ATRS hangs 'for sale' sign on real estate holdings: pension fund enjoys return of resurging investment market.

ARKANSAS TEACHER Retirement System waded into real estate investing under the leadership of its former executive director, Bill Shirron. The move produced at best a mixed bag of results for the state's largest pension fund and exposed a system in need of checks and balances.

David Malone, Shirron's replacement, helped establish a moratorium on direct real estate investments until he could get a firm handle on the situation.

His conclusion is that an inordinate amount of staff time is spent dealing with such a small portion of the fund's $8.1 billion in assets. ATRS has invested about $185 million in real estate holdings, primarily in Arkansas.

To put things right, Malone is directing a sell-off of some properties.

"We're purposefully trying to downsize this portfolio over time," he said. "But we're not going to let someone come in and buy a property in a fire sale."

Malone has identified 17 properties to sell during the next five years. Eight are pegged for sale as soon as an acceptable deal can be struck. This short list includes seven properties that produce little or no income for the pension fund.

Four are undeveloped tracts, would-be retirement center sites in west Little Rock, Fayetteville and Jonesboro and acreage near the Northwest Arkansas Regional Airport.

"I'm losing opportunity by having that money tied up," Malone said.

He wants to get that money working in the pension fund's resurging stock holdings. The value of its domestic holdings grew by 25.7 percent and foreign stock holding increased by 28 percent during the fiscal year ending June 30.

The value of the pension fund's overall investments grew by 17.7 percent during that period.

"We're understaffed for an $8 billion pension fund," Malone said. "We decided to downsize the real estate portfolio. It was a personnel issue.

"We're going to be pushing the Legislature on this. If we're going to have as diversified a portfolio as we have, we're going to have to have more people, more highly trained people."

In terms of selling properties, ATRS already has shed three from its portfolio this year.

* The Benton Commons Shopping Center, purchased in November 2000 for $6.6 million, was sold for $6.8 million.

* The 8,100-SF Cherry Brook Building, purchased in June 1996 for $1.1 million, was sold for $1.2 million.

* The 27,000-SF Riley Building in downtown Little Rock, inherited along with $1.1 million in debt in a loan default settlement with Pat Riley Sr., was sold for $1.5 million.

Here's a digest of the fund's other real estate holdings and Malone's current plans for them:

Properties For Sale

* 1,364 Acres in Benton County 

The property near the Northwest Arkansas Regional Airport is under contract in a deal that essentially would be break-even for ATRS. The land was assembled during 2000-01 for $11.8 million in a speculative deal.

* 63 Acres in Fayetteville

Negotiations are in motion to sell to Stonehill-PRM Realty of Dallas in a $5 million deal. The property was acquired for $4.26 million.

* 70.9 Acres in west Little Rock

Two 5-acre tracts are under contract to separate would-be buyers. ATRS officials are confident about ultimately recouping more than $4.3 million, the original purchase price.

* 102 Acres in Jonesboro

The ATRS Board of Trustees approved selling 35 acres for $682,500 to Mark Fowler, president of Liberty Bank of Jonesboro. Fowler has offered to acquire an additional 23 acres for $368,000, and there are negotiations to sell the entire property.

Trustees are coming to grips with the reality that the pension fund could lose as much as $1 million on a resale. ATRS officials have learned the $2.9 million purchase price was based on an unrealistic appraisal.

* 623 Woodlane Ave., a 3,900-SF building near the state Capitol and 46 adjoining parking spaces

The ATRS investment committee recently rejected a $300,000 offer by the Arkansas Board of Registration for Professional Engineers and Land Surveyors to acquire the building and 14 parking spaces.

The $700,000 investment originally was envisioned to complement the pension fund's neighboring Victory Building development. Recent appraisals indicate ATRS paid too much for the property, which was purchased without the benefit of an appraisal.

* 8015 Geyer Springs Road, a 6.6-acre development in southwest Little Rock that was once home to a Harvest Foods grocery store

The 56,000-SF building and most of the parking area is under contract for sale to be redeveloped as a secured storage facility, and ATRS intends to retain an acre leased for a McDonald's restaurant. Expectations are the sale, lease payments and an expected future sale to McDonald's will help the pension fund recover its $1.5 million investment.

* 39.58 percent stake in the 11-story, 258-room Hilton Suites Dallas North, which opened in late 2002 adjacent to the Galleria Entertainment and Shopping Complex

After opening less than two years ago, the project already is in financial trouble. ATRS contributed an additional $1 million to keep the project afloat.

