CalSTRS to be net seller in 2017

The pension system is exploring liquidation options for its legacy portfolio, which has dragged real estate returns.

The California State Teachers’ Retirement System is planning to sell more real estate this year than it did in 2016, the pension system said in its meeting materials last week.

CalSTRS said the expected higher disposition activity would occur in tandem with “limited” acquisitions in 2017.

The pension system is also considering changes to its use of leverage, writing that “additional leverage may be used given favorable interest rates and the ability to increase returns with limited risk to capital.”

As part of this disposition activity, CalSTRS noted it is examining strategies for its legacy portfolio.

“Staff continues to evaluate liquidation options for the legacy portfolio,” one of the presentations said. “The portfolio is expected to be in full compliance no later than fiscal year 2018, depending upon the impact of sales and the denominator on new capital allocations… Non-core investments suffered greatly during the global financial crisis and those held in the portfolio through the market correction are not expected to provide incremental returns above market recovery returns.”

A spokesman declined further comment.

CalSTRS’ legacy real estate investments, defined as those made before July 1, 2008, have dragged the portfolio’s returns, according to its presentation. Overall, real estate has generated a net 11 percent return over the three years ending June 30, slightly below its 12.1 percent benchmark. When legacy assets are excluded, real estate has returned 13.6 percent in the same period.

The real estate opportunity set varies by region, the pension system said in the meeting materials. In the US, CalSTRS cited opportunities in core real estate, which “offers good income and protection against a potential slowdown.” By contrast, in Europe and Japan, the pension fund highlighted repositioning opportunities as attractive investments, and noted low debt cost in both markets “offers good leverage, without adding much risk.”

CalSTRS managed $25 billion in real estate and $202.1 billion overall as of February 28, according to its website.