Exclusive: Los Angeles’ CIO Preps for Potential $1 Billion Real Estate Sell-Off

Being 2% overweight to real estate means it’s time to trim the hedgings.

Jonathan Gaabel

As much as $1 billion in assets may hit the real estate market as part of the Los Angeles County Employees’ Retirement Association’s (LACERA) review of its real estate portfolio.

There’s no event that’s prompting the potential sales, other than bringing core and value-added real estate strategies closer to their 7% target allocation, Chief Investment Officer Jonathan Grabel told CIO. “We’re not opining on individual properties, it’s just part of asset allocation, and these strategies happen to be overweight.”

“Subject to board approval, much of this could happen over the next 24 months,” Grabel added. However, despite the main goal of divesting to reduce the portfolio’s allocation, the pension still intends to execute a modest amount of new investment activity so that vintage year diversification can be maintained. In that case, LACERA’s investment staff sought board approval to allow up to $500 million to be invested by the fund’s existing separate account managers, Clarion Partners, Heitman, Invesco Real Estate, DWS, and Stockbridge.  

According to Grabel, LACERA conducts structure reviews of its asset categories to optimize the implementation of each portfolio. The real estate structure review identified various initiatives including being a net seller during the 2019-2020 fiscal year, and states that for every $1 of new investment, $2 of sales should occur.

The vacated space in the portfolio could be filled with LACERA’s other initiatives in its real assets outlet, including infrastructure, Treasury Inflation-Protected Security (TIPS), and natural resources, as well as its credit portfolio. The total real estate portfolio is currently valued at about $6.4 billion.

The sell-off is expected to include approximately $500 million worth of apartment assets. The full $6.4 billion real estate portfolio is illustrated below:

Source: LACERA

After the dust has settled, LACERA staff anticipates that at least 60% of the portfolio will be core real estate assets. They’re studying whether or not to gain access to office and retail exposure, since technological disruptions from online competition has “challenged mall holdings” in the past for other investors. They also intend to target niche, long-term strategies such as medical offices, senior housing, student housing, self-storage, and other investments.

Another key theme is for the pension to consider using more open-end fund vehicles, since they may improve liquidity, diversification, and have higher performance figures.

The $56 billion pension is in the midst of deploying its inaugural infrastructure strategy, part of which includes fulfilling a 2%, or $1.1 billion, target allocation.

Grabel joined LACERA in April 2017, replacing David Kushner, who resigned after a three-and-a-half year stint at the retirement system.

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