BLUEPRINT: Coming full circle

Henry Cisneros has worn many hats over the past 20 years: city mayor, US housing secretary and president of a major Spanish-language broadcaster. One thing, however, has remained constant throughout his various career moves – his Monday morning schedule.

While serving as mayor of his hometown of San Antonio, Texas during the 1980s, “I realized that the most precious thing I had was my time and what I needed to do was deploy it properly over the course of the week,” Cisneros says.  So, he began carrying around lists of goals in his pocket to enable him to match those goals to available time slots during the week. The one time slot that always was reserved in his calendar was the first half of Monday, which was set aside for meetings with his staff.

Cisneros continued that practice when he became US Secretary of the Department of Housing and Urban Development (HUD) under President William Clinton during the 1990s. With 10 regions of the US under his management, he made sure everyone was included. “Even though we met at 10 am on the East Coast and it was 7 am on the West Coast, we had people on the line,” he recalls.

That routine remains today at CityView, the Los Angeles-based private equity real estate firm that Cisneros co-founded in 2000 and where he currently presides as chairman. At CityView, the workweek begins with a Monday morning conference call that connects the ‘chairman’s office’ in San Antonio – where Cisneros is based – with the firm’s Los Angeles headquarters and satellite offices in New York, San Francisco and Dallas. 

Driven by results

Cisneros’ strict adherence to a weekly schedule goes hand-in-hand with having an ambitious agenda. “Even when I was in government, I tended to enjoy producing results more than anything else,” he says. “Some people are in government because they enjoy the politics and the campaigning. What I enjoyed was moving the systems and making change.”

As mayor of San Antonio from 1981 to 1989, Cisneros helped to rebuild the city’s economic base and spur job creation through massive infrastructure and downtown improvement projects.  As HUD secretary, he was credited with initiating the revitalisation of the US public housing system and devising policies that contributed to achieving the nation’s highest-ever homeownership rate.

Cisneros is similarly focused on producing results at CityView, which has raised more than $1 billion in capital through two real estate separate accounts and four commingled funds, including more than $285 million in the past 12 months. To date, the firm has invested more than $2 billion in urban housing projects in more than 20 metropolitan areas in 12 states across the US. Projects have encompassed workforce housing, multifamily residential, mixed-use retail and student housing.

Cisneros says his current role has many of the same dimensions that being mayor did, as it calls for him to work with local developers, officials, school districts and police departments. However, working in government also required him to devote much of his time to other activities, such as presiding over ceremonies and attending state functions. “What I like about what I’m doing now is that a considerable portion of my time is focused on the substance and on producing results,” he says.  “I don’t have to campaign to do the job.”

The case for urban housing

Although his most high-profile jobs have been in government, “my career, in some respects, has been equal parts in business and development,” Cisneros says. The traits needed at a high level in both government and business are similar, in that both require an executive to manage an agenda, time and people towards goals.
However, “in business, you have the additional consideration of whether it makes money,” Cisneros adds. “The best way to make money is to anticipate where the society is going – what its preferences are going to be – and provide the things that people need.”

Cisneros first made this observation during his mayoral days, when he began working with Toyota to bring a major automotive production facility to San Antonio. “One aspect of the Toyota way is to anticipate the future and position yourself to respond to real needs in that future,” he explains. A prime example of this was the Japanese automotive giant’s foresight about the need for fuel-efficient vehicles and its subsequent development and marketing of the Prius vehicle, which today accounts for more than 40 percent of the hybrid market.
“If you anticipate properly what the marketplace wants and needs, then it can be a very profitable proposition,” Cisneros says. In his view, that need currently is urban housing.

“The reality of the new American economy is an economy driven by our metropolitan areas,” Cisneros says. Once largely reliant on manufacturing, the US economy is now based on industries that are urban-centric, such as international trade, business, professional services, biosciences and healthcare. Those job opportunities have in turn spurred population growth in cities ranging from New York to Dallas and San Francisco.

