State worker pension giant CalPERS got this ugly report from its financial consultants on its real estate bets in its most recent quarterly report …

- Real estate losses equaled a -30.1% return during the quarter and a – 48.7% return in the year ended June 30. Ten-year profits were still +4.4%.

- CalPERS owned real estate worth $13.4 billion at June 30, a decline of $4.2 billion or 24% from the previous quarter and an $8.6 billion or 39% decline from a year ago. Real estate is 6.9% of CalPERS assets, below target allocation of 10.0%.

- Reports says: “The performance in the real estate portfolio has been deteriorated by four primary factors. First, capital markets have had significant impact on real estate property valuations. Second, the macro-economy continues to go through a downturn which has had an impact on rents. The final two factors are related to the exposure in the CalPERS real estate portfolio to non-stabilized assets with higher amounts of leverage. These final two factors have exacerbated the recent underperformance to the benchmark as non-stabilized assets provide less income to insulate valuation declines and increased leverage magnifies returns in upward and downward market cycles.”

- Also, “Other factors negatively impacting returns included a relatively large proportion of non- stabilized and non-income producing properties and high levels of leverage utilized in CalPERS real estate portfolio relative to the benchmark.”

- Consultants PCA expects “fundamentals, and therefore the performance, of the real estate portfolio to continue to deteriorate over the next 12 months and potentially longer. Persistently weak economic conditions, the absence of a functioning commercial mortgage origination/re-financing market and negative leverage are likely to erode income streams and total returns.”

Other coverage
- CalPERS axing investment managers over real estate losses (LA Times)
- At Calpers, the Great and the Not-So (Wall Street Journal)
- Calpers Real-Estate Holdings Decline 30% During First Quarter (Bloomberg)
- Calpers up 8.6 pct for quarter despite property losses (Interactive Investor)