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SMU, Yale Trimmed Real Estate Investments Before Values Cooled

  • Most investments are in direct holdings or private equity
  • Asset allocation pruning detailed in congressional inquiry

Large endowments including Southern Methodist University and Yale University reduced investments in real estate through the middle of last year before values cooled, a timely move that could help their performance.

Southern Methodist’s $1.5 billion endowment decreased its real estate holdings by 84 percent to 1.2 percent -- the biggest drop among schools -- in the year ended June 2015 from two years earlier, according to responses to a congressional inquiry. Yale trimmed its allocation 31 percent to 14 percent in its $25.6 billion fund in the same period.

The selloff may be a bright spot for endowments as they struggle to boost performance in the fiscal year that ended June 30. Real estate was one of the best-performing investment categories in fiscal 2015, prompting some endowments to cash in. 

“It could have been a good time to sell the asset because of what they perceived to be cyclical high prices,” said Christy Fields, an investment consultant with Pension Consulting Alliance. “People are feeling like the pricing is rich and they’re happy to take some money off the table and keep some dry powder for the next potential correction.”

U.S. commercial real estate values have fallen this year following a six-year streak of uninterrupted increases. Prices may decline as much as 5 percent in the next 12 months because of volatility in the public markets, tightened regulations and maturing loans, according to a June 20 report by Pacific Investment Management Co.

The real estate trims between fiscal years 2013 to 2015 were detailed in responses to a congressional inquiry this spring about how tax-exempt university endowments spend their money. The richest 56 private colleges were asked a range of questions including the amount of “real assets” held, excluding publicly traded stocks or real estate investment trusts. Most of the investments are held through private equity funds or direct property holdings.

Among the 49 responses provided by schools to Bloomberg, George Washington University’s fund, at $1.6 billion in assets, held the highest allocation of real estate at 42 percent.

Holdings Sold

The shifts may have occurred because private equity funds returned profit to the endowments, which didn’t allocate new capital to the sector. Other asset classes may have outpaced real estate, reducing the share of the pie devoted to the group.

SMU sold real estate holdings because the property values had “increased significantly over time,” Kent Best, a school spokesman, said in a statement.

“This sale improved the liquidity position of the SMU endowment and generated additional money that could be invested into other opportunities,” he said.

Yale and other schools, which provided the data to the inquiry, declined to discuss their holdings.

Reviewing Answers

Not all of the endowments answered the real assets question completely. Some described campus holdings like housing that aren’t included in the endowment. The House Ways and Means and the Senate Finance Committees received the responses in April and continue to review them. The fiscal year for most schools ended June 30, and endowments will report annual returns in the fall.

Baylor University, with a $1.2 billion fund, lowered its share of real property through private investment funds to 11 percent in fiscal 2015 from 19 percent two years earlier. The $4.1 billion fund at Vanderbilt University, which made investments primarily through limited partnerships, dropped to 4.9 percent from 9 percent. Princeton University’s allocation in U.S. holdings declined to 7.6 percent from 10.6 percent in its $22.7 billion endowment. The size of the funds are as of June 30, 2015, except for Baylor, which is through May 31.

The average allocation to real estate through private equity and non-campus investments was 7 percent in fiscal 2015 for schools with funds of more than $1 billion, according to the National Association of College and University Business Officers and Commonfund. That’s less than some of the endowments that trimmed their allocations and down slightly from 8 percent two years prior.

‘Great Diversifier’

The best performing asset classes in fiscal 2015 for endowments of all sizes were venture capital at 15.1 percent and private equity real estate at 9.9 percent, according to Nacubo. Fifteen endowments that provided Bloomberg with total returns for the second half of 2015 lost 3.6 percent on average. 

George Washington, which didn’t decrease its allocation, owns investment real estate on or near its campus in the Foggy Bottom area of Washington, and generates revenue mostly from ground leases on buildings developed by outside companies. The school holds three ground-lease partnerships that generates revenue for the endowment, two of which were developed by Boston Properties Inc. and one by Skanska AB, according to the school.

The strategy has bolstered the school’s 10-year return to an average 8.9 percent, the 12th highest gain among the richest 100 colleges, according to data compiled by Bloomberg.

“It’s performed very well for us,” Louis Katz, treasurer of the private school, said in an interview. “It’s a great diversifier.”

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