Post on 02-Aug-2020
Real Estate UpdateNovember 16, 2017
Investment Management Division
AgendaI. Real Estate Team
II. Real Estate Market Conditions
III. Role and Objectives Core and Non-Core Comparison
IV. Real Estate Allocation
V. Real Estate Cash Flow
VI. Unfunded Commitment Pacing
VII. Manager Concentration
VIII. Cost Efficiency
IX. Performance Non-Core Core
X. Investment Strategy Initiatives
XI. Appendix NCRS Investment Approach Total Performance vs. REITs Leverage Example Investment Characteristics
2
Investment Management Division
Real Estate Team
VacantDirector of Real Estate
Troy March, CCIM, MBAPortfolio Manager
4.5 Years with IMD16 Years Industry Experience
Tinh Phan, Licensed BrokerPortfolio Manager
4 Years with IMD18 Years Industry Experience
Tessa Tanis, CPA, MSAPortfolio Manager
2 Years with IMD16 Years Industry Experience
Sean IncremonaAnalyst
2 Years with IMD2 Years Industry Experience/
7 Years Economist
3
Investment Management Division
Real Estate Market Conditions
New completions are a near-term headwind for rent growth, but starts haveslowed and long-term drivers of demand remain relevant.MultifamilyMaturing economic cycle and pockets of supply are having an impact on leasing, but income continues to be solid. OfficeChallenging landscape from rise of e-commerce and evolving consumer preferences.Value is concentrated in high-quality, well-located assets. RetailTop-performing sector underpinned by strong rent growth on robust demand for logisticsand limited new supply, especially in the in-fill markets.IndustrialSomewhat more balanced after dealing with pressure from elevated supply in recent years. Hotel
• Growth moderated from strong levels, vacancy remains low• Real Estate investment capital availability and pricing have held up despite reduced
transaction volume• Steady to slightly higher cap rates as income growth leads appreciation• Debt is accessible to quality sponsors, terms are prudent
Student/senior housing and storage are producing attractive income returns. Marketspecific issues related to new construction and the pace of rent growth.Other Niches
4
Investment Management Division
Role and Objectives
CoreInflation hedge
High current income
Stabilized occupancy
Credit tenancy
Long-term return > fixed income
Minimal risk/downside protection
Non-CoreGrowth diversifier
Opportunity to add value
Renovation, development, leasing
Stabilized upon completion
Long-term appreciation and returns
Low correlation to fixed income
Investment StrategyHigh Quality Well Located
Strong Risk-Adjusted Returns
Core Thesis“To generate durable income and stable returns through strategic investments, with prudent use of leverage, in assets with long-term
fundamental drivers that will endure for generations”
Non-Core Thesis“To achieve attractive risk-adjusted
net returns through appreciation and income from a diversified
portfolio, planning for strategic exit optionality”
5
Investment Management Division
Real Estate Allocation
Allocation decrease is attributable to year-to-date net receipts of ~$800 million and the growth of the overall plan.
NCRS data as of 9/30/17Special Situations – Build-to-Core Strategy
4.4% 4.3% 4.2%3.6%
3.5%4.6% 5.1%
4.9%
7.9%
8.9%9.3%
8.5%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
4Q14 4Q15 4Q16 3Q17
% o
f Pla
n
Core Non-Core
3.6%2.5%
0.8%0.3%
4.9%4.2%
0.7%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
1 2 3 4
% o
f Pla
n
REITs
Private Core
SpecialSituations
Value Add
Opportunistic
Legislative Cap for RE as % of Total Plan: 10.0%
Policy Target as % of Total Plan: 8.0%
SubstrategyStrategy
Core
Non-Core
6
Investment Management Division
Real Estate Cash Flow
Investment StrategyHigh quality assets
Strong market locationsMeet or exceed benchmarks
Net realized distributions year-to-date (10/31/17) of ~$800 million.
NCRS data through 10/31/17 with Projected 2017
Commitments ($M): 380 1,205 1,885 1,402 915 0 343 1,265 1,005 1,211 1,798 1,575 1,965 0
7
Investment Management Division
Unfunded Commitment Pacing
Investment StrategyHigh quality assets
Strong market locationsMeet or exceed benchmarks
Of the $2.7 billion in unfunded commitments at 10/31/17, we project $1.8 billion will be called by 2020 and approximately $900 million will be held as reserves and is unlikely to be called.
