According to an announcement to participant/holders of the fund, on Friday, June 18, 2010, available payments were announced to partially satisfy approximately 29% of the value of transaction requests subject to the fund’s withdrawal limitation, which was imposed on September 26, 2008.   

According to a participant Q&A document, the most recent payment was made available for two primary reasons: first, the successful closing of sale transactions and second, the availability of liquidity with which to make an additional distribution.  In the announcement, Principal notes that as of Tuesday, June 15, $379 million of assets were sold in the second quarter of 2010. After transaction costs and repayment of debt, cash available from the sales totalled approximately $179 million.

Limitation Origins

On September 26, 2008, Principal imposed a withdrawal freeze, closing the Property Account to withdrawals.  Market turmoil, compounded by an already challenging real estate market, resulted in a marked slowdown in the sale of commercial real estate assets, and while the Principal noted that “transaction volume in the broader commercial real estate market has improved in recent months, it is still well below historical levels”.  Principal also noted that this is the only time in the 28-year history of the Separate Account that a contractual Withdrawal Limitation has been applied. 

The Principal U.S. Property Separate Account, managed by Principal Real Estate Investors, LLC, is unlike most other retirement plan investment options because it invests primarily in owned real estate rather than securities; holdings that generally include developed commercial properties such as warehouses, office buildings, apartments, and retail properties.  “Unlike public securities sold on an exchange, real estate assets are sold in private transactions,” according to a Principal Q&A document, which goes on to note that, “Due to the nature of these transactions, the Separate Account may be subject to adverse market conditions, most notably the purchaser’s ability to secure financing, which may delay or prevent the sale”.

For its part, Principal has described the move to “apply a contractual limitation which delays the payment of withdrawal requests and provides for payment of such requests on a pro rata basis (a “Queue”) as cash becomes available for distribution, as determined by Principal Life,” as being in the best interests of fund shareholders. 

Current Distribution

As with previous distributions, this payment was made on a pro-rata basis, based on unit values at the time of payment, and was applied to pending transaction requests (generally transfers and non-hardship distributions) made prior to 3 p.m. CT on Thursday, June 17, 2010.  Among the transaction requests not subject to the withdrawal limitation are payments requested due to death, disability, or retirement (though some conditions apply), ADP/ACP refunds, minimum required distributions, life insurance premiums, full plan terminations, and hardship withdrawals (for both active and terminated participants, depending on plan provisions).

Explaining the process, the Principal notice said that “The net proceeds of second quarter dispositions through June 15, 2010, were combined with other sources of cash flow and utilized to fund Separate Account obligations during the quarter including operational requirements of the properties and forward commitment obligations. After funding those obligations, the Separate Account had remaining cash and access to relatively inexpensive borrowing on its line of credit. Both the return generated from cash and the borrowing rate on the line of credit are lower than the expected return generated by the properties in the portfolio. Therefore, in the best interest of all investors, the Separate Account made another payment available to those investors whose withdrawal requests are subject to the Limitation.”

As has been the case with prior distributions, certain de minimis amounts, generally those valued less than $300 on Thursday, June 17, 2010, were satisfied in full. 

Previous distributions were made on May 14, 2010 (approximately 18% of the value of transaction requests paid - see Principal Real Estate Fund Makes Another Payment), and January 29, 2010 (payments made to partially satisfy approximately 13% of the value of transaction requests).  In what it described as “the best interest of all Separate Account participants”, Principal noted that distributions were generally made on a pro-rata basis, and that there was no distribution on a first-in first-out basis.