PERE LA: CalSTRS explores real estate debt

The second largest US pension plan is considering the creation of a mortgage lending program, its real estate head revealed this week.

The California State Teachers’ Retirement System (CalSTRS) is looking at expanding into private real estate debt, with the goal of becoming a mortgage lender. The potential initiative is part of the pension plan’s ongoing effort to boost its liquidity.

“We’re looking into doing private real estate debt and those strategies,” said Mike DiRe, director of real estate at CalSTRS, speaking at the PERE Global Investor Forum 2014 in Los Angeles. “We’re talking with some funds to start with.” However, over the longer term, the $183.3 billion pension plan is eyeing the start of a mortgage lending program.

Private debt would not fall under the real estate allocation or the fixed income allocation, and the move potentially may call for CalSTRS to create a separate bucket for private debt. “There’s a premium available for private debt versus public debt markets, and so we think there’s an opportunity there,” said DiRe. “But finding a place to put it is difficult.”

Private real estate debt is the latest strategy that CalSTRS is exploring to add liquidity in its private asset classes, a focus for the pension plan since the global financial crisis. “In real estate, that’s very difficult,” he said. “I would say we have not accomplished that goal, but we have worked a long way toward that.”

Indeed, DiRe said getting liquidity out of the real estate portfolio was a “big picture theme” for CalSTRS. He added that the public institution was concentrating on cash flow, as it currently is paying out more benefits that it is receiving in contributions. The low cash flow from its fixed-income portfolio, moreover, has driven the pension plan to do more core investing.

”Also, for the first time over the last three years, we’ve built up open-ended funds, which at some point in my career I said I would never do,” said DiRe. The pension plan to date has amassed a portfolio of approximately $2 billion of investments in core open-ended funds, which can be appraised fairly quickly and provides CalSTRS with another form of liquidity, he said.

Yet another new initiative intended to further drive liquidity is CalSTRS’ current search to add real estate investment trusts to its real estate portfolio. “It’s never been done at CalSTRS,” said DiRe. “It was always done as part of the public market portfolio, but now we’re looking at them for the private market portfolio.”