-
200
400
600
800
1,000
1,200
1,400
1,600
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Historical Projection
$ in
Mill
ions
Contribution Pacing by Vintage Year (excludes REITs)
2004 (96% | 96%) 2005 (95% | 95%) 2006 (82% | 82%)2007 (91% | 91%) 2008 (87% | 87%) 2009 (N/A | N/A)2010 (86% | 88%) 2011 (87% | 90%) 2012 (89% | 96%)2013 (81% | 88%) 2014 (80% | 94%) 2015 (58% | 93%)2016 (24% | 93%)
*Vintage (% Called | % To be Called)
8
Investment Management Division
Manager Concentration (excludes REITs)
Investment StrategyHigh quality assets
Strong market locationsMeet or exceed benchmarks
Contribution to Return
3 Year 5 Year
Private Core 9.0 10.0
High Conviction 7.6 7.9
Others 1.4 2.1
Non Core 13.6 14.0
High Conviction 9.8 9.5
Others 3.8 4.5
74% of private market value with high conviction managers –reduce complexity and fees, increase transparency and maximize returns.
* “High Conviction” Managers are identified by the Real Estate Team as General Partners with the highest probability of meeting/exceeding expected fund-level returns
NCRS data through 9/30/17
0
1
2
3
4
5
6
7
8
2005 2006 2007 2008 2010 2011 2012 2013 2015 2016 2017
Mar
ket V
alue
($ B
illio
ns)
High Conviction Managers
Other Private RE Managers
9
Investment Management Division
Cost Efficiency
Leverage relationships and scale to minimize costs and enhance alignment.
-6.0%
-3.0%
0.0%
3.0%
6.0%
9.0%
12.0%
15.0%
2009 2010 2011 2012 2013 2014 2015 2016$0
$20
$40
$60
$80
$100
$120
$140
Tim
e W
eigh
ted
Net
Ret
urn
Ince
ntiv
e Fe
e ($
M)
Incentive Fee 5 Year Net Return
NCRS data through 12/31/16 2015: Convergence of delayed realization of GFC funds, early realization of post GFC funds, and an Industrial manager selling their entire platform
$40
$45
$50
$55
$60
$65
$70
$75
$80
$85
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
2.2%
2009 2010 2011 2012 2013 2014 2015 2016
Man
agem
ent F
ee ($
M)
Perc
ent o
f Mar
ket V
alue
Management Fee Fee % of MV
10
Investment Management Division
Performance: Non-Core Real Estate
Investment StrategyHigh quality assets
Strong market locationsMeet or exceed benchmarks
Non-Core Contribution to Return3 Year Contribution
Opportunistic 7.9 Value Add 5.7Total Non-Core 13.6
Major Drivers VintageO NorthCreek 2011 1.9 V NorthRock II 2012 1.5 O BREP VII 2011 1.0 V DRA VII 2011 0.8 O Lone Star II 2010 0.7
5 Year Contribution Opportunistic 8.8 Value Add 5.2 Total Non-Core 14.0 Major Drivers Vintage
O NorthCreek 2011 1.5 O BREP VII 2011 1.1O BREP VI 2007 1.0V NorthRock II 2012 0.9 O Lone Star II 2010 0.8
Non-core portfolio continues to outpace the benchmark by a significant margin due to strong performance in separate accounts and other high conviction managers.
