The Oklahoma Teachers’ Retirement System (OTRS) expects to allocate an additional $283 million to its real estate portfolio at today’s investment committee meeting in order to reach its increased target for the asset class. The Oklahoma City-based pension plan will use the increase to make its first commitments to real estate debt and non-core strategies.
The most recent update to the pension plan’s asset allocation model, completed at the end of the third quarter, increased OTRS’ target allocation to real estate from 5 percent to 7 percent. Currently, OTRS only devotes 4.3 percent of its portfolio to real estate through commitments to three open-ended core managers: $182 million with AEW Capital Management, $192 million with Heitman and $171 million with L&B Realty Advisors. In order to reach 7 percent, the OTRS investment committee will propose the $283 million increase, bringing the total target to just under $900 million.
The OTRS investment committee will present a real estate project timeline at today’s meeting, the first step of which is to increase the three current core investments to an even $200 million each. That would bring its core allocation to $600 million, or approximately two-thirds of the overall real estate portfolio.
Step two in the timeline is issuing a request for proposals (RFP) for a real estate debt fund manager. OTRS is looking to add such a manager as the “high income and ability to prosper in a rising interest rate environment make this the most logical next step for the real estate allocation,” according to board documents.
The final step is to issue an RFP for a non-core manager in order to raise the portfolio’s return profile. OTRS noted that it would consider commitments to non-core strategies sponsored by its existing managers as well as other firms. OTRS will work quickly to implement the timeline and plans to issue the RFPs later this month.
The increased allocation is the first change to OTRS’ real estate portfolio since the pension plan first began investing in the asset class in 2011. Board documents noted that, while OTRS believes core vehicles to be the “appropriate risk profile for most of the real estate allocation,” the increase will allow for “useful” diversification. OTRS is targeting a 15 percent IRR for both its new debt and non-core strategies, bringing its total portfolio performance to a projected 10.7 percent return, versus a 9.3 percent return without the investments in riskier strategies.