The Iowa Public Employee Retirement System (IPERS) is investing a $150 million chunk of equity into U.S. real estate investment trusts. Pending the completion of due diligence and final contract negotiations, the allocation will be managed by Plymouth Meeting, Pa.-based Urdang Capital Management, the real estate investment arm of Pittsburgh, Pa.-based BNY Mellon.
IPERS' investment move comes at a time when U.S REITs continue to outperform the broader equity market. In the first quarter, REITs delivered a 7.5 percent return compared to the S&P 500’s 5.92 percent, according to the First Quarter REIT Performance report issued this week by Washington, D.C.-based National Association of Real Estate Investment Trusts (NAREIT). Since their market trough in March 2009, REITs are up 205 percent, NAREIT says.
“Today, REITs are both financially and strategically well-positioned to continue their track record of building long-term value for their investors,” says NAREIT president and CEO Steven A. Wechsler.
According to the association’s report, REITs raised a combined $23.3 billion in 59 equity and debt offerings in the first quarter, putting the industry on track to best the $47.5 billion raised in 2010 and the $49 billion raised in the record year of 2006. Capital has largely been used to de-leverage, NAREIT says. The industry’s debt ratio has been reduced by more than one-third from its high of 66.3 percent at the end of February 2009 to 39.8 percent at year-end 2010, which puts the ratio near its historical average.
IPERS isn’t the only U.S. pension fund taking a harder look at the REIT sector. In February, news of possible changes in REIT allocations by the California Public Employees Retirement System (CalPERS) raised industry concern after several media reports had CalPERS announcing a phase out of its investment in REIT stocks as part of its real estate portfolio over the next three years.
CalPERS information officer Clark McKinley says flatly that those decisions have not been made yet. “CalPERS isn't planning on getting out of REITs,” McKinley says. “The REITs market sounded the alarm and a lot of media bought it and hyped the story when we announced through a staff presentation of the new real estate strategic plan to the CalPERS Board that we're now using a passive index strategy for REITs in real estate (as we are in public equity). It's possible that within the next few years all REITs will be consolidated under public equity, but REITs are staying in real estate in the meantime.”
According to McKinley, REITs currently comprise 7 percent of the total CalPERS real estate market value of approximately $16.5 billion. Across the entirely of its investment portfolio, CalPERS has approximately $2.4 billion invested in the REIT sector. “There will not be any sell-off of REITs in the near future,” McKinley says. “Any consolidation of all REITs investment in the Global Equity portfolio is contingent on our ongoing review of REITs in our overall program. The real estate strategic plan has a five-year time window, and it's premature to say there will be a significant change in REIT holdings. We're not planning on major shifts in the near future.”
While confirming the structure of the $150 million Urdang REIT allocation, IPERS spokesperson Judy Akre declined to comment on the pension fund’s motivation behind its recent REIT investment. She said the allocation is discretionary and Urdang was not provided with guidance as to what real estate sectors (i.e. apartments, office, heath care) to invest in.