real estate | Pension360

Kentucky Bill Aims To Increase Transparency, Accountability In Retirement System

Kentucky State Rep. Jim Wayne has introduced legislation that would infuse a ray of transparency into the state’s retirement systems, including KRS, a system oft criticized for its opaque practices.

From the Independent:

The legislation, Bill Request 91, would require state-administered retirement systems to operate under the state procurement laws, which includes making contracts public. It would also prohibit the use of placement agents, intermediaries who have been involved in pay to play scandals in other states.

The legislation also seeks to tighten requirements for KRS board members appointed by the governor to ensure they have appropriate investment expertise. The current low-qualified “investment experts” on the board refused to comment on any investment issues for the Kentucky Center for Investigative Reporting story, Wayne said. He added the two investment experts on the board need to be knowledgeable, independent and willing to be accountable to the public.

[…]

“The current model smacks of the good ol’ boy system,” said Wayne, D-Louisville. “The system is closed. A small group decides behind closed doors who gets to manage billions of dollars in public money and what they’ll get paid for it, no questions allowed. That’s just way to chummy for my tastes.”

The urgency for such legislation was illustrated after two journalism organizations investigating the pension plans during the summer were denied information on fees and even the names of individual managers, Wayne said.

The Lexington Herald-Leader reported June 14 that KRS spent at least $31 million on managers of hedge funds, private equity, real estate and other “alternative investments” that hold just one-fourth of the system’s $15 million in assets and produced its lowest returns.

A July 24 report by the Kentucky Center for Investigative Reporting in Louisville found KRS potentially spent $156 million in mostly undisclosed fees to these “alternative investments.”

Wayne added one more comment:

“The health and well-being of public employee retirement systems should not be shrouded in mystery,” said Wayne. “No one should be required to invest their hard-earned money in a system that is not fully transparent. Not only should public employees know if the systems are financially stable, the taxpayers should also know.”

The Kentucky Retirement Systems holds $16 billion in assets and is about 45 percent funded, although certain parts of the system are unhealthier.

KRS allocates about 35 percent of its assets toward alternative investments, including real estate; the nationwide average is 25 percent, according to data from Cliffwater LLC.

Virginia Pension Commits $200 Million To Industrial Properties

The Virginia Retirement System (VRS) is committing $200 million to a joint venture with LaSalle Investment Management that seeks to build industrial warehouses in the United States.

From IPE Real Estate:

The pension fund told IP Real Estate it was committing $200m in equity to the LaSalle VA Industrial JV.

The partnership will develop industrial warehouses in select US markets. Virginia would not comment on which markets the venture would focus on.

LaSalle said it would focus on opportunities to develop and lease large, modern distribution buildings in major population centres with strong transportation infrastructure.

LaSalle recently announced it had been awarded a mandate from a large US public pension fund, an existing client.

Jason Kern, chief executive of Americas at LaSalle, said end-user demand for industrial real estate is “very strong”, driven by growing GDP and global trade, as well as the need for “modern buildings part of an efficient supply chain”.

According to the firm’s research and strategy team, the availability rate for industrial supply has dropped 2.2% since the end of 2012 and 4.2% since 2010. LaSalle is forecasting annual rental growth of 3%. Internet retailing and larger multinational retailers’ focus on improving supply-chain efficiencies are also improving demand.

Virginia has existing exposure to industrial real estate, with 15.6% of its private real estate portfolio invested in the sector at June this year.

Real estate assets make up 10.5 percent of the VRS portfolio. The fund manages $65 billion of assets.

Arizona Pension Commits $150 Million To Real Estate Funds

The Arizona State Retirement System (ASRS) has committed a total of $150 million to two real estate funds: Blackstone Property Partners and Related Companies’ Energy Housing Fund.

The first fund will invest in industrial, retail and office buildings. The second fund will focus on residential apartments.

From IPE Real Estate:

The pension fund approved the $100m commitment to Blackstone Property Partners, as well as a $50m commitment to the Related Companies’ Energy Housing Fund.

