TCERA seeks manager for value-add RE debut

Oaktree, TA Realty and American Realty Advisors have made the pension’s shortlist.

A vineyard hugs the rolling hills in California's Central Valley with the Coast Ranges in the background.

Tulare County Employees’ Retirement Association is looking to commit to its first value-add real estate fund and has narrowed its list of options to three.

The nearly $1.6 billion pension fund has previously only invested in core real estate through open-end vehicles, Leanne Malison, assistant administrator to the TCERA retirement board, told PERE. Now, it is willing to take on riskier real estate to achieve better returns, allocating 5 percent of its assets, roughly $80 million, to value-add strategies. The association’s retirement board approved this strategy change at its October 2018 meeting.

“The board’s reason for moving into this particular asset class is they feel it will add additional diversification and better returns while reducing exposure to [public] equity risk,” Malison said.

Verus Investment Partners, the California municipality’s investment consultant, provided a list of potential managers, which has since been whittled down to Oaktree Capital Management, TA Realty and American Realty Advisors. The finalists will present their funds and strategies either this month or next, Malison said. TCERA will then visit the chosen firm to perform a due diligence review. It expects to invest with only one manager and make its commitment before the end of the calendar year.

TCERA has set a benchmark for its value-add investment of 200 basis points better than the Open-End Diversified Core Equity Index. The National Council of Real Estate Investment Fiduciaries tracked an annualized return of 8.68 percent for ODCE funds through the third quarter of 2018. The pension’s lone real estate investment – a 10 percent allocation to DWS’s RREEF America REIT II – kept pace with that average, delivering a single-year gross return of 8.6 percent as of December 2018. The vehicle has produced a three-year return of 7.4 percent and a five-year return of 10.3 percent.

Malison said a value-add commitment has been “under discussion for quite some time,” as TCERA has sought ways to insulate itself from the volatility of public equity markets.

Funds targeting value-add strategies have raised $36.5 billion through the first quarter of 2019, according to PERE data, making it the most popular risk-profile in the market. Opportunistic funds were not far behind with $33.2 billion raised while all other strategies accounted for a combined $54.8 billion.

Value-add strategies have performed well during the past decade. Funds with a vintage between 2008 and 2010 have enjoyed a median net internal rate of return of 15.2 percent, according to the NCREIF Closed-End Value Add fund index.  Vehicles formed in 2011 and 2012 have a median net IRR of 16.6 percent. More recent value-add funds with 2016 and 2017 vintages have seen a median net IRR of 9.1 percent.