bay area, also delivered during the quarter, and have achieved initial occupancies of 57% and 47% respectively, despite economic headwinds. 2040 Lofts Phase II, a 240-bed student housing complex serving Marquette University in Milwaukee, Wisconsin received its initial certificate of occupancy and is commencing its first leasing season for the upcoming school year. The only remaining development project is the second phase of Playa Vista, an office building in West Los Angeles.
COMMERCIAL REAL ESTATE MARKET OUTLOOK
70 60 50 $ Millions 40 30 20 10 0
7.45% annualized return $60,337,324 Core Real Estate Open End Fund Benchmark 6.14% annualized return $44,362,694
The national commercial real estate outlook continues to be challenging. Although there are signs that the recession is nearing an end, most economists expect a slow recovery. Since employment growth is typically a lagging indicator, relief from the downturn in commercial real estate is not expected to be imminent. Wage and job growth will be a big part of the prescription for a turnaround, and recent reports have provided a mix of good and bad news. Given that the rate of decline in most economic indicators has been abating,
*The ASB Allegiance Real Estate Fund is benchmarked against NCREIF’s NFI-ODCE Index (presented on an equal weighted basis), which tracks the performance of other national open-end core equity real estate investment vehicles. All performance is presented gross of investment fees through 6/30/09, as of the Fund’s Inception date of June 1984. 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.
Ownership of high quality commercial real estate properties traditionally has been one of the best inflation hedges available to institutional investors.
it is probable that the economy is at least beginning to transition in the right direction. New signs of stability in the housing market and successful Real Estate Investment Trust capital raising totaling over $7 billion year-to-date are hopeful signs. The recovery in equity markets through the first half of 2009 has provided some relief to pension plans, easing pressure to rebalance real estate portfolios and sell illiquid assets at distressed levels. However, next year’s need to refinance a record number of commercial mortgage-backed security loans that were made from 2005 through 2007 is a potential concern, despite a notable amount of equity that is currently on the sidelines waiting to be placed. As currently constituted, the Federal Reserve’s TALF (Term Asset-Backed Securities Loan Facility) rescue program is not expected to solve the problem. Only highly-rated securities can be purchased through the program, and commercial mortgage-backed security ratings will likely follow property valuations in moving down by the time the loans are due.
THE CORK FACTORY —
Pittsburgh, Pennsylvania
Along with commercial mortgage defaults caused by declining rents and increasing vacancies, the lack of liquidity available for refinancing could lead to further reductions in property valuations, even after the decline in the economy subsides. Nevertheless, some comfort can be taken that the recession’s effects so far appear to be accurately reflected in real estate. Commercial property values are now below their long-term averages and below replacement costs. Many economists are worried that the economic stimulus packages ultimately will create large deficits, resulting in inflation. Ownership of high quality commercial real estate properties traditionally has been one of the best inflation hedges available to institutional investors.
Faces of the ASB Allegiance Real Estate Fund
JOHN SKRAM, Managing Director, ASB Real Estate Investments
Mr. Skram helps to lead portfolio management and strategy implementation for ASB’s real estate portfolios, a role he has held for 24 years. Prior to joining ASB, he worked as General Manager at the real estate investment arm of Prudential Insurance Company. Mr. Skram holds the Chartered Financial Analyst designation and is a Certified Public Accountant.
“Over the last 25 years, word got out about the good returns being generated in real estate, even when the stock and bond markets were not doing well. As a result, real estate became a popular asset class with institutional investors, and the quality, intelligence, and motivation of real estate investment professionals grew significantly. – Technological advances have made a huge difference in our ability to research properties, markets, and prospective tenants.
The availability of so much more information has made us better at managing our portfolio. – Increased transparency, less leverage, and greater institutional ownership of investment-grade properties have added over time to the stability of real estate. In adverse market conditions, the need to fire sell properties has declined significantly because most owners now have deeper pockets.”
ASB Allegiance Real Estate Fund Highlights
The Urban Retail Transaction of the Year Award was presented to 455 Massachusetts Avenue, an office project in Washington, D.C., by the Greater Washington Commercial Association of Realtors. This recognition was the result of a new 9,350 square foot lease with Buddha Bar, an international restaurant founded in Paris, with additional locations in Dubai, Cairo, London, Jakarta, Sao Paulo, Dublin, Prague, and New York. The Washington Business Journal reported that the new restaurant, which is expected to open late this year, “will clearly be one of the most dramatic designs in Washington, D.C.”
200 Powell Street Building
in San Francisco received the 2009 Preservation Award from the Art Deco Society of California. The award description said, “This petite jewel box of a building on the Powell St. Cable Car run is one of the most delicious examples of Art Deco ornament in the entire Bay Area. The recent, sensitive renovation of this two story building restores the exterior, replacing the missing components of its distinctive parapet silhouette to original configuration. Its striking terra cotta ornament of jade green and gold shimmers anew.”
The Urban Retail Transaction of the Year Award was presented to 455 Massachusetts Avenue (above), an office project in Washington, D.C.
PROPERTIES SOLD Twin Lakes, Industrial, Minneapolis, Minnesota Mira Loma-Wineville, Industrial, Los Angeles, California Chinoe Creek, Apartment, Lexington, Kentucky Ontario Distribution Center, Industrial, Los Angeles, California
During the quarter, the Fund leased 375,000 square feet at Laraway Crossings Business Park (pictured on cover), outside Chicago, Illinois bringing the property’s occupancy to 100%.
The Cork Factory,
of a project—design, construction, economic viability, marketing, and management. The ASB Real Estate Fund sold its interest in the property following completion of the renovation in 2007, capturing an 11.4% internal rate of return on its investment.
For additional information about the ASB Allegiance Real Estate Fund, please contact: Judy K. McCoy Managing Director Sales, Marketing and Client Service (240) 482-2908 Phone (240) 482-2992 Fax jmccoy@asbcm.com asbrealestate.com 7501 Wisconsin Avenue Suite 200 East Bethesda, MD 20814 (240) 482-2900 Phone (800) 544-8850 Toll Free (240) 482-2992 Fax asbcm.com
a Pittsburgh conversion of an abandoned factory into 295 high-quality loft apartments and 37,000 square feet of retail space, received the Urban Land Institute Award of Excellence. This award is the centerpiece of the Urban Land Institute’s efforts to identify and promote best practices in all types of real estate development. The award recognizes the full development process
This quarterly 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 visit our website at asbrealestate.com. ASB Allegiance Real Estate Fund is a registered mark in the U.S. Patent and Trademark Office.