Kansas City school pension looks to restart real estate investing

After a roughly five-year real estate investment hiatus, Kansas City Public School Retirement System wants to resume investing and is already evaluating commitments to the asset class, mostly with existing managers that have performed well for the fund.

That was among the takeaways from a portfolio review provided by the system’s consultant, Segal Marco Advisors, at the pension’s investment committee meeting on Monday. PERE watched a live broadcast of the meeting.

Rosemary Guillette, a senior vice-president of Segal Marco Advisors, told the pension’s board that after skipping every vintage year since 2020 – aside from $15 million committed in 2021 – the system should get more active in the asset class.

“Because of the uncertainty with covid in 2020, and some of the market declines we saw [in real estate], you took a pause,” she said. “We’re saying now’s the time to end that pause… There’s money coming back to you [out of older funds], and you need to put that money to work just to stay at the current allocation level you’re at.”

As of the end of June, real estate exposure represented 8.4 percent of the total fund – well below the system’s 12 percent target allocation for the asset class.

To steadily close the gap between its actual and target allocations to real estate, Guillette recommended that the pension deploys at least $15 million on average annually for the next five years.

The investment committee questioned whether increasing the system’s real estate exposure was wise, given that many of the existing value-add and opportunistic funds in its portfolio generated negative returns in recent years.

Guillette responded by pointing out the pension’s since-inception return in real estate was about 13 percent, “and that includes the really negative returns over the past two or three years.”

She added that of the seven private real estate managers in the fund’s portfolio, some have demonstrated outperformance even in a challenged market, naming Kayne Anderson in particular.

Guillette went on to recommend that the system should re-up with the Los Angeles-headquartered manager on its latest fund, Kayne Anderson Real Estate Partners VII. The opportunistic fund, which focuses on medical offices as well as senior housing and student housing, has already closed on $2.5 billion of commitments, based on a PERE report.

The fund was targeting a net IRR of 15-18 percent, according to meeting materials presented by the consultant – the highest such target among the five funds that Segal Marco Advisors circled as the pension’s first potential real estate commitments in several years.

Other fund options for the system’s real estate program restart included PGIM Essential Property Partners II, which has a net IRR target of 13-15 percent for a development-focused affordable housing strategy; Starwood Distressed Opportunity Fund XIII, which has a net IRR target of 14-16 percent and a residential, industrial and hospitality focus; and Westport Special Core Plus IV, which is targeting the same three sectors with a projected 11-14 percent net IRR, the meeting materials showed.

The system will also be exploring new manager relationships, starting with TA Realty, which currently is in market with TA Realty Fund XIV, a fund focused primarily on the multifamily and industrial sectors. Guillette told the board that the Boston-based manager is an “impressive” candidate that offers niche data center exposure.

The system’s current exposure is heavily weighted to residential at 57.4 percent of the program. Industrial holds the second largest exposure at 17.2 percent. While office represents a close third at 16.9 percent, Guillette noted that 40.5 percent of that allocation is in the medical office space, which has seen less distress than the wider office market.

Geographically, the system’s real estate exposure is mostly situated in the US, with only 4.8 percent overseas.

The system’s board and Segal Marco Advisors will look to bring in managers to review potential commitments at its March investment committee meeting, Guillette said.