Looking at this question in the context of a large institutional source of equity (i.e. direct pension fund investment such as CalPERS, STRS, etc).
In the current market, is utilizing leverage for core investments appropriate? Non-core?
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I work for a firm that works directly with large public equity sources similar to what you describe above. In the fund space, most public pension plans have exposure to one or a few of the NFI-ODCE funds. These funds are all made up of core investments (small value-add piece less than 10%) and the index is levered today at 22%. When designing core mandates, we typically consider anything with less than 40% leverage "core". It's not exactly black and white as you'll see a number of core-plus funds come into play in the 30-50% LTV range. Non-Core would be anything that doesn't fall in the bucket described above. Typically, non-core not only has higher leverage, but some type of major capital expenditure to capture additional upside.
Virtually all the plans we work with are not going direct, as they're outsourcing all or a portion of the investment decision making to us, but that should at least give you some barometer to leverage policy with public pensions.
Yes, it is appropriate. I think 50% would be considered the "cap" for the plans you stated above, and probably all the other larger plans out there. Newer foreign investors are the ones that are more sensitive to our interest rates/market, and it's not unusual for those mandates to be equity only.
For non-core deals, I've seen up to 75% (value-add or opportunistic).
It'll be interesting to see how/if these leverage needs change over the next few years.
I would say 30ish % leverage is the max one of those guys you mentioned would utilize for core-plus/core.
That's interesting. They must set different levels for different advisors.
From a lender's prospective on stabilized "core" assets there is really no difference in pricing (spread) when you are sub 50% LTV, but the lower you go the more I/O you'll get. There is jump from sub 50% to 50-65% LTV. 65% is considered full leverage. Over 65 is "high leverage" (much more expensive). Most senior lenders top out around 75-80% LTV and the only lenders at that type of leverage are debt funds. This is for perm / interim / bridge not new construction.
It's all generalizations, but generally speaking on a global basis I see core levered at 20-40%, value add at 40-60% and opportunistic at 60% and above. This is for stabilized cash flowing assets. Opportunistic can utilize lower leverage in ground up development and other specific cases.
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