“The cities are going to grow, and the country needs them to stay strong,” Cisneros says. “In order to be strong, they need a mix of housing. If we can do that correctly, we can generate outsized returns.”

Epiphany moment

In some ways, Cisneros has come full circle with his work at CityView. “I would frequently be asked as mayor to bless a project early on as it was developing, and the next time I was aware of it was when I was present for the groundbreaking or for the ribbon-cutting,” he says. “It struck me as a little bit false on the part of a public official to get credit for that progress in the city when other people were doing the heavy lifting.”

As HUD secretary, Cisneros witnessed the transformation of US cities on a wider scale, and it was during that time, watching families move into new homes, that he had an ‘epiphany’ moment.  “What became clear to me was that I wanted to set up a business where I could do this for the rest of my career,” he says.

After leaving HUD and completing a four-year stint as president and chief operating officer of Univision Communications, the Spanish-language television broadcaster, Cisneros did exactly that in 2000.  For his new venture, he teamed with Victor Miramontes, with whom he had worked at Cisneros Asset Management, a fixed-income management firm Cisneros established after finishing his last term as San Antonio mayor in 1989.

The firm, known as American City Vista, initially started out as a joint venture with homebuilder KB Home, which wanted to bring its large-scale suburban residential developments into urban areas in the US. The entity built about 20 subdivisions in 15 US cities, including San Antonio, Houston, Dallas, Los Angeles and Phoenix.

The genesis of CityView

In 2001, American City Vista responded to a request for proposals (RFP) from the California Public Employees’ Retirement System (CalPERS) for managers for its California Urban Real Estate (CURE) programme. Out of dozens of applicants, American City Vista was one of a handful of firms hired. 

Over the next two years, Miramontes devoted nearly all of his time to negotiating a final agreement with CalPERS. Because KB Homes was not structured to invest pension money, CityView officially was formed in April 2003. “The CalPERS RFP and the competitive process was the genesis for who we are today,” says Miramontes, who serves as CityView’s vice chairman and is focused on the firm’s client services.

CityView stood out to CalPERS partly because of Cisneros’ involvement with several successful projects in San Antonio and the firm’s relationship with KB Homes, recalls Mike McCook, who was then the head of real estate at CalPERS. And with a Mexican-American at its helm, the firm also met the pension system’s objective to invest in minority-owned businesses.
 
“CalPERS is always looking for firms that can grow,” says McCook, who is now vice chairman and executive vice president at The Resmark Companies, a Los Angeles-based residential and retail real estate investment advisor. “We thought this was a business that could be grown in magnitude and size.”

With the pension plan’s initial $40 million allocation, CityView set up its first separate account with CalPERS and made its debut investment in a housing project in Santa Maria, California in August of 2003. The separate account, called CityView West, eventually received a total of $325 million in CalPERS capital, which was invested in for-sale residential developments in the western US states of California, Washington, Oregon and Arizona.

In 2005, CityView formed a second separate account with CalPERS called CityView America, which focused on projects in the other 46 US states. That account, which was seeded with an initial $100 million commitment from the pension system, ultimately grew to $250 million of equity.

With CalPERS as its first institutional investor, CityView was able to attract other California pension systems interested in investing in urban housing, including the Los Angeles City Employees’ Retirement System, the Los Angeles County Employees Retirement Association (LACERA) and the Los Angeles Fire and Police Pensions. This led to the formation of the firm’s first commingled real estate fund, CityView LA Urban Land Fund, in 2007.

LA Urban Land Fund, which targeted opportunities specifically in the Los Angeles County area, raised $150 million and focused not only on for-sale projects, but rental properties and land transactions as well, in order to differentiate the fund’s strategy from that of the CalPERS separate accounts. CalPERS also became an investor in the vehicle.

Return to core

During the recession, however, CalPERS suffered heavy losses in its real estate portfolio, which at the time consisted primarily of riskier opportunistic investments. The pension system responded by restructuring its real estate strategy to focus on lower leverage and more stable core investments.

