Exclusive: Michigan’s Hotel-Heavy Strategy Pulls Real Estate Portfolio Ahead of the Pack

Being ‘overweight’ in hotels helped real estate outperform other asset classes in $69 billion portfolio.

The $69.5 billion State of Michigan’s Retirement Systems’ private real estate allocation was its strongest performing portfolio in 2018, after a bad year with global equities that many other pensions experienced at the end of the year.

Deputy Chief Investment Officer Ron Leix explained to CIO that the portfolio’s “outperformance relative to the one-year benchmark resulted from the Real Estate and Infrastructure Division’s (REID) strategy of being underweight in retail, overweight in hotels, team selectivity in the apartment sector, several favorable sale executions, and unrealized appreciation and income in the overall portfolio.”

The private real estate portfolio generated an annualized 6.7%, whereas public real estate investment trusts (REITs) fell in value by 4.1% including dividend returns. The difference was a bit of an anomaly though, mostly because of REITs’ significant beta with public markets. Over the past 10, 20 and 30 years, publicly traded REITs have out-returned private real estate by 5.5%, 1.4%, and 2.8% annualized respectively, though they are three times more volatile.

“The REID has direct investments within the portfolio and focuses on value-add and build to core strategies,” Leix explained to CIO. “The portfolio is actively managed and was a net seller in 2018. The REID portfolio has significantly outperformed both its peer median return set and benchmark over the one-, three-, five- and seven-year periods. There is a pacing schedule and the portfolio is at its target allocation of 10%.”

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The REID actively manages its portfolio with dispositions resulting in capital returned in excess of $2.1 billion, and funding new investments of nearly $1.9 billion over the past 12 months, according to a report from the institutional investor.

It has approximately $1.5 billion in unfunded commitments and made two sizable pacts in the last quarter of 2018: $200 million was committed to Blackstone Real Estate Partners IX, a fund that specializes in “large, global, opportunistic real estate transactions,” and another $200 million was committed to Lone Star Fund XI, which looks for global opportunistic real estate credit strategies.

The pension’s real estate and infrastructure allocations are detailed below:

Source: Michigan Retirement Systems

A strategy update provided to the board noted that the team is focusing on sourcing off-market opportunities through its “extensive” network and reducing risk in the portfolio through early income-generating investments, such as credit strategies that are “higher in the capital stake with a shorter projected hold period.”

Some institutional investors,, such as Norway’s sovereign wealth fund which is planning to cull some of its unlisted real estate assets and discontinue the organization’s property arm, haven’t had as much success as Michigan.


More than $1.5 billion committed in three months

In the three-month period ending December 2018, the investment board allotted over $1.5 billion towards 13 strategies between its private equity, real estate, and infrastructure division, and real, opportunistic, and absolute return divisions.

They were as follows:

Source: Michigan Retirement Systems

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