The Florida State Board of Administration (SBA) is gearing up for a massive investment drive in real estate over the next five calendar years, on behalf of the $143.7 billion Florida Retirement System (FRS) pension plan. The institutioncurrently is anticipated to allocate $5.2 billion to the asset class during that period as it seeks to achieve its new 10 percent target allocation, which was approved in December.
The largest allocations are expected to occur this year and in 2015, according to SBA’s new five-year pacing model, which was revealed at its investment advisory council meeting yesterday. The pension plan has outlined $1.21 billion of commitments this year, including $651.5 million in new core investments, $351.2 million in value-added and $204.9 million in opportunistic. Similar amounts of capital also are designated for 2015, with $650.4 million for core, $354.1 million for value-added and $211.8 million in opportunistic, for a total of $1.22 billion in planned investments.
Steve Spook, senior investment officer of real estate at SBA, noted during a webcast of the meeting yesterday that the allocations to core and non-core investments were quite similar in size during those two years, despite a target to allocate 80 percent of the pension plan’s property portfolio to core and 20 percent to non-core. The reason for the seemingly disproportionate allocation was that SBA’s investments in value-added and opportunistic real estate receive distributions more quickly and frequently than those in core, he explained.
After 2015, the pension’s property allocations decline gradually. In 2016, SBA is projected to earmark $1.15 billion to the asset class, comprising $651.5 million in core, $279.6 million in value-added and $218.9 million in opportunistic. In 2017, the allocations are anticipated to total $1.04 billion, with $651.7 million in core, $159.5 million in value-added and $226.2 million in opportunistic. The aggregate property commitments drop to $605.1 million in 2018, consisting of $244.3 million in core, $127 million in value-added and $233.8 million in opportunistic.
By 2018, the pension plan would be just shy of its 10 percent allocation goal, with real estate projected to make up 9.3 percent of SBA’s total assets by that time. Of its property holdings, 77.9 percent would be allocated to core, 12.2 percent to value-added and 9.9 percent to opportunistic that year. In contrast, real estate is anticipated to represent 6.6 percent of its total portfolio by the end of 2014, with 79.7 percent in core, 10.7 percent in value-added and 9.7 percent in opportunistic.
SBA’s real estate investments are divided between principal investments and externally managed investments. Principal investments, which have a core focus, allow staff to maintain discretion in terms of approving acquisitions, dispositions, financings, capital projects and annual business plans. Meanwhile, externally managed investments include pooled funds, REIT separate accounts and certain joint ventures, where managers have discretion over major decisions. Although externally managed investments currently include exposure to core open-ended funds, the focus going forward will be on non-core. Currently, its real estate portfolio consists of 49.6 percent principal investments and 50.4 percent externally managed investments.
SBA prefers to invest in private real estate through direct-owned separate accounts because of greater staff control and lower fee structures, but it also utilizes commingled funds for diversification, specialized strategies and non-core investments. Indeed, the pension plan’s core separate accounts with Chicago’s Heitman and Dallas-based L&B Realty Advisors are not only its largest but also its most successful over all time periods, beating the ODCE index by 650 and 510 basis points, respectively, over a five-year time period.
SBA manages the assets of both FRS' pension plan and defined contribution plan, as well as 30 other funds for Florida's state and local governments. Of SBA's $176.9 billion in total assets, about 80 percent is for the FRS pension plan.