Arizona is the second major US institutional investor to place capital with Blackstone Property Partners, following a $100m commitment last month by the Texas Permanent School Fund.

Blackstone, which is looking at a $1bn initial capital raise for the fund, will co-invest $75m of its own capital.

The open-ended fund, will invest in larger properties and portfolios. US office, industrial, retail apartments are being targeted by the fund, which is projected to achieve between 9% and 11% returns and be leveraged at 50%.

Arizona said Related’s Energy Housing Fund will invest in residential properties – primarily apartments – in areas of energy development and tight housing conditions. The pension fund will classify the investment as a niche and tactical investment within its real estate portfolio.

The fund will invest in US apartments as well as new developments, focusing on deals in Texas and North Dakota for their links to the energy sector.

[…]

The pension fund said it is also conducting due diligence on two more potential investments: a joint venture with Red Mill Capital to invest in US retail, and a co-investment with the CIM Group on a New York residential and retail project.

ASRS allocated $500 million for real estate investments in 2014.

The pension fund manages $30 billion in assets.

Orange County Pension Seeks Manager For $150 Million Real Estate Commitment

The Orange County Employees Retirement System (OCERS) is looking for a manager to handle a new, $150m non-core real estate investment. From I&P Real Estate:

Orange County Employees Retirement System is conducting a new manager search for $150m (€117.7m) of non-core investment.

[…]

Orange County and RVK will conduct due diligence on investing some capital in the AG Core Plus IV fund.

An investment recommendation is expected next month, along with a presentation to the pension fund’s investment committee.

Orange County made a $40m commitment to AG Core Plus III in 2011, and the fund has generated a gross IRR of 18.94% since inception.

The $22.7m of capital called and invested is currently valued at $29.5m, as of the end of June.

For Fund IV, Angelo Gordon & Co is targeting 14-15% gross returns, with most investments to be in the US, alongside selective transactions in Europe.

Orange County and RVK will also consider other diversified funds targeting a similar risk/return profile to that of AG Core Plus IV.

The manager needs to have at least $500m in combined US and international real estate assets under management.

Orange County does not want more than 20% ownership of the total fund.

Each manager must have at least five years of performance history managing commercial real estate.

Orange County is looking for a focus on core-plus and value-added assets, with the opportunity to increase value through leasing, redevelopment, repositioning and other activities.

Preferred property types include apartments, hotel, industrial, office, retail and self-storage assets.

The move is part of a plan by OCERS to significantly increase non-core real estate investments. Currently, non-core makes up 23.7 percent of the fund’s real estate assets.

OCERS is shooting to increase that number to 30 percent by the end of 2016.

Oklahoma Teacher’s Fund Hires Six Real Estate Managers

The Oklahoma Teacher’s Retirement System has chosen six real estate managers to handle a combined $300 million worth of non-core investments.

Reported by I&P Real Estate:

The US pension fund will invest in the American Realty Strategic Value Realty Fund, Antheus Realty Partners IV, Dune Real Estate Fund III, GreenOak Real Estate Partners US Fund II, Landmark Real Estate Fund VII and Starwood Opportunity Fund X Global.

The funds were selected on the recommendation of the fund’s consultant, Gregory W Group.

Oklahoma initially planned to invest $50m with each of the six managers.

Landmark, however, could not take the full amount by the time of the board’s approval and was allocated $35m.

The pension fund planned to spread the remaining $15m across the remaining five managers.

However, GreenOak closed its capital raise.

The other four managers will receive $53.7m each.

Antheus Realty Partners IV will focus solely on apartments, while Starwood will invest equally in Europe and the US.

Landmark will buy current limited partnership positions in existing funds on the secondary market.

American Realty will be buying value-add US office, industrial, retail and apartment properties and has raised $240m of capital for the open-ended fund.

GreenOak raised $756m for its US-focused fund, which will invest in several property classes.

Dune Capital is targeting an $850m total equity raise for its opportunity fund.

Investing in multiple property types, the fund has targeted IRRs of 15-17% net.

