DECEMBER 19, 2013

Florida to up real estate allocation

by Reg Clodfelter

At a recent board meeting, the Florida State Board of Administration voted to up its target allocation to real estate from 7 percent to 10 percent. The change will facilitate an increase of approximately $4 billion in capital.

The 3 percentage point increase will be taken from a 6 percentage point decrease in target allocation to fixed income, reducing it from 24 percent to 18 percent. “The board was concerned about interest rate risk in fixed income,” comments Dennis MacKee, director of communications for the board, “and decided to reallocate assets across the other asset classes to mitigate this risk.” The board had invested 21 percent of its portfolio in fixed income and 7 percent in real estate, as of September 2013.

Though the pension fund will use the new capital for a variety of investment strategies, board documents state that the additional capital will be used to take advantage of unique opportunities in opportunistic and value-added real estate internationally to achieve additional diversification relative to core real estate. Various amounts of leverage will be used, depending on the vehicle and strategy in question, but at the portfolio’s current level, no more than 40 percent LTV is permitted. The Townsend Group is the FSBA’s current real estate consultant and will continue to work with the board on future investments.

In the third quarter, the board committed $13.6 million in equity to acquire a student housing community through an established joint venture; $25.7 million in debt financing was used in the transaction. The board also sold off two core assets, selling them into a highly liquid core market for a total of $144.6 million in proceeds.

The FSBA manages $167.5 billion in assets, as of September 2013, $138.0 billion of which is the Florida Retirement System Pension Plan, making it one of the nation’s largest pension plans. The real estate portfolio is allocated 71.4 percent to core investments, 9.6 percent to value-add investments, 6.8 percent to opportunistic investments and 12.2 percent to REIT investments. Some 49.1 percent of the portfolio is externally managed.

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