The Pennsylvania State Employees’ Retirement System is weighing a proposed $100M commitment to the Blue Owl Real Estate Fund VII, a North American net lease strategy that targets assets primarily in the industrial data center and essential retail sectors.
The commitment would be PennSERS’ first real estate investment of the year. The strategy focuses on properties that corporations rely on to operate core businesses, said Stephen Balucha, the pension fund’s portfolio manager for private markets, during a recent board meeting.
“Blue Owl serves as a solutions provider for these corporations, offering the ability to unlock balance sheet assets to support business objectives through a sale, lease back or developer takeout,” he said. “In exchange, fund investors receive favorable off-market pricing, triple-net-leased to investment grade tenants.”
Blue Owl is a publicly traded alternative manager based in New York City with roughly $300B in assets under management, of which its real estate business accounts for $80B. Within the net lease space, the firm has about 80% market share. Its investment strategy is focused on providing downside protection first, as well as clear and consistent current cash flow.
This wouldn’t be the first commitment PennSERs has made to this fund manager; it has made a total of $525M in commitments to Blue Owl going back to 2017. The manager’s net lease funds have generated consistent results across vintages, said Balucha. In aggregate, the series has delivered a 15.9% net internal rate of return (IRR) and a 1.3x multiple, with every fund ranking in the first quartile on a net IRR basis.
The investment exclusively targets single-tenant assets across a diversified set of sectors, including industrial, retail, data centers, headquarters, healthcare, life sciences, and ground leases. “We want diversification, but with the consistency of single-tenant structures,” said Gary Rozier, Blue Owl’s senior managing director of real assets, during the meeting.
Its triple-net lease acts as an inflation hedge by shifting operating expenses such as property taxes, insurance, and maintenance to tenants. This helps to mitigate inflation and expense risk, while long-term leases reduce vacancy exposure, noted Rozier.
As Blue Owl’s tenants are required to be investment-grade rated, they’re typically large, publicly traded global operators such as Oracle, Intel, CVS, 7-Eleven, BP, and Schlumberger.
“We believe this lowers default risk because these companies are well-capitalized and expected to meet their lease obligations,” he added, noting over the firm’s 16-year history, Blue Owl has worked with more than 300 tenants and experienced only five defaults.
Blue Owl’s leases are structured for long durations — typically 15 years — and with annual rent escalations of 2%, ensuring net operating income rises consistently regardless of expense changes. In addition, the firm adheres to strict acquisition pricing, with a hard minimum cap rate of 7% embedded in its limited partnership agreement, which has helped the portfolio avoid overvalued properties in recent market cycles. Its framework allows Blue Owl to deliver an 8% annualized yield, paid monthly. “For 180 months now, we’ve never missed a monthly payment,” said Rozier. “That’s cashflow coming back to investors every single month from the real estate we own.”
As well, Blue Owl also produces an annual sustainability report that tracks both environmental, social and governance and diversity, equity, and inclusion progress — practices that align with PennSERS’ transparency initiatives.
PennSERS’ real estate portfolio generated a 1.4% return in Q1, compared with 0.9% for the NCREIF ODCE index, the policy benchmark. On a trailing one-year basis, the ODCE returned 1.2%, showing modest but positive momentum after several challenging years for real estate. While longer-term results still lag, signs are pointing to stabilization and gradual improvement, said Matthew Ritter, partner and head of real assets at consultancy NEPC, during the meeting.
Roughly 45% of the portfolio is allocated to value-add and opportunistic strategies, with the remainder in core/core-plus. Around $300M of unfunded commitments remain in value-add/opportunistic funds that are still in investment mode — providing the portfolio with dry powder to deploy.
