BOSTON -- Delta Air Lines Inc. is looking for $480 million in real estate investments to reach its pension fund's target allocation and is on track to make $150 million in new investments this year.
The $12 billion pension fund has an 8% target real estate allocation, said John P. Seckman, manager real estate, at a panel discussion of high-yield opportunistic investments at the 20th annual Pension Real Estate Association conference held last month in Boston.
Delta is bullish on real estate, Mr. Seckman said, because "we're only at half our allocation. But you have to be careful in this market."
He's not comfortable with riskier plays now, he said, and would agree to them only on six- to 12-month cycles rather than longer term.
In the past year, he said, he considered 40 tactical opportunities but selected only two: One in real estate operating companies and one in redevelopment companies.
He would not be more specific.
Delta's target returns are 13% to 15% net of fees, for what are mainly value-added investments, he said.
The separate accounts are "return driven," he said, because managers are paid incentive fees based on returns.
He has scaled back expectations and is looking for basic risk-adjusted returns of 13%, rather than 15%. "Trying to get higher returns could add more risk than it's worth," he said.
He noted many managers boast they will get 20%-plus returns. "But few actually can, except for those which are more like venture cap with a real estate play. "We see people managing suburban office properties saying they'll get those returns, which is hard to believe. The risk is that in this market they will underperform."
He added that he hires managers he trusts to guide him: "We select firms that have been in business 15 years with strong track records and compelling stories," he said. "In private equity limited partnerships, we generally invest $15 million to $25 million per deal."
DuPont's approach
In contrast, E.I. du Pont de Nemours & Co. takes a more aggressive approach to real estate investing.
Brian Abrams, real estate portfolio manager for the $19 billion in pension assets at DuPont, Wilmington, Del., said he looks for distressed assets that are mispriced or overleveraged. "By buying at a discount, I can limit the downside," he said.
The $1 billion DuPont real estate portfolio is diversified by property type and uses a range of vehicles such as large opportunity funds, joint ventures and separate accounts. It has limited international investments.
He would not discuss returns.
The Massachusetts Pension Reserves Investment Management Board, on the other hand, is more conservative in its approach to real estate, which is used strictly as a diversifier at the Boston-based system, said Glenn M. Johnson, chairman of the real estate committee. The system's 6% allocation to real estate is invested primarily in a core strategy that can provide low-risk, stable income that allows the $27 billion pension system to be in control, he said.
"We have four managers, limited leverage, and we've been successful with an annual return of 11.3%," he said.
Last year, PRIM branched out and invested $100 million in real estate investment trusts and made some value investments in properties that might require a few minor changes, but nothing that involves major repositioning. The core investments make up 75% of the real estate portfolio, which is within $200 million of its target allocation.
High-yield enthusiasm
DuPont expects to find a lot of opportunities with high-yield potential, because "real estate is such a huge, localized, inefficient market," Mr. Abrams said.
The market's having changed will present more opportunities. "We're going for the smaller opportunity funds and more joint ventures with operating partners. We have done some international investments through opportunity funds. But it's hard to find the operating partners we're looking for overseas," he said.
Delta's Mr. Seckman sees no point in looking outside the United States. "International investment involves high fees, currency risk and no compelling returns for those risks. We don't have to do those kinds of deals, since there is a big domestic market available," he said.
But DuPont expects to see more opportunities in Asia and in Western Europe. "With EMU, there will be more cross-border opportunities," Mr. Abrams said. "People will be interested through opportunity funds, but they (the funds) will have to prove they have the resources and the staff to implement their strategy."
