CalSTRS to invest $775m in real estate

The $176 billion pension plan made a strong return to funds during the third quarter, with property investments that were exclusively in non-core real estate.

The California State Teachers’ Retirement System (CalSTRS) pledged $775 million to real estate during the third quarter, all of which was designated for value-added and opportunistic managers. Of the $775 million, $550 million was earmarked for commingled funds – a departure from an investment approach that has heavily favored joint ventures and separate accounts in recent years. Indeed, four out of six of CalSTRS’ real estate investments during the third quarter were in funds as compared to the second quarter, when all six of the pension plan’s investments were in joint ventures.

The new fund investments included a $50 million commitment to Brookfield Asset Management’s Brookfield US Multifamily Value Add Fund, which will acquire and develop US multifamily properties. The value-added vehicle, which is targeting $700 million in commitments and a 12 percent to 15 percent return, is Brookfield’s second multifamily fund. The firm’s first multifamily offering, Brookfield Fairfield US Multifamily Value Add Fund, raised $323 million in 2012, including $50 million from CalSTRS.

The pension plan also set aside £64.6 million (approximately €75 million; $100 million) for Frogmore’s Frogmore Real Estate Partners III, a £350 million fund that will invest in income-producing assets and redevelopments across property sectors in the UK. CalSTRS previously committed to both predecessor funds in the value-added series.

CalSTRS’ largest real estate commitments during the third quarter, however, were to two opportunistic funds. Secured Capital’s Secured Capital Real Estate Partners V and Lone Star Funds’ Lone Star Real Estate Fund III each were granted $200 million in equity from the pension plan during the third quarter. Secured Capital, CalSTRS’ sole new real estate manager during the period, will seek to invest in distressed real estate debt and portfolios of loans collateralized by commercial or residential real estate assets primarily in Japan. Last month, the firm held a final close of $1.5 billion for its fifth opportunity fund, significantly above its original $1 billion target.

Meanwhile, Lone Star is continuing to pursue distressed investment opportunities in economically troubled developed markets with its third global commercial real estate-focused fund. The vehicle, which raised $6.6 billion of third-party equity in October, is the sixth Lone Star fund in which CalSTRS is a limited partner.

The pension plan’s non-fund investments during the third quarter included earmarking an additional $150 million to an existing joint venture with CenterCal Properties. The partnership will continue to pursue a build-to-core acquisition strategy focusing on retail properties on the West Coast. Additionally, CalSTRS agreed to make a follow-on investment of $75 million to an existing joint venture with IHP Capital Partners, which is pursuing an opportunistic strategy of investing in single-family housing projects, residential development and entity-level investments in operators and builders.

At the end of the third quarter, CalSTRS held $22.22 billion of real estate assets, which represented 12.92 percent of its total portfolio. Several years after shifting its property investments to be heavily weighted to core, the pension plan saw its core real estate holdings overtake its opportunistic assets in size. Despite CalSTRS not making any core real estate investments during the third quarter, that segment of its property portfolio still grew from $8.70 billion to $9.54 billion during the three-month period. Meanwhile, opportunistic real estate fell from $10.41 billion as of June 30 to $9.16 billion as of September 30. Value-added holdings also declined from $3.51 billion to $3.24 billion during the third quarter.