Texas Municipal considers real estate co-investments

The $19.5 billion pension plan, which currently invests in the asset class through commingled funds, is examining the expansion of its real estate portfolio to include co-investments.

Texas Municipal Retirement System (MRS) is mulling co-investments in real estate as it seeks to continue to build its portfolio to meet a long-term 10 percent allocation target.

ORG Portfolio Management, the pension plan’s real estate consultant, stated during an educational presentation at last week’s board meeting that “Texas MRS can capitalise on attractive investment opportunities that fit its portfolio objectives on a favourable fee basis” through real estate co-investments. Additionally, co-investments would help to improve access to attractive deals by positioning the pension plan as a preferred capital source, as well as help to better control portfolio diversification.

ORG recommended that the pension’s staff be granted discretion for co-investments, provided that allocations are limited to $50 million per manager and capital is committed only to managers previously approved by the board. A spokesman said Texas MRS is considering real estate co-investments because “real estate investment is still a new asset class, and this was part of the ongoing education of the board.”

Formed in 1948, Texas MRS had invested almost entirely on bonds until 2008, when it adopted a new policy that included a 10 percent target allocation to real estate. In 2010, the pension hired ORG to assist with its entry into the asset class and, in March 2011, selected its first real estate managers, committing $100 million each to open-ended core real estate funds managed by Harrison Street Real Estate Capital and Stockbridge Capital Group.

During its second round of real estate managers selections last September, Texas MRS allocated $100 million to H/2 Capital Partners’ core debt fund, as well as $75 million each to Miller Global Properties and Greenfield Partners’ value-added real estate vehicles and $50 million to Walton Street Capital’s opportunistic fund. The pension plan, however, terminated its agreement to commit to H/2 Capital after the two parties failed to reach an agreement on contract terms.

Texas MRS has not made any real estate co-investments to date and currently does not have any specific plans for such a strategy. Although the board did not change its 10 percent allocation to real estate at last week’s meeting, a study released last week indicated that the pension system plans to continue to build its allocation to real estate with additional searches in fiscal year 2012-2013.