New Mexico to liquidate industrial fund interests

In its first such exchange, the $10.2 billion pension plan intends to sell its investments with one underperforming industrial real estate firm and re-commit the capital to a first-time fund manager in the sector.

The New Mexico Educational Retirement Board (ERB) has approved the liquidation of its investments with its current industrial real estate manager, Prologis, with which it has committed more than $30 million through the Prologis Targeted US Logistics Fund and the Prologis Targeted Europe Logistics Fund. 

Because of the poor performance of the two Prologis funds, “ERB currently is slightly underweight in industrial real estate versus the private real estate benchmark – the NCREIF Property Index,” wrote Mark Canavan, senior portfolio manager of real assets, in a memorandum to the pension plan’s investment committee. “Staff believes the essentials supporting the original recommendation of Prologis have changed substantially and the investment is likely to underperform relative to the alternatives available.” 

New Mexico ERB first committed to the Prologis funds in 2008, when the vehicles were still managed by AMB Property prior to its merger with ProLogis. The pension plan currently has approximately $11 million committed to Prologis Targeted US Logistics Fund, a 2004 vintage fund, and $21.8 million to Prologis Targeted Europe Logistics Fund, a 2007 vintage vehicle. Both are open-ended core funds with redemption rights. As of March 31, the US fund was generating an internal rate of return of -6.98 since inception of New Mexico's investment, while the European vehicle was producing a -11.06 percent percent return since inception of investment.

At the same time, the pension plan has agreed to commit $25 million to a new manager, Realterm Global, through the Annapolis, Maryland-based industrial real estate investment management company’s debut offering, Realterm Logistics Fund. The firm is seeking to raise $200 million to invest in US industrial real estate, particularly high flow-through (HFT) properties. Such facilities have rapid turnover rates of inventory – up to 700 times per year, compared with traditional warehouses where inventory turns over only several times per year. 

“Staff believes that high flow-through properties provide one of the best entry points into industrial real estate,” said Canavan in his memorandum. He noted that both the rise in just-in-time manufacturing – which calls for parts to be delivered only on an as-needed basis – and the globalization of the supply chain “require an increasing supply of HFT properties. This is before taking into consideration demands on the supply chain due to the advent of the Internet and e-commerce.”

New Mexico intends to liquidate its Prologis investments as Realterm makes capital calls for its fund. Such an exchange – a first for the pension plan’s real estate portfolio – “will provide exposure to a superior manager and bring ERB’s weighting to industrial real estate in line with the benchmark,” Canavan said.

The pension plan had allocated five percent, or approximately $506 million, of its total assets to real estate as of June 30. At the end of June, New Mexico ERB had invested a total of $203 million in private real estate, about 50 percent of its $406 million allocation target. Given the projected rate of capital deployment – $205 million in commitments in 2013 and $100 million in commitments annually from 2014 through 2016 – and anticipated distributions from prior investments, it expects to reach its private real estate target in late 2014 or early 2015.