CityView agreed to buy out CalPERS’ interests in the two separate accounts and offered them to The Blackstone Group, which agreed to acquire the pension plan’s stake in a transaction reportedly valued at $225 million, including debt and equity. The firm currently is developing a range of housing assets with Blackstone through the two accounts, which today comprise a total of 21 for-sale and rental properties.

Despite CityView’s focus on development, an investment traditionally classified as opportunistic, the shift by many investors to core strategies actually has worked in the firm’s favour. As buyers have bid up the prices of core properties to levels that would not allow pension plans to meet their return thresholds, investors have had to seek alternative real estate investment strategies, including building new core assets.

Such a strategy formed the basis of CityView’s next fund, CityView Bay Area Fund, which was launched in 2011 and is structured with LACERA as its sole investor. CityView Bay Area Fund, for which the pension plan committed $130 million in equity, targets the development of new multifamily properties in the San Francisco Bay Area, which encompasses San Francisco and the 10 counties surrounding the city. So far, the fund has invested in three assets in San Francisco, Berkeley and Foster City and is expected to be fully invested by the end of the year.

Last month, LACERA approved a $100 million commitment to CityView Bay Area Fund II to continue its build-to-core strategy via a second solo vehicle. The structure will provide the pension plan with significant control rights, as well as the ability to acquire a 100 percent interest in completed properties as long-term core holdings.

CityView also is raising another commingled real estate fund, Southwest Multifamily Partners, in partnership with Lincoln Property, a Dallas-based multifamily developer. The $200 million fund is pursuing a “rehab-to-core” strategy, acquiring and rehabilitating apartment properties in the five Southwestern cities of Dallas, Austin, Houston, Phoenix and Denver.

CityView held a first close on Southwest Multifamily Partners in June, raising $56.1 million, according to a filing with the US Securities and Exchange Commission. Limited partners include the Teacher Retirement System of Texas, the Teachers’ Retirement System of the State of Illinois and the Chicago Teachers’ Pension Fund, say multiple sources. The firm declined to comment on the fundraising.

Setting strategy

Whether CityView pursues a build-to-core or rehab-to-core strategy largely depends on the replacement costs of assets in the targeted geographical area, says David Martin, chairman of the firm’s investment committee. CityView will execute a rehab-to-core strategy in cases where properties are trading below their replacement costs and execute a build-to-core strategy when assets are trading above their replacement costs. “If you can buy below and sell above replacement costs, you can make money year-in and year-out,” he adds.

The investment focus of a fund, meanwhile, is a pairing of both the firm’s and the investor’s interests. In the case of Bay Area Fund I, LACERA wanted to increase its exposure to core but didn’t like the retail pricing of core. At the same time, it wanted to increase its geographic exposure to the Bay Area. Meanwhile, CityView considers the Bay Area to be a market with strong investment opportunities because of its growing population, robust job growth and limited supply of new housing.

“On the one hand, we’re constantly studying investment opportunities in major metropolitan markets, looking at the submarkets in those markets, looking at the growth trend and the supply side,” says Martin. At the same time, “we’re having conversations with limited partners about what their investment perspectives are and what their investment needs are. What we do as a firm is basically marry the two.”

Success with LPs

In a fundraising environment that has been particularly trying for emerging managers, Cisneros attributes CityView’s ability to raise capital from some of the largest US pension plans partly to the firm’s niche investment strategy in urban housing. “Firms do best in this environment when they are known for something, when they specialise and develop a deep expertise,” he says.

The backgrounds of CityView’s management team also have given the firm an edge. At Cisneros Asset Management, Cisneros and Miramontes raised about $750 million from institutional investors, which introduced the principals to public pension plans from all over the country.

Cisneros also sat in the limited partner’s seat when he was mayor of San Antonio as a member of the city’s Fire & Police Pension System. “I was on the other side of the table, interviewing consultants, overseeing asset allocations and looking at different investment strategies,” he recalls. “So, I have a refined, well-honed sense of responsibility with respect to the sacredness of that pension money.”