The pension fund is targeting net returns of 11-12 percent.

Chart: CalPERS’ Real Estate Returns Since 2000

CalPERS announced last week plans to increase its real estate investments by 27 percent. This graph [above] shows the performance of the pension fund’s real estate portfolio since 2000.

As the graph indicates, the fund’s real estate investments have generally performed well, consistently netting returns of 15 percent or more.

But 2009 and 2010 were disastrous, and CalPERS lost $10 billion on real estate investments over that period.

CalPERS’ latest foray into real estate will be marked by investments in properties with “established demand”, according to the fund’s CIO, Ted Eliopoulos. Such investments include apartment complexes in cities and fully leased office buildings.

Graph credit: The Wall Street Journal.

CalPERS Weighs Foray Into Riskier Loan Securities

The CalPers Building in West Sacramento California. — The CalPERS building in West Sacramento, California.

CalPERS is considering investing in collateralized loan obligations (CLOs), or securities backed by a pool of (sometimes low-grade) corporate loans.

From the Wall Street Journal:

Fixed-income executives for the nation’s largest public pension fund told their investment board committee Monday they want to buy riskier versions of “collateralized loan obligations,” which are securities backed by corporate loans. The plan already invests in triple-A rated slices of these securities.

“We think we have expertise in this area,” said fixed-income head Curtis Ishii. He added: “You get more spread if you take more risk.”

Mr. Ishii did not disclose how much the system, which is known by its abbreviation Calpers, would like to invest in the riskier loan-based securities. The move still needs to be approved by an investment strategy group comprised of the fund’s top investment officers.

Any shift it makes will likely influence others because of its size and history as an early adopter of alternatives to traditional stocks and bonds.

CalPERS announced last week that it is increasing its real estate holdings by 27 percent.

Photo by Stephen Curtin

Study: Has a 400 Percent Increase in Alternatives Paid Off For Pensions?

A newly-released study by CEM Benchmarking analyzes investment expenses and return data from 300 U.S. defined-benefit plans and attempts to answer the question: did the funds’ reallocation to alternatives pay off?

The simple answer: the study found that some alternative classes performed better than others, but underscored the point that “costs matter and allocations matter” over the long run.

In the chart at the top of this post, you can see the annualized return rates and fees (measured in basis points) of select asset classes from 1998-2011.

Some other highlights from the study:

– Listed equity REITs were the top-performing asset class overall in terms of net total returns over this period. Private equity had a higher gross return on average than listed REITs (13.31 percent vs 11.82 percent) but charged fees nearly five times higher on average than REITs (238.3 basis points or 2.38 percent of gross returns for private equity versus 51.6 basis points or 0.52 percent for REITs). As a result, listed equity REITs realized a net return of 11.31 percent vs. 11.10 percent for private equity. Net returns for other real assets, including commodities and infrastructure, were 9.85 percent on average. Net returns for private real estate were 7.61 percent, and hedge funds returned 4.77 percent. On a net basis, REITs also outperformed large cap stocks (6.06 percent) on average and U.S. long duration bonds (8.97 percent).

– Many plans could have improved performance by choosing different portfolio allocations. CEM used the information on realized net returns to estimate the marginal benefit that would have resulted from a one percentage point increase in allocation to the various asset classes. Increasing the allocations to long-duration fixed income, listed equity REITs and other real assets would have had the largest positive impacts on plan performance. For example, for a typical plan with $15 billion in assets under management, each one percentage point increase in allocations to listed equity REITs would have boosted total net returns by $180 million over the time period studied.

– Allocations changed considerably on average from 1998 through 2011. Of the DB plans analyzed by CEM, public pension plans reduced allocations to stocks by 8.5 percentage points and to bonds by 6.6 percentage points while increasing the allocation to alternative assets, including real estate, by 15.1 percentage points. Corporate plans reduced stock allocations by 19.1 percentage points while increasing allocations to fixed income by 10.5 percentage points (consistent with a shift to liability driven investment strategies), and to alternative assets by 8.6 percentage points. For the DB market as a whole, allocations to stocks decreased 15.1 percentage points; fixed income allocations increased by 4.3 percentage points; and allocations to alternatives increased by 10.8 percentage points. In dollar terms, total investment in alternatives for the 300 funds in the study increased from approximately $125 billion to nearly $600 billion over the study period.

