California Teachers Looks for New Fund Managers

Jon Peterson

The California State Teachers’ Retirement System is seeking proposals from real estate fund managers to oversee up to $1 billion or more in assets as part of a larger rejiggering of the CalSTRS portfolio.

In a request for proposals released April 5, the pension fund said it is seeking relationships with an undetermined number of separate-account managers to oversee from $100 million up to $1 billion or more in investments.

A separate account, in contrast to a commingled fund, has only a manager and one capital source, such as a pension fund or other institutional investor. The fund manager often contributes a small percent of equity. Typically, only the largest pension funds and institutional investors have separate-account relationships.

Like many public pension funds, CalSTRS is seeking a transition to what it believes will be a less risky strategy for its real estate. In the past, the pension fund allocated 50 percent of its portfolio to so-called “opportunistic” properties and 30 percent to “core” properties. It is now seeking to reverse that policy, with 50 percent of its real estate in core properties and 30 percent in opportunistic properties, Ricardo Duran, a spokesman for the pension fund, said in an e-mail.

Opportunistic real estate is acquired with the notion of collecting rents but also enhancing rental rates and property values by addressing leasing or other problems. Opportunistic buys involve greater risk and potentially greater reward than core, or well-leased, well-located stabilized properties.

In general the pension fund wants to buy core real estate using no more than 40 percent debt. These acquisitions would be for the most part offices, industrial buildings, shopping centers and apartments nationwide.

This is the first time since 1999 that CalSTRS has conducted a search for a separate-account fund manager to acquire and manage a core portfolio.

Industry sources indicated that it is likely that more than one manager would be hired for the assignment. The deadline for the responses is June 21. CalSTRS has not indicated when a final decision will be made.

Any real estate managers who compete must be able to meet four minimum qualifications: They need to have at least three separate-account relationships that are fully discretionary; be able to demonstrate experience with at least two separate-account takeover assignments; be able to show acquisition and disposition experience in office, industrial, retail and apartments; and have a minimum of $2 billion in assets under management.

CalSTRS seeks a 9 percent internal rate of return on its investments before manager fees are considered, according to the pension fund. It is considering a fully discretionary relationship with its real estate managers, meaning the managers can make final investment decisions on transactions without approval from the pension fund.

It will not be easy for CalSTRS to place core capital. Many core funds have raised significant amounts of equity over the past year and are now having a hard time finding properties to buy. Indeed, so many investors are seeking to adopt more conservative practices that, many are waiting, money in hand, to be admitted to core open-ended commingled funds. At the end of last year, $7.3 billion was waiting on the sidelines to get into such funds, according to data provided by The Townsend Group, a leading real estate consulting firm based in Cleveland.

Through September of last year, CalSTRS valued its core portfolio at $4.5 billion. Its largest core managers are Los Angeles-based CB Richard Ellis Investors, with $1.6 billion; Iowa-based Principal Real Estate Investors with $698.7 million, and Chicago-based Heitman LLC with $455 million.

The pension fund placed the total value of its real estate portfolio at $15.8 billion through the end of 2010, or not quite 11 percent of the $146.4 billion of total plan assets.

West Coast Commercial Real Estate News