A San Diego-based REIT with nearly $1 billion in assets has linked up with the nation's largest public pension fund to develop and manage some of its properties.

Burnham Pacific Properties Inc. in September became the California Public Employees' Retirement System's exclusive investment partner for neighborhood, community, power and specialty retail centers throughout the western United States.

Under the arrangement, CalPERS is contributing $250 million worth of properties. Burnham, in turn, is investing $50 million and will acquire, develop, rehabilitate, lease and manage nine properties as non-mall retail properties.

"Burnham Pacific is very pleased to have been chosen as CalPERS' exclusive co-investment partner for Western retail," says J. David Martin, Burnham Pacific's president and CEO. "This expanded relationship with CalPERS provides Burnham with several unique advantages."

In particular, he says, Burnham Pacific will have easier access to capital and investment opportunities. The company also will see a reduction in operating expenses, such as insurance rates and debt costs.

It's no wonder CalPERS chose Burnham as a partner. Boasting 9.5 million sq. ft. and 76 assets in its portfolio at the end of August, it is the largest retail REIT on the West Coast. The company acquires, rehabilitates, develops and manages properties, specializing in strip centers, power centers, and centers anchored by drugstores, grocers or theaters.

The REIT's recent growth has been rapid. Its property portfolio skyrocketed 187% during 1997, from 3 million sq. ft. to 8.6 million sq. ft. Its asset base kept pace, shooting up 165%, from $356.2 million to $943.8 million. Its stock price traded in the $12 range during September, with a 52-week high of $15.75 and a low of $12.50.

To finance most of the growth, Burnham Pacific made two private placements last year: one totaling $73 million in May and another totaling $70 million in December. The first private placement was used to retire debt.

The second enabled Burnham Pacific to acquire the Golden State Properties portfolio of 20 shopping centers comprising 2.6 million sq. ft. All of the properties are anchored by a grocery or drugstore, are located in California, and are situated in dense markets difficult for otherretail developers to penetrate. Thus, there is less risk of competition.

Narrow focus Burnham Pacific's roots stretch way back. John Burnham & Co., a San Diego-based company more than a century old, formed two limited partnerships in the 1960s, Sleepy Hollow Real Estate Investment Co. and Burnham American. Both expanded over the next two decades through buying a mixture of property, including a hotel, mobile home park and apartment complexes, mostly in San Diego.

Both partnerships were converted to REITs in the mid 1980s, while at the same time Sleepy Hollow changed its name to Burnham Pacific. They both traded on the American Stock Exchange, and eventually Burnham American was merged into Burnham Pacific. The combined REIT moved to the Big Board in 1990.

In the mid 1990s, Burnham Pacific went through a major restructuring, which analysts believe contributed to its recent major growth. First, the REIT brought in a new, aggressive and focused management team that included Martin. The team decided retail was the wave of the REIT's future.

The REIT subsequently divested more than $40 million of its office assets. The money raised from these sales was used to buy more retail properties.

The restructuring's cornerstone, however, was to narrow its retail portfolio even more, specifically to strip centers. "We concluded that non-mall retail had the greatest opportunities and the fewest competitors," Martin says, adding that many grocery stores in 10- to 20-year-old centers aren't big enough.

Thus, Burnham Pacific's strategy is to increase the size of the centers, as well as the markets, and add other tenants.

Martin and his new management team also began spreading upward from San Diego to other West Coast regions, including the San Francisco Bay Area, Pacific Northwest and Los Angeles.

"We wanted to grow and be larger," Martin says. "You can only grow so large in San Diego."

Burnham Pacific has further reined in success by focusing on more mature markets. It prefers to buy properties in areas with less retail per capita than in other regions. In older markets, Martin argues, the demand and supply for retail is already known, whereas in outlying areas the potential for the supply of retail is much greater and often unknown.

The REIT also uses its size as clout, cutting costs through bulk bidding of products and services. This savings is then passed along to tenants through lower occupancy costs.

Finally, Burnham Pacific's winning strategy includes building new stores where no existing location is available. It acquires the land or building only after securing all governmental approvals, and develops the site only after all major tenants have committed to it and all contracts with general contractors have been negotiated.

Reviving a city landmark Burnham Pacific's venture with CalPERS fits nicely into CalPERS real estate strategy, says CalPERS spokesman Brad Pacheco. The fund owns retail, apartment, office and industrial properties.

Until now, the fund's own real estate advisers handled the properties, with no manager handling one specific type of property. However, the fund's management team decided to divide the properties into their four category types, split them between the East Coast and West Coast, and find experts in each category to manage them.

Burnham Pacific was chosen to handle the West Coast, Pacheco explains, because it was willing to invest in the properties. Managers with a personal stake in projects are much more likely to manage them effectively, he says.

Aside from all the hoopla over the deal with CalPERS, Burnham Pacific has several other projects in the works. One recently completed is the AMC 1000 Multiplex at 1000 Van Ness in San Francisco. The 14-screen theater is housed in a renovated city landmark built in 1921. Architectural details in the lobby include restored polished bronze doors flanked by massive stone columns in the entryway, a carved and molded staircase that leads to a restaurant, ornate wooden columns and colorful hand-set ceramic tiles.

The project is "such a tremendous blend of old and new," says Terrence Tallen, vice president and managing director of leasing. The architecture is based on the 1920s, yet the theater is built with state-of-the-art technology, he says.

The theater, one of the top-grossing in the country, occupies the first floor of the seven-story building. The upper stories include a new health center and 53 loft-style homes. The entire project was developed by Burnham Pacific, but the REIT will divest the homes since they are non-retail properties.

Another project, Pleasant Hill, broke ground in September in the Northern California city it's named after. The project is literally giving this city a downtown it doesn't have, Martin says. It will include a Main Street with retailbuildings fronting it and parking in the rear.

Anchors secured so far for this 363,000 sq. ft. project include a 14-screen Mann Theaters and a Lucky/Savon. Meanwhile, negotiations are under way with Ross Dress for Less, Michael's Crafts, Bed Bath & Beyond, Border's Books Music & Cafe and Old Navy Clothing Co.

Leasing strategies Burnham Pacific typically buys "B" grade properties, adding value to them through leasing, redevelopment, retenanting and remerchandising, Tallen says. In many cases, a tenant targeting lower demographics is replaced with an upscale one. As a result, he says, Burnham Pacific can increase rents and add value to the centers.

Further, the leasing team has long-term relationships with popular grocery and drug chains, as well as category-killers. Noting Burnham Pacific's symbiotic relationships with its tenants, Tallen says, "We help each other out. We work very hard to know our retailers."

And to help retailers get to know Burnham Pacific, the REIT offers a website that gives potential tenants aerial views of shopping centers, rosters of current tenants, demographic information, and even a picture of what their front door would look like.

The company leased more than 150,000 sq. ft. during this year's third quarter. For next year, its goal is to lease between 150,000 and 250,000 sq. ft. per quarter. About 93% of Burnham Pacific's portfolio is leased, Tallen says.

"We're moving up," he says. "Our goal is to maintain a portfolio between 98 and 100% occupied."

Kara Glover is a Los Angeles-based freelance writer.