The study’s author commented on his findings in a press release:

“Concern about the adequacy of pension funding has focused attention on investment performance and fees,” said Alexander D. Beath, PhD, author of the CEM study. “The data underscore that when it comes to long-term net returns, costs matter and allocations matter.”

[…]

“Many pension plans could have improved performance by choosing different allocation strategies and optimizing their management fees,” Beath continued. “Listed equity REITs delivered higher net total returns than any other alternative asset class for the fourteen-year period we analyzed, driven by high and stable dividend payouts, long-term capital appreciation and a significantly lower fee structure compared to private equity and private real estate funds.”

Read the study here.

Canada Pension To Invest Up To $500 Million In Mexico Real Estate Projects

Caisse de depot et placement du Quebec, the entity that manages Quebec’s public pension assets, has unveiled plans to invest up to $500 million in residential and urban housing projects in Mexico.

First up: a $100 million investment in two yet-unbuilt condo complexes.

From the Yucatan Times:

Ivanhoe Cambridge, the real estate unit of the Caisse de depot et placement du Quebec, a public pension funds manager, is teaming up with United States-based Black Creek Group with an investment of up to US $500 million.

Its first project, reported to be its first foray into Mexico, will be a residential development in the borough of Cuajimalpa in Mexico City consisting of two residential condominium buildings with 479 units in total.

It will invest $100 million in the 46,500-square-meter project.

Black Creek is a private-equity firm and real estate company with 17 years’ experience in Mexico in building infrastructure, retail and residential developments, targeting low and middle-income Mexican families. Another market is second homes for American and Canadian baby-boomers.

“With this investment, Ivanhoe Cambridge is setting a major foothold in Mexico, which will provide excellent access to opportunities, including long-term investments in a portfolio of high-quality assets,” said Rita-Rose Gagne, an executive vice-president with Ivanhoe Cambridge.

“The investment is part of Ivanhoe Cambridge’s strategy of developing a long-term, active presence in growth markets. The economic growth and demographic trends in Mexico are producing a large and sustained local demand for commercial and residential real estate.”

Caisse de depot et placement du Quebec manages around $180 billion (USD) of assets.

Pennsylvania Public Schools Fund Commits $200 Million To Real Estate

The Pennsylvania Public School Employees’ Retirement System (PSERS) has announced its decision to allocate an additional $200 million to its real estate portfolio; $100 million will go to the AG Core Plus Realty Fund IV, which targets a return of 14-15 percent before fees.

From IP Real Estate:

The plan made two new $100m commitments to the AG Core Plus Realty Fund IV and the pension fund’s in-house co-investment and secondary real estate programme.

Pennsylvania is the second US public pension fund to approve a new commitment to Realty Fund IV, following the Illinois State Board of Investment, which made a $30m allocation.

Courtland Partners, the real estate consultant for Pennsylvania, said Angelo Gordon & Co would continue its core-plus strategy of acquiring equity interests in high-quality assets likely to appreciate over time.

The fund will target underperforming office, retail, apartment and industrial assets, with an emphasis on the Top 15 US markets, shunning development projects.

Most assets will be in the US, although the fund can invest as much as 25% outside North America.

[…]

Targeted gross returns for the fund are 14-15%, with the current income component of the return projected to be 7-8%.

The fund will have a leverage component of 55-65%.

Pennsylvania has now committed a total of $200m to in-house co-investments and its secondary investment strategy.

The capital can be invested via co-investments on specific transactions with other funds, as well as by buying out other limited partners from existing positions in funds.

PSERS is also exiting the Prologis North American Industrial Fund, a fund of logistics and distribution facilities in the U.S.

PSERS committed $200 million to that fund in 2006, but the investment is now thought to be worth $167 million.

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