The pension fund initially contributed $5.15 million to help launch the development brought to ATRS by Herrington Inc., a Little Rock-based private equity firm led by Phil Herrington.

The property is for sale with an uncertain financial outcome.

* Bank of America Plaza, a 75,900-SF office building in Fayetteville

Though profitable since its $3.5 million purchase in December 1999, the property is marked for sale to shorten the ATRS real estate roster.

It was chosen for sale because of its location near the Fayetteville Square, considered a hotbed for redevelopment.

Recommended for Sale

The following properties are being considered for sale in the next three to five years, after firm cash flows are established or lawsuits resolved:

* 377 Airport Road, a 26,000-SF office building in West Memphis purchased for $2.2 million and leased to the Department of Human Services, and 3737 E. Broad St., a 26,000-SF office building in Texarkana purchased for $1.8 million and leased to DHS.

Both properties are generating nice returns, and both are the subject of breach-of-contract lawsuits with ATRS as the plaintiff. The pension fund had to invest an estimated $250,000 to fix structural problems covered by warranty under the purchase agreement.

The parking lot in Texarkana had to be rebuilt because the contractor allegedly performed inadequate base work to support the paving. The West Memphis project had alleged deficiencies in site work that caused foundation problems from rainfall flowing toward the building instead of away from it.

* 1 & 2 American Center, a 412,600-SF office complex in Nashville, Tenn.

ATRS invested nearly $17 million to acquire an 80 percent stake in the American Center project in December 2000. Cooper Realty Investments of Rogers owns the remaining 20 percent of this overall $71 million deal.

* Crescent Center/Forum I, two office projects in east Memphis

The pension fund invested nearly $14.4 million in May 2001 to acquire an 80 percent share of the 336,000-SF Crescent Center and the 162,000-SF Forum I.

Ownership declined to 66.24 percent after ATRS officials opted not to invest an additional $3 million to pay for improvements and leasing costs. Cooper Realty shouldered the full brunt of the cash call and increased its original 20 percent stake to 33.7 percent.

Whether the projects were under-budgeted by Cooper Realty or the properties simply were overpriced remains a topic of debate.

* Two Financial Centre, a 118,000-SF office building in west Little Rock

Financial Centre

ATRS invested $3 million for an 80 percent stake in the office development in May 2000. Ownership was cut to 69.2 percent when ATRS officials chose not to invest an additional $400,000 to overcome a higher than expected loss of tenants.

Cooper was forced to fund the full capital call, increasing its ownership to 30.8 percent.

* Southcenter Shopping Center, a 215,000-SF retail project in Hot Springs

The pension fund paid $12.7 million for the 20-acre development in July 2000. The project, which had generated an 8.5 percent return, was rocked when it lost Kmart as an anchor tenant.

The retailing giant escaped from its long-term lease through Chapter 11 reorganization, and ATRS is to receive shares of rebounding Kmart stock to cover past-due lease payments. Two-thirds of the Kmart space has since been leased to Hobby Lobby.

* Woodland Heights, 63-unit retirement project in west Little Rock

The pension fund took ownership of the project three years ago as part of a settlement with Pat Riley Sr., who defaulted on an $11.5 million loan from ATRS.

Though not part of the loan's collateral, Riley transferred ownership to the pension fund to help negotiate a release of his personal guarantee of the debt. In accepting the property, ATRS took on about $3 million in liabilities tallied by Riley.

Occupancy at Woodland Heights is now at 100 percent with a 25-person waiting list. ATRS is considering the construction of a second residential tower to address the demand and make the project more fiscally efficient.

* Woodland Heights Rehabilitation Health Care Center, a 222-bed nursing home in west Little Rock

ATRS inherited the property through the Riley loan default. Occupancy has ranged as high as 175 beds to between 90 and 125 beds more recently. Plans call for boosting occupancy by increasing the number of assisted living to complement the acute care operations.

* Northridge Rehabilitation and Health Care Center, a 112-bed nursing home in North Little Rock with a capacity for 224

The pension fund inherited this project through the Riley loan default. State regulators closed the Northridge facility in late 2000 after Riley failed to meet the standard quality of care.

ATRS reopened half the facility after investing $1.5 million to bring the entire project up to grade. The project is about 70 percent occupied, and officials hope to use the other half of the facility for assisted living residents.

For Sale in 5-10 years

* Victory Building, a 250,100-SF office building at 1401 W. Capitol Ave. in Little Rock and an adjoining 1,000-car parking deck

The $42.8 million project opened in early 2002 and is 56 percent leased, about a year behind Flake & Kelley Commercial's leasing projections.