CalPERS is trying hard to get real estate right this time.
Officials at the $229.8 billion California Public Employees' Retirement System, Sacramento, are aggressively moving the pension fund's $21 billion global real estate portfolio into core real estate, after years of restructuring.
CalPERS isn't the only big institution investing in core, but as the largest institutional investor in real estate in the U.S., others paid attention when fund officials took several years to fix the portfolio. Now they are back in the market in a big way, buying core even though core prices in some cities are high.
For example, Los Angeles-based CommonWealth Partners LLC spent close to $1 billion on behalf of CalPERS on core office buildings in the last three months, including the $480 million purchase of Russell Investments' headquarters in Seattle from insurer Northwestern Mutual Life Insurance Co. in April and Hamilton Square in Washington from San Francisco-based real estate investment firm Shorenstein for $200 million in June.
“We have been concentrating on core in the U.S. portion of the portfolio,” said Theodore Eliopoulos, senior investment officer, real assets, in an interview.
In the last four years, CalPERS terminated more than 20 real estate managers, reducing the total to 60, Mr. Eliopoulos said. Since his ideal target is 20 to 30 firms, more cuts are planned.
Today, 61% of CalPERS' real estate holdings are in what pension fund officials call a strategic portfolio, managed by CalPERS' strategic partners. Pre-recession real estate investments are in the pension fund's so-called legacy portfolio, which contains older investments that are being sold by CalPERS managers. An example was last year's transfer of the $570 million CalSmart portfolio of 11 office, industrial and apartment properties to Canyon Capital Realty Advisors from RREEF, Deutsche Bank AG's real estate arm.
“We did the basic blocking and tackling of restructuring,” including transferring properties to new managers, deleveraging portfolios, selling properties, turning properties back to lenders and making some well-timed purchases, Mr. Eliopoulos said.
When officials began reorganizing, the portfolio was overweighted in opportunistic and value-added real estate and underweighted in core, said Theodore M. Leary Jr., president, Crosswater Realty Advisors LLC, a Los Angeles-based real estate strategy and restructuring firm that assisted CalPERS' real estate unit.
The strategic portfolio contains new investments made mostly in large separate accounts with a shortlist of managers. It also includes a one-third stake in Toronto-based real estate investment firm Bentall Kennedy, which CalPERS bought last month for $100 million, Mr. Eliopoulos said. (Bentall Kennedy manages $200 million for CalPERS.)
“We transferred a lot of property into our strategic partners' hands and allocated significant dollars over the past few years. We increased our purchasing in core recently,” Mr. Eliopoulos said.