LACERS BOARD UPDATE
By Michael R. Wilkinson, LACERS Commissioner
LACERS recently renewed its commitment to the private real estate asset class as part of a regular review of the real estate investment plan, as well as maintaining its long-term goal of a 7.0 percent allocation of the total portfolio of nearly $21 billion (as of 12/31/2022).
The Townsend Group, LACERS Real Estate consultants, made recommendations to the Board to continue its investment in both core and non-core real estate.
Core real estate represents the highest quality investments, which are generally fully leased. Non-core refers to investments that have some additional risks such as being partially leased or in need of rehabilitation. To have a highly diversified set of investments, LACERS invests in a mix of core investments for their high quality and dependable income, along with non-core investments, which are more challenging, but also offer higher returns.
Since 2014, the LACERS Board has been moving from a 30 percent core exposure and 70 percent non-core to a more conservative (lower risk) 60 percent core and 40 percent non-core allocation. Currently, we are at a 59.0 percent core and 29.4 percent non-core allocation.
The recommendation for the upcoming 2023-24 fiscal year is to make additional investments of up to $100 million in core funds and up to $200 million in non-core investments of between $50 million and $75 million each. While we are currently underweight to non-core and overweight to core investments, we are within the range of plus or minus 2 percent for the targets.
Some of the buying goals for the upcoming year are:
- Apartment buildings in the United States to increase this class
- Distressed assets where LACERS can find properties at a deep discount
- Specialized exposures in life sciences, industrial outdoor storage, data centers and others.
Finally, why is LACERS invested in real estate? Real estate provides both income from rents and the possibility of appreciation in value. Looking at the core real estate gross returns since 2000, only in the years 2008 and 2009 did the total returns come in negative. The average return over this period was 8.3 percent, with 2.7 percent coming from income and 5.6 percent from appreciation. The 8.3 percent return exceeds LACERS’ assumed rate of return of 7.0 percent.