Deep Dive: CalSTRS’ real estate changemaker

For the California State Teachers’ Retirement System, 2023 represented a year of major change for its real estate business.

In September, the second-largest US pension plan announced the appointment of Julie Donegan as its next real estate investment director. The leadership change marked two milestones: CalSTRS’ first new head of real estate in more than 20 years, as well as the first female to serve in the role.

It is a formidable role to assume. Donegan now presides over the portfolio of one of the world’s largest real estate investors; CalSTRS places sixth in this year’s PERE Global Investor 100 ranking, with $52 billion allocated to the asset class.

The executive, who was already acting as interim real estate investment director prior to her promotion, is well aware she has big shoes to fill. Her predecessor, after all, is Mike DiRe, who was one of the industry’s best-known investors during his two-decade tenure before his elevation to senior investment director of private markets in January.

“That’s one of the more daunting aspects when I sit back and I take a look at it,” Donegan says, speaking with PERE over the phone in late September. “I was filling out the application thinking, wow, this hasn’t even been possible for 20 years, even if somebody wanted that role. There could be folks in the business where the only person they’ve known is Mike as the head of real estate. So it was very much humbling when I was going through the process and applying for the position.”

Carrying the torch

Ascending to the top real estate post at CalSTRS is not the only way Donegan has followed in DiRe’s footsteps. The two executives have known each other for 25 years, having first worked together at fellow Sacramento-based pension California Public Employees’ Retirement System, where Donegan began her career as an analyst and DiRe was a portfolio manager. Their time at CalPERS overlapped only two years before DiRe left for CalSTRS, with Donegan leaving for the private sector four years later.

However, “I always kept an eye on Mike and the CalSTRS team,” she recalls. “And my long-range goal was to come back and work with him specifically and work at STRS. I even put a Google Alert out for any positions for CalSTRS Real Estate, so I would know ahead of time when that position was available.”

Donegan, who finally joined CalSTRS in December 2019, gave multiple reasons why she wanted to work with DiRe again. “I recognized that Mike was a strong leader. I knew that I could trust him in terms of being able to work with him and grow my leadership style. I felt there was just a real connection there. And it’s quite unique to get someone who’s down to earth and still very senior in this role.”

Donegan adds that she feels fortunate to have been promoted yet still report to the same leader: “I have the benefit of being able to tap into his experience and walk down the hallway, say, ‘Hey, Mike, what do you think about this?’ And yet, at the same time, I have the freedom to develop the team and take it into the future. I’m really lucky that I have the best of both worlds.”

“After two decades of [the same] leadership, maybe there are some things that need to change”

Julie Donegan

Real estate bosses generally do not stay in their positions for as long as DiRe did, says David Schwartz, chief executive and chairman at Chicago-based multifamily specialist Waterton, which has been one of CalSTRS’ real estate managers for more than 20 years. “The great thing about this is Mike is remaining there, so I’m sure he’ll continue to be a mentor to Julie, and his brain trust isn’t leaving the door, which is great for her,” he says.

Schwartz expects CalSTRS’ entrepreneurial culture in real estate, developed under DiRe’s leadership, will continue under Donegan’s watch. “They will be contrarians when the time is right. Julie, I think, represents that culture. They will take risk if there’s proper reward.”

For example, Waterton and CalSTRS acquired several debt pools on a discounted basis during a one-month period at the start of the pandemic. “There was a window of distress,” says Schwartz, “and we were able to take advantage of some investment opportunities with them. I’m sure that’s going to be the case too in this new cycle.”

Of Donegan, he says: “I think she’ll carry on the torch of the culture and entrepreneurial type of investment philosophy that they have, but she’ll also make her own mark in her own way.”

Making her mark

One key distinction between Donegan and DiRe is their professional experience, observes Schwartz. Aside from eight years in the private sector at the start of his career, DiRe has worked primarily in the public sector, logging 23 years at CalSTRS and seven at CalPERS. By contrast, Donegan began her career with a six-year stint at CalPERS, but spent the majority of her professional life in the private sector, including nearly a decade at California-based asset manager Franklin Templeton.

“She doesn’t have this long history of being on the investor side,” says Schwartz. “Her history is more on the investment management side. So she’s going to bring that perspective as we go through the cycle.”

In terms of making her own mark, Donegan is emphatic she wants to continue what is working well and attributes the success of CalSTRS’ real estate investment program to the strength of its team.

