PhillyDeals: Pa. retirement system makes a real estate bet

Second of two columns on this topic.

The $25 billion Pennsylvania State Employees' Retirement System (SERS) has been buying real estate since 1984. It's been a drag on the fund for most of the last decade.

The system, which pays for the pensions of retired state employees and must finance the retirements of today's state workers, still owns about $3 billion in real estate. It pays private investment firms roughly $1 for every $100 worth of property they manage for the state, and more when they actually make money.

Now SERS is making what, for it, is a small bet on a big rebound: At the system's board meeting in Harrisburg on Wednesday, trustees voted to invest $50 million with Regional Real Estate Investment Corp. to buy properties within the Commonwealth of Pennsylvania.

Regional is owned by Philadelphia lawyer, real estate investor, and political fund-raiser Thomas Leonard and fund manager Paul Gilbert. Besides SERS's new $50 million portfolio, Regional runs the Delaware Valley Real Estate Investment Fund for a group of construction labor unions.

To pick investments for SERS, Regional hired the Pennsylvania Real Estate Investment Trust (PREIT). PREIT owns a string of suburban malls, as well as the aging Gallery in Center City, which is due for a makeover, PREIT chief executive Joseph Coradino has said.

Two SERS trustees abstained from voting on the $50 million investment. One was Nicholas Maiale, the onetime state representative who has chaired SERS's board since 1992 and has been friends with Coradino since they went to parochial school together. Maiale also cited "a consulting relationship that may conflict," SERS spokeswoman Pamela Hile said.

State Treasurer Rob McCord also recused himself "due to the receipt of political contributions from a law firm associated with the prospective manager." Leonard actually backed McCord's opponents, but Leonard's firm, Obermayer Rebmann Maxwell & Hipppel, contributed to McCord.

The state, with its slow economic growth and cities like Philadelphia, where office rents remain stuck at the levels of 20 years ago, has not been a commercial real estate profit center.

National investors like the Mack-Cali Realty Corp. have given up on Philadelphia offices and sold properties here.

But where others see stagnation, SERS says it sees opportunity. "We believe that Pennsylvania markets are underserved by institutional real estate investors and, hence, can generate attractive risk-adjusted returns," Hile said.

Many legislators and citizens like to see SERS money stay in Pennsylvania. But schemes to keep money at home resulted in embarrassing losses on soda-bottling plants and other boondoggles in the past. With pension checks flying out a lot faster than investment profits are piling up, and with public payments to SERS topping $1 billion this year and rising fast, every investment dollar has to count.

"In the early 1990s we were not that smart. We would buy the first building that we saw," Joseph Rocks, the former state senator turned mental-health contractor, who serves on the SERS board, acknowledged during last week's board meeting.

He said the record improved as SERS hired more professional managers. In 1994, SERS invested $250 million in a Pennsylvania real estate program. By 2000, the portfolio had gone up an average 16 percent a year, though stocks did better.

So SERS is keeping this $50 million at home, among friends, and hoping it will have something to show for buying local.