DECEMBER 20, 2013

Pennsylvania schools commits $275m to noncore real estate

by Reg Clodfelter

The $49.4 billion Pennsylvania Public School Employees Retirement System has committed $275 million to noncore real estate, as confirmed by board documents released this month. The capital will be divided among three separate noncore real estate funds: DRA Growth and Income Fund VII, Blackstone Real Estate Partners Europe IV and Exeter Industrial Value Fund III.

DRA Growth & Income Fund VIII, managed by DRA Advisors, received $100 million from the pension fund. The value-add fund, which launched this past May, had a $446 million first close in October, covering one-third of its $1.35 billion fundraising goal. The fund invests in office, retail, multifamily and industrial properties across the United States, and increases property income through operational improvements. PSERS chose to make a follow-on investment with DRA Advisors because of the firm’s willingness to be flexible, its proven execution and its presence in Pennsylvania — DRA currently owns 29 office properties in Pennsylvania, totaling 1.6 million square feet and valued at $260 million. This will be PSERS third investment with DRA. The pension fund invested $148 million in DRA Growth & Income Fund VI in 2007 and $100 million in DRA Growth & Income Fund VII in 2011. Other institutional investors in the fund include the North Carolina Retirement System and the Montana Board of Investments.

PSERS also committed $100 million to BREP Europe IV, managed by The Blackstone Group. The opportunistic fund launched this past May with a €5 billion ($6.8 billion) fundraising goal. The fund had a €2.67 billion ($3.7 billion) close in November and has an anticipated close date of March 2014. The fund will invest in a wide variety of property types throughout Europe. It will purchase high-quality distressed properties to turn over as core properties once they’ve been stabilized. PSERS has a long history with Blackstone, having previously committed to BREP V, BREP VI, BREP VII, BREP Europe III and Blackstone Real Estate Debt Strategies II. Other recent institutional investors in BREP Europe IV include the Teachers' Retirement System of Louisiana and the Texas Permanent School Fund.

Exeter Industrial Fund III, managed by Exeter Property Group, received a $75 million commitment from PSERS. The fund launched in November 2013 with a $675 million fundraising goal and has already raised at least $140 million. The value-add fund aims to acquire, reposition, develop, operate and sell industrial and business park assets in the United States and select Canadian markets such as Vancouver, Calgary and Toronto. Investments will include big-box warehouses that lease to national consumer goods and logistics operations, multi-tenant industrial or regional/metro warehouses, and suburban office properties that typically lease to biotech/pharmaceuticals, technology and defense. In board documents, PSERS noted that Exeter already has a strong presence in Pennsylvania, holding 14 investments throughout the state totaling $254 million. This commitment will be the pension fund’s second investment with Exeter. In early 2012, PSERS invested $75 million in Exeter Industrial Value Fund II. Other institutional investors in the fund include the Ohio Police & Fire Pension Fund and the San Antonio Fire & Police Pension Fund.

Pending commitments notwithstanding, PSERS has an allocation to real estate of 14.4 percent and a target allocation of 14 percent. The real estate portfolio is valued at approximately $7 billion. As of September 2013, the real estate portfolio had a one-year return of 9.47 percent.

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