SALEM, Ore. -- The Oregon Public Employees Retirement System has restructured its $3 billion real estate portfolio, expanding its manager lineup from two generalist managers to four specialist managers, said Steve Gruber, senior real estate investment officer at the $40 billion system.
Under the new structure, the managers will co-invest anywhere from 1% to 20% of their allocations, and also will offer Oregon the right of first refusal on properties.
The change has been in the works since April 1999, Mr. Gruber explained. "We wanted to have a specialist strategy so that our properties would be in the hands of dedicated managers who are solely focused on one property type, people with talent a mile deep and an inch wide."
Previously, the $2 billion core property portfolio was divided between Clarion Partners, New York, and LaSalle Investment Management, Inc., Chicago, which each managed multistyle portfolios with full discretion. The system also has $1 billion invested in opportunity funds, which are unaffected by the restructuring.
Under the new program, Oregon retained Clarion Partners to managed $150 million in properties it had been managing already and allocated another $575 million in office properties to the firm. In addition, it hired:
* Greystar Capital Partners LP, Charleston, S.C., to manage an initial $200 million in a national multifamily program;
* Lincoln Property Co. Realty Advisors, Chicago, to manage an initial $300 million allocation to a national industrial property portfolio;
* Regency Realty Corp., Jacksonville, Fla., to manage $300 million in grocery-anchored neighborhood and community shopping centers;
Also hired, but not considered part of the new specialist structure, was Cohen & Steers Capital Management Inc., New York, for a $100 million passively managed portfolio of real estate investment trusts that invest in large regional malls.
LaSalle, whose predecessor ABKB was hired in 1981 as Oregon's first real estate adviser, will not be part of the new program. In a statement, LaSalle said it resigned as investment adviser to accommodate Oregon's move to a specialist approach. Spokeswoman Kim Dobbins said she couldn't explain why LaSalle decided not to compete for any of the mandates.
John Weisz, managing director at Clarion, said the new structure was great for his firm. Previously, it managed $1 billion for Oregon, with $700 million of that in office, $150 million in retail and $150 million in a combination of industrial and apartments. Now the retail and industrial properties have been transferred to the managers in charge of those sectors, while Clarion continues to manage $150 million in retail plus $350 million in office properties previously managed by LaSalle. With the additional office allocation of $575 million, and leverage, Clarion's total managed for Oregon will be $1.2 billion.
All of the specialists have the authority to invest nationally with full discretion. Properties managed by Clarion and LaSalle are being sold or transferred to the appropriate managers in each sector, Mr. Gruber said.
The target weightings in Oregon's core portfolio also have changed. Apartments have been increased to a target weighting of 21%, up from the current allocation of 4%; industrial, to 21% from 6%; retail, to 20%, down from 24%; and office to 38%, from 66%.
"The allocations have all been approved by the board, but the agreements are still being completed," Mr. Gruber said. He is targeting returns that will be 200 basis points over those of the NCREIF Property Index.
Office weighting factors
Clarion's Mr. Weisz noted that even though the system plans to reduce its office weighting, it will do so over three to four years. If the overall growth of the pension fund continues, the office weighting could rise to a much higher dollar value than is now estimated.
The system wanted to move to a specialist strategy, because it believes it can do better under a partnership structure -- in which the managers co-invest with the fund -- compared with the previous advisory setup. Previously, Oregon did not have dedicated managers, co-investors or exclusivity, Mr. Gruber emphasized.
Cohen & Steers, which Oregon considers a completion fund, rather than a specialist manager, is not co-investing.
Mr. Gruber added the main reason for the change was the growth of the portfolio. "The performance has been great. But we can't continue to manage a big program using a small program strategy. We believe the decentralization of acquisitions, the focus on sector and co-investing will all work in our favor. This is positioning us for when we're a $70 billion fund."