“People-oriented leadership skills build a strong foundation, and that’s part of what allows our team to withstand unpredictable challenges,” she says. “Whether it’s from market uncertainty or other circumstances, it’s really that baseline trust of a strong team that’s going to help you get through those challenges. So my goal, quite simply, is to build and cultivate our team, strengthening its resiliency. I think we’re going to need that as we go through changing market cycles and opportunities.”

CalSTRS’ real estate team currently works a hybrid schedule of two office days and three flexible days spent either at home or traveling for business. However, Donegan comes to the office three or four days a week so her team can catch her in person. “As the leader of the team, I think one of the values that I bring is being available,” she says. “I have an open office policy. I encourage everyone to stop by and chit-chat, tell me how their weekend was, ask me a question. I think being available really is the backbone of being a good leader.”

At the same time, she says, “I also recognize that after two decades of [the same] leadership, maybe there are some things that need to change.” Donegan is currently holding a series of hour-long one-on-one meetings with all 31 members of her real estate team to get their feedback on the operational aspects of the business. “It’s an opportunity to step back and reflect upon what works and what doesn’t work and make those changes.”

After the one-on-one meetings are concluded, the executive expects to hold a strategic planning session with her team based on her key findings from those meetings. “It’s very insightful that there are common themes coming up in terms of what they like, what they don’t like. She anticipates the plan will be implemented in stages over one-, three- and five-year windows.

“Her legacy will definitely be some of the best vintages ever”

Gila Cohen
Monroe Capital

Rebalancing act

On the asset level, Donegan will be focused on rebalancing CalSTRS’ real estate portfolio, which is currently overweight in office and underweight in residential and industrial compared with its benchmark, the NCREIF Fund Index – Open End Diversified Core Equity. These underweight positions “could create a performance drag going forward as these property types have exhibited among the strongest net operating income growth,” the investor’s real estate consultant, RCLCO Fund Advisors, wrote in its semi-annual report in September.

“We’re going to continue to work with our partners and expand our residential exposure as well as our industrial exposure,” Donegan says. “When you look at the ODCE index, you’ll see that those are the two property types where performance has been the strongest and we think they will continue to be.”

Real estate, along with private equity, is the second-largest asset class for CalSTRS after public equity, representing 15.82 percent of the pension plan’s portfolio as of August 31. With real estate now at its 15 percent allocation target, Donegan doesn’t “anticipate real estate allocation growing in the short term. If anything, it’s a mature asset class and we will be going through the process of rebalancing.”

In the multifamily sector, for example, this will include actively disposing assets with completed business plans and redeploying capital into areas where the pension plan sees continued growth, such as build-to-rent strategies.

Meanwhile, Donegan is also working across CalSTRS’ other investment teams. One such collaboration came in March 2022, when the real estate team jointly committed $50 million with CalSTRS’ Sustainable Investment & Stewardship Strategies unit to Los Angeles-based manager SoLa Impact, which focuses on affordable and workforce housing in California’s Black and Brown communities.

“We do have experience in real estate operating company ownership,” says Donegan, “and we have been able to share that experience with other asset classes as they’ve looked at potential ownership opportunities and giving them some benefit of our experience. So there’s some cross-fertilization there.”

A double-edged sword

Arguably the most daunting aspect of Donegan’s new role is the timing of her job change. In Donegan’s promotion announcement, DiRe said of his successor: “Julie is the right person at the right time to lead the CalSTRS real estate team… through the current challenging market environment and into the future.”

When asked about DiRe’s remarks, Donegan says: “For me, being the right person at the right time really means being prepared to hit the ground running. And that means being able to provide a smooth and stable transition of leadership for our team. Obviously, these are uncertain times of rapidly changing market conditions.”

As one of the world’s largest property investors, the pension plan faces choppier waters than many of its peers. “CalSTRS’ real estate portfolio is so large that it can’t help but be exposed to and ultimately reflect the changes taking place in the real estate industry,” says Taylor Mammen, chief executive at RCLCO Fund Advisors.

“Julie and her team, therefore, have to tackle all of these: adapting to the economic and demographic trends that are changing demand for real estate, addressing both internal and external succession as experienced real estate practitioners retire, and meeting the demands of stakeholders, regulators, and many tenants to shift toward a greener portfolio.”

