The Ohio Public Employees Retirement System (OPERS), like many institutional real estate investors, has deployed capital in the four main property types of office, apartment, retail and industrial. However, the $91.2 billion pension plan also likes to “invest where there is less capital,” according to its first quarter real estate portfolio report.
Consequently, OPERS has a tactical overweight to nontraditional property types, including hotel, secondaries, mortgage pools, land, storage, senior housing, healthcare and cash. Such strategies accounted for a total of 21 percent of the pension plan’s overall real estate portfolio during the first quarter, the report said.
In its report, OPERS also noted that “the separate account channel has provided the best returns over the long term.” Separate accounts, with a net asset value of $4.11 billion as of March 31, generated a return of 4.19 percent during the first quarter and of 9.7 percent since inception. By contrast, closed-end funds returned 1.42 percent during the first quarter and 5.11 percent since inception.
At the end of the first quarter, 51 percent of OPERS’ total $7.77 billion real estate portfolio was invested in separate accounts, including 34 percent in core and 19 percent in non-core. Meanwhile, 26 percent was invested in closed-end funds, including 11 percent in core and 15 percent in non-core.
Indeed, one of the pension plan’s primary non-core investment themes is to undertake development and redevelopment projects with separate account managers, including debt and equity investments in hotel and industrial, and equity investments in retail and multifamily. OPERS also plans to make follow-on investments with select opportunistic closed-end fund managers while co-investing with opportunistic funds on certain projects.
On the core side, the public institution has adopted the strategy of going deeper into the capital stack, particularly in preferred equity and subordinate debt, as well as in “stretched” first mortgages. In its 2015 investment plan, OPERS said it was expanding its exposure to real estate debt strategies fairly significantly, with the goal of “mitigating downside risk when the next cycle comes around.” In its first-quarter report, the pension plan also disclosed that it was purchasing on the secondary market interests in closed-end funds that were producing core-plus returns, as well as stabilizing development assets to core.