For LACERA, Cisneros’ background “was a significant positive factor when we first evaluated CityView and its strategy in 2007,” says John McClelland, principal investment officer of real estate. From the pension plan’s perspective, Cisneros’ roles as HUD secretary and mayor of San Antonio gave him a keen understanding of the challenges of addressing affordable housing needs in cities and doing so in line with smart growth objectives, while also creating attractive investment opportunities for institutional investors, he explains.

“Cisneros’ experience has been an asset to CityView as they have navigated the complexities involved with inner-city development, perfecting entitlements and, most importantly, collaborating with local planning and municipal authorities to design and build successful projects,” adds McClelland.

Then there is CityView’s performance, which McClelland and Trina Sanders, investment officer of real estate at LACERA, called “impressive” in a memorandum last month. Out of 56 completed investments, the firm has realized returns on 16 investments, generating an internal rate of return of 33.9 percent and a net profit of $31 million, according to documents from the pension plan. Overall, CityView is targeting an average IRR of 14 percent for its funds.

Challenges of an emerging manager

Despite its success so far, CityView continues to wrestle with some of the challenges associated with being an emerging manager. While limited partners such as LACERA have cited the extensive experience of the firm’s staff in developing workforce housing – Martin, for example, has developed more than $3 billion in multifamily and other types of real estate assets in California, particularly in the Bay Area – “sometimes certain investors will pigeonhole you and assume out of the gate that an investment manager maybe doesn’t have that much experience or doesn’t have a deep bench,” says CityView president Sean Burton, who previously worked as an attorney representing real estate investors and operators.

Some in the industry also have questioned the ability of CityView, with a full-time staff of just 25, to juggle multiple accounts and strategies. Although the firm may appear to have numerous strategies because of the customised nature of their funds, Burton says “there’s a common theme, which is a focus on urban housing. We’re only doing urban projects, and we’re only doing residential projects.”

In addition, the future growth of CityView could be complicated by its investment strategy, in which the firm historically has acquired, rehabilitated or developed and then sold assets. Because of such a strategy, the firm’s AUM has not increased significantly over time, notes Micolyn Magee, a principal at The Townsend Group, in a report on CityView Bay Area Fund II. “The health and success of an emerging manager depends on the successful growth of AUM in order to provide stable fee revenue and limit the need for and distraction of constant capital-raising efforts,” she wrote in her analysis for LACERA.

Homeownership versus rentership

Although Cisneros’ work habits have remained largely unchanged, his views on housing have shifted since his days as HUD secretary, when he was making a homeownership push to US residents. “I am sober about some of the abuses that generated the housing bubble and contributed to the general economic turndown,” he says. Predatory lending, inordinately low interest rates after the dotcom bust and inaccurate credit ratings were among the factors that helped to drive up the homeownership rate to record highs.

“We know now that there were a substantial number of people who really could not sustain homeownership,” says Cisneros. But “it ought not dissuade us from a more reasonable push for homeownership going forward.” Homeownership, he maintains, helps to grow the US middle class and, for many Americans, their total net worth is tied to the equity they have in their homes.

“We need to have greater balance between homeownership and support for rentals,” Cisneros says, noting that the US homeownership rate is likely to find equilibrium at around 65 percent, down from more than 69 percent at its peak. “A greater number of Americans will be renters for a variety of reasons,” including young people who can’t afford to buy homes because of a challenging job market and others with damaged credit, who are unable to get mortgages.

In fact, CityView’s own real estate investment activity has shifted from for-sale developments in the early days of the firm to primarily multifamily, with rentals currently making up 85 percent to 90 percent of the units in its portfolio.

“When you look at all of the things we are buying or producing, the vast majority today is multifamily because of where we are in the housing cycle,” says Cisneros. “But the country will return to a more balanced posture in the years to come.”