Leonard J. O'Donnell, USAA Real Estate Company

With over US $12 billion in assets under management, USAA Real Estate Company, a subsidiary of USAA, a $160 billion financial services company, provides co-investment asset management services to US pension funds, as well as to foreign and domestic institutional investors. REP's Leon Goldwater asked Leonard J. O’Donnell, President and CEO of the company, what the company is involved in and its plans for the future.

What does USAA Real Estate Company do?

"The real estate company was founded 30 years ago, predominantly to diversify the parent’s investment portfolio into real estate. Approximately 12 years ago, the company started to expand the business into third-party asset management services for other institutions. Initially it began as co-investing with pension funds and life companies including foreign and domestic investors. Today we are managing about $12 billion in assets, of which approximately 25% is our parent’s capital.

"We are active in all product types, industrial, office, multi-family, retail, hotel and in all markets. We are in all major cities and most secondary cities in the US, although not so much in what would be called tertiary markets. We represent capital ranging from core investments for some of our pension fund clients, and we manage a variety of funds; including our US industrial funds for example, which are large bulk industrial properties. We also have the Cobalt funds that buy small industrial products and we have a government building fund, which is a core product buying long-term leased government facilities in the US.

"Soon we will launch our first multi-sector open-ended fund, a fully diversified fund, reflecting what we have been traditionally, namely a very successful, conservative but opportunistic investor. We invest in all categories, from core to new development. We are one of the largest providers of development capital in the US, where we typically use our balance sheet to fund developers, but we have begun opening some of these opportunities to our clients.

"In our investment management business, I believe at the core, what differentiates us from some managers is that we are a significant co-investor in everything that we do. Our primary goal today is still to invest our parent’s capital, so we are not driven by fees. We certainly want to grow our AUM, but really as a means of diversifying our own portfolio, so when our investors invest with us they know that we have a substantial stake at whatever they are doing and as such we have great conviction about the strategy.

"This was best highlighted by the fact that the widest margin of performance between us and the industry was in 2008 and 2009 when the markets really suffered. Those were our best performing years relative to the industry."

How did you manage that?

"Effectively one of the elements that differentiates us is that we are very active in selling assets. Many managers don’t like to sell assets, because it reduces their fee stream and their AUM. However, as an investor we are driven to make money for ourselves and for our investors, so we sold a very significant percentage of our holdings in 2007 and early 2008, even to the detriment of our asset management business. Through these sales we generated significant earnings for us and our investors and in 2008, 2009 we had no write-downs and no impairments. We were extremely liquid, so we started buying aggressively in 2009 and more so in 2010. We acquired over $2 billion of assets in 2011. We bought situationally, where we thought there was opportunity and we will actually be a significant seller of assets in 2012. We are expecting to sell in excess of $1 billion in assets.”"

Why are you planning to sell?

"In 2009 and early 2010, when there was no capital for development, we did a number of development projects, large corporate build-to-suits, where tenants needed facilities and there was no capital in the marketplace. We were able to do so at very favorable returns, and given the appetite for core product today, we will take advantage of the chance to provide some product to that market.

What are your activities outside the US?

“We have not invested outside the US presently, but I think at some point in the next few years that might happen. Most of our activity abroad has been forming co-investment relationships with people who want to come to the US. We have investors from Europe, from Canada, and the Middle East who have invested with us, either in our funds or in separate accounts within the US."

What about the new funds you are going to launch?

"Right now we are actively raising capital for our government building fund and later we will start raising capital for our open-ended fund. The government building fund was an existing fund that we converted to open-ended, which had about $1 billion of assets. So we are hoping to raise another $500 million to $1 billion in the next year and then we will continue on from there. We think that there is enough product in the pipeline to support that amount of capital right now.

"In terms of the open-ended fund I’m hoping that it will have an initial raise of about $1 billion. We will hit the market within late summer or fall and hopefully we will have an initial closing by the year end or the first quarter of 2013. What makes us unique is that we have actually acquired a number of seed assets for that fund. So we will go to market with somewhere between $500–800 million of identified assets to bring into the fund.

"In this fund raising environment, where there is caution and some concern, I think when you combine our historical and significant sponsored co-investment performance and the fact that we have identified the assets and have the financial capacity to acquire them in advance, makes me feel confident our fund raising will be successful."

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