New York State Teachers’ RE debt funds underperform

The New York State Teachers’ Retirement System’s portfolio of comingled real estate debt funds has generated a return of negative 7.2 percent since its inception, according to meeting materials made available by the retirement system.

“The 2008 Lehman bankruptcy and its effect on commercial asset prices had an obvious effect,” said NYSTRS spokesman John Cardillo when asked about the portfolio’s performance.

The $299 million portfolio includes a pair of Lehman Mezzanine Funds that were transferred to PCCP on 14 December, 2009 following Lehman Brothers’ bankruptcy, according to documents. Those funds – PCCP Mezzanine Partners Recovery I and PCCP Mezzanine Partners Recovery II – were generating returns of negative 14.4 percent and negative 11.4 percent since inception as of 31 March.

Other funds that have generated negative returns since inception include Latitude Management RE Investors (negative 0.4 percent); Capri Select Income II (negative 15.4 percent); Carbon Capital II (negative 31.1 percent); Guggenheim Structured Real Estate III (negative 7 percent) and Torchlight Debt Opportunity Fund II (negative 6.9 percent).

Although their performance has suffered, each of the vehicles listed above was able to generate a positive return through the first quarter of 2013, and most were generating positive one-year returns through 31 March. Top performers on the year included Torchlight (27.6 percent) and PCCP II (48.5 percent).

Cornerstone Enhanced Mortgage Fund I, a 2011 vintage, is the only vehicle in NYSTRS’ portfolio to generate a positive double-digit return since inception as of 31 March. That fund had returned 19.5 percent with a 1.09x equity multiple, according to meeting materials.

When asked whether NYSTRS’ investment staff expected the portfolio’s performance to rebound as real estate markets improves, Cardillo said: “Certainly, like everyone else, that’s our hope.”

NYSTRS’ $5.48 billion real estate debt portfolio also includes $3.88 billion in direct mortgage holdings and commitments and $1.16 billion in CMBS holdings. The overall portfolio had returned 9.1 percent since inception as of 31 March, according to documents.