CalSTRS Eyeballs Public Securities, Core Assets

Jon Peterson

The board of the California State Teachers’ Retirement System is expanding the pension fund’s permissible real estate investment options in a bid to reduce risk to its $18.8 billion in real estate assets.

Under new policy adopted July 11, the public pension fund could invest up to $2.81 billion, or 15 percent of its total real estate assets, in public real estate securities. It would be the first time ever that CalSTRS owned the stock of public real estate investment trusts, or REITs. The board sees public securities as a way to diversify its real estate investments and to increase the portfolio’s liquidity, spokesman Ricardo Duran said in an email message.

CalSTRS is the state’s second-largest public pension fund with $154.6 billion in total plan assets.

CalSTRS also could allocate as much as 65 percent of its real estate portfolio to core assets, Duran said. Core assets are those considered the least risky based on their age, occupancy and tenant quality. That proportion compares to 31.4 percent in core real estate assets held by CalSTRS at the end of September 2010. The transition is expected to take three years to five years.

The pension fund has already undertaken a search for new core asset managers, setting aside as much as $1 billion for them to oversee. It hopes to conclude the selection process by the fall or earlier.

CalSTRS almost certainly will face intense competition for core assets in today’s market, where many public pension funds are seeking what they believe are more conservative investments. To help achieve its core holdings goals, the pension fund expects to use a “build- or lease-to-core” strategy where it makes direct investments in non-core assets then improves them with new construction or leasing such that they become what are considered core properties.

Going forward, the pension fund plans to reduce its exposure to office properties and to increase its retail and industrial property holdings. Its office properties now account for 42 percent of its real estate portfolio compared to the 35 percent suggested by the National Council of Real Estate Investment Fiduciaries Property Index. The NCREIF index is used by many pension funds as a point of comparison for exposure to various property types.

At the same time, the pension fund is under-invested in both retail and industrial properties, according to the NCREIF index, which suggest 25 percent of plan real estate assets be in retail properties and 15 percent be in industrial properties. CalSTRS has roughly 14 percent in retail properties and 10 percent in industrial.

The pension fund also intends to expand its stable of independent real estate fiduciaries that advise it regarding its investments. Over the past 12 months, the pension had employed five independent fiduciaries: Courtland Partners; Bard Consulting; Principal Real Estate Investors; Bonuccelli & Associates; and Cambridge Associates. CalSTRS expects to add two companies to this list.

West Coast Commercial Real Estate News