Investors - APRIL 16, 2014

LACERA to potentially invest $1.5b in real estate

by Reg Clodfelter

The real estate committee of the $42.2 billion Los Angeles County Employees Retirement Association recently approved the recommendation of a real estate investment plan for fiscal year 2014–2015 that would involve investing $1.5 billion during the fiscal year coupled with dispositions totaling $710 million for a net increase in investment of $793 million, according to documents prepared by John McClelland, principal investment officer, real estate, with LACERA. The recommended plan will be submitted to the board of investments for a vote of approval at the board’s June 11, 2014, meeting.

Though LACERA will enter the coming fiscal year overallocated to real estate by 0.2 percent (its target is 10 percent of the total fund), the documents state that significant investment would continue due to “(i.) pending investments, (ii.) capital investment in properties already owned, (iii.) continued investment of capital previously allocated to the three ‘new’ managers and the debt managers; and (iv.) fulfilling prior commitments to commingled funds.”

The increased investment is expected to leave LACERA with an 11.7 percent allocation to real estate by summer 2015, which, while above the target allocation, is still within LACERA’s investment policy range of 7 percent to 15 percent. The documents explain the real estate committee’s decision to increase investment despite being above the target allocation by stating that the staff “would like to position the fund to be able to opportunistically take advantage of compelling investments that may arise.”

The plan also proposes that LACERA set aside a $300 million allocation that any separate account managers not on LACERA’s watch list could apply to use for investment in compelling opportunities.

The proposed plan would also increase the real estate portfolio’s allocation to core investments from 67 percent to 74 percent, with the subsequent decrease divided between the “value-added” and “high-return” segments of the portfolio. The resulting decrease in risk is viewed by the real estate committee as appropriate “given the fund’s primary objective for real estate is to provide diversification and generate stable cash flow.”

The proposed plan will also result in an increase to the overall leverage of the portfolio from 41 percent to 43 percent, as “managers are choosing to use leverage on most new core investments since low-rate debt is plentiful at less than or equal to 50 percent loan-to- value,” the plan documents state.

The real estate committee does not anticipate that any of the $1.5 billion in real estate investment during fiscal year 2014 would be committed to new commingled funds, but the proposed plan does reserve LACERA the right to make such investments if they are “particularly compelling.” 

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