Illinois Teachers maps active buying plans

Real Estate Alert, March 3, 2004

Rapidly growing Illinois Teachers could buy more than $700 million of core and value-added properties this year to catch up to its targeted real estate allocation.

The $30.4 billion-asset pension plan has authorized the advisors of four separate accounts to increase their investments by $430 million. And it is mulling adding one or two more advisors, either for separate accounts or commingled funds.

Last year, Illinois Teachers' real estate investments climbed by $450 million, to $2.6 billion. But because the fund's asset base grew faster, the actual allocation to real estate dropped, to 8.6% of total assets at yearend 2003 from 10.2% a year earlier. That left Illinois Teachers even further below its 14% target allocation.

The pension plan's investment board has set an interim target of 11% for the end of this year. Based on its current size, Illinois Teachers would have to increase its real estate portfolio by $736 million, to $3.3 billion, to meet the 11% goal. Of course, should the pension plan grow further, the needed real estate investments would be even more.

The pension plan's asset base grew by an extraordinary 43% last year, primarily because of gains in its stock portfolio and an unusual allotment of cash from the state government to finance pension obligations. The State of Illinois sold $10 billion of pension obligation bonds last June and distributed the proceeds to five state pension plans, with Illinois Teachers receiving the largest share--$4.3 billion. The issuance of pension obligation bonds, which are designed to finance unfunded pension obligations, has become more popular of late as states, counties and municipalities look for ways to free up resources.

To help meet its real estate targets, Illinois Teachers increased its allocations to four separate-account advisors:

* A $220 million increase, to $605 million, for Commonwealth Realty Advisors, a core advisor that invests heavily in retail properties.

* A $125 million increase, to $180 million, for KBS Realty Advisors, a value-added advisor that mostly buys offices.

* A $50 million increase, to $180 million, for Lincoln Property, a value-added advisor that mostly buys offices.

* A $35 million increase, to $300 million, for Stone-Levy, a value-added advisor that buys hotels.

The pension plan's other separate-account advisor, Capri Capital, did not see its allocation increase from its current $800 million. Nonetheless, because Capri is upgrading the portfolio it oversees--mostly apartments and industrial properties--it is expected to be an active buyer and seller this year.

Illinois Teachers is currently putting together a strategic plan, which should be completed by midyear. At that point, possibly depending on how much progress it has made toward its interim target allocation, the pension plan might add one or two more separate-account advisors. It could also choose to add to its six commingled-fund managers--a mix of value-added and opportunistic operators.