Gila Cohen, who is head of global institutional partnerships at Chicago-based private credit manager Monroe Capital, has known Donegan since the latter’s days at CalPERS. She says it is very hard for CalSTRS and other large pension plans to allocate capital at the moment because of the denominator effect and valuation issues in the market. “You’re going to have to make some really difficult calls,” Cohen says. “And you’re going have to reach out even to your best partners and say, ‘I’m really sorry, but there isn’t going to be capital for you right now.’”

“Being the right person at the right time really means being prepared to hit the ground running”

Julie Donegan

In other challenging conversations, Donegan will also be required to stand in front of CalSTRS’ board of directors and leadership and explain why the real estate portfolio is not performing at the level it has been over the last decade, she adds.

CalSTRS reported a -0.5 percent return in real estate for the 2022-23 fiscal year ended June 30. The asset class was the pension’s third-worst performing after private equity and risk-adjusted strategies. In stark contrast, real estate was the top performer for CalSTRS’ 2021-22 fiscal year, delivering a 26.2 percent return.

But taking the helm during a time of market uncertainty “is a double-edged sword,” Cohen says. “The reward is that her legacy will definitely be some of the best vintages ever, especially in real estate debt and in opportunities that show up in converting office or repurposing for different uses. We’re coming into a very innovative cycle in real estate, where there’s going to be unprecedented change to how we’ve done things. And that will be Julie’s [job] to help direct and steer and manage. And I think that’s a very exciting place to be, that she gets to lead the team through that opportunity.”

Meanwhile, Eliza Bailey, chief executive at Los Angeles-based Belay Investment Group, which oversees CalSTRS’ real estate emerging manager program, points out that the real estate market has already been undergoing a correction for some time, which could work to Donegan’s benefit. “She’ll have opportunities to invest into a recovery cycle rather than into a cycle that has been more of a correction cycle in the last year-plus,” Bailey says.

Similarly, Donegan prefers to view the current downturn “as an opportunity for things to improve.” With CalSTRS positioned as a long-term investor, “the short-term focus is really on maintaining liquidity and dry powder,” she says. “So as the market changes, and we see distressed opportunities or other opportunities, we have the capital available to go ahead and take advantage of those unique windows in time.”

In the meantime, the real estate team is “challenging opportunities as they come in the door,” she says. “We’re essentially looking at everything and saying, ‘Is this the best deal?’ And if we don’t have a high conviction that that’s the case, we think, ‘Six months from now, will this deal be even better?’ It’s having that visibility that we need to look for coming opportunities that we haven’t yet identified.”

‘Representation is powerful’

As one of the few female managers at the largest real estate investors in the world, Donegan hopes to prove a role model for women starting out in their careers.

Donegan is one of only a handful of women in charge of the world’s largest real estate investor portfolios. Of the top 50 organizations in PERE’s Global Investor 100 ranking, only 10 have female heads of real estate or real assets, according to PERE data.

On becoming the first female real estate investment director at CalSTRS, Donegan says she “was incredibly honored,” but adds “it’s a little surprising” that the pension plan had not had a female head of real estate until now. “But I think that’s more to do with real estate than CalSTRS.”

She notes the pension plan is led by chief executive Cassandra Lichnock, who is also the first female to serve in her role. Additionally, women are nearly on par with men in terms of senior-level representation on CalSTRS’ investments team, holding five out of 11 investment director positions, according to the investor’s 2022 annual diversity report.

“I really think that representation is powerful,” says Donegan. “You can’t be what you can’t see – you’ve heard that often. I think back to my first days in this business, and I really couldn’t look ahead of me and see [myself as] a director. I never worked for a female director.”

She hopes her appointment is just “the tip of the spear” for women being elevated to the top real estate jobs. “I try not to think about being a female leader,” Donegan remarks. “I just see myself as a leader, and I happen to be female. But I understand why it’s important. I’m hopeful the industry continues to evolve and broaden its definition of what a leader looks like.”

Although he stresses Donegan was promoted to the role because “she is simply the right person for the job,” Taylor Mammen, chief executive at RCLCO Fund Advisors, acknowledges “it’s pretty exciting that the heads of real estate for both CalSTRS and its counterpart across the Sacramento River, CalPERS, are women. It’s a milestone and I hope that it’s motivating to younger women and others from underrepresented groups in real estate to keep doing what they’re doing with every expectation that they can rise to the most senior levels in our industry.”