* Non-Core Real Estate Benchmark is comprised of the following Burgiss Group Private iQ indices: 80% U.S. Non-Core Real Estate (Opportunistic and Value-Added) and 20% Non-U.S. Non-Core Real Estate (Opportunistic and Value-Added). NCRS data through 9/30/17
10.7%
13.6%14.0% 14.0%
2.7%
6.6%
8.2%7.5%
6.7%
9.2%
10.3%
-0.2%
7.1%
8.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
1 Yr 3 Yr 5 Yr 7 Yr 10 Yr 15 Yr 20 Yr
Tim
e W
eigh
ted
Net
Ret
urn
Non-Core Benchmark*
11
Investment Management Division
Performance: Core Real Estate
Investment StrategyHigh quality assets
Strong market locationsMeet or exceed benchmarks
Core Contribution to Return3 Year Contribution
Private Core 7.5 REITs 1.3Total Core 8.8
Major Drivers VintageNorthRock I 2008 1.8 JPM SPF 1998 1.3 BREP EDENS 2013 1.1
5 Year Contribution Private Core 8.0 REITs 1.7 Total Core 9.7 Major Drivers Vintage
NorthRock I 2008 2.8 JPM SPF 1998 1.8
Core real estate portfolio has started to outperform the benchmark as core plus investment strategy moves through the J curve.
* The Core Real Estate Benchmark is comprised of 80% NCREIF ODCE Net and 20% FTSE EPRA NAREIT Global Index.NCRS data through 9/30/17
8.6%8.8%
9.7%
10.2%
4.2%
6.6%7.2%
6.5%
10.0%10.3%
11.4%
4.4%
7.3%
8.1%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
1 Yr 3 Yr 5 Yr 7 Yr 10 Yr 15 Yr 20 Yr
Tim
e W
eigh
ted
Net
Ret
urn
Core Benchmark*
12
Investment Management Division
Investment Strategy Initiatives
Continue to increase allocation to high conviction managers and reduce manager count More attractive terms (e.g. fee discounts for loyalty and size) Greater control and transparency (e.g. Separate Accounts, custom solutions, founding
Limited Partner)
High Conviction Managers
Minimize costs and maximize returns by favoring fee structures that optimize alignment
Cost Efficiency
Target new commitments in property types that enhance portfolio construction Favorable long term risk/return profiles Diversification benefits
Sector Allocation
13
Investment Management Division
14
Appendix
i. NCRS Investment Approach
ii. Total Real Estate Performance vs. REITs
iii. Leverage
iv. Example Investment Characteristics
Investment Management Division
Investment Approach• Downside protection• Eye toward current income for core or speed to income for opportunistic
strategies• Moderate leverage levels
Stay the course with our investment strategy…do not
reach for yield
• Stabilize Core portfolio• Diversify by strategy, property sector and location• Balance asset risk and market risk by insisting on the highest asset quality and
location• Target specific submarkets and streets
Use thoughtful & deliberate portfolio construction
• Better terms & fees• More transparency and control• Ability to move quickly to capitalize on opportunities & dislocations• Be the founding investor for new strategies with high conviction managers
Leverage the size of our plan & skill set of our team
• Separate accounts• Multiple strategies with single manager• Fee benefits
Invest meaningful amounts with fewer best-in-class
managers
• Be involved, be nimble and follow through• Deliver results• Be a leader among Limited Partners
Take a long-term view toward investments and manager
relationships 15
Investment Management Division
Performance: Total Real Estate vs. REITs
Investment StrategyHigh quality assets
Strong market locationsMeet or exceed benchmarks
NCRS data through 9/30/17
FTSE EPRA/NAREIT Developed Index: The index serves to represent real estate equities across developed markets of North America, Europe and Asia.FTSE EPRA/NAREIT Global Index: The index is designed to track the performance of real estate equities in both developed and emerging markets.
9.5%
11.2%
12.0%12.3%
2.9%
6.2%
7.4%
1.5%
6.8%
7.6%8.4%
2.6%
10.4%
7.4%
4.4%
7.3%7.6% 7.9%
2.4%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
1 Year 3 Year 5 Year 7 Year 10 Year 15 Year 20 Year
Tim
e W
eigh
ted
Net
Ret
urn
NCRS Real Estate FTSE EPRA/NAREIT Developed FTSE EPRA/NAREIT Global
16
Investment Management Division
Leverage
Investment StrategyHigh quality assets
Strong market locationsMeet or exceed benchmarks
Maintaining prudent levels of leverage and retaining ability to adjust through our Separate Accounts.
40%
32%
39% 39%
50%
43%41%
0%
10%
20%
30%
40%
50%
60%
Private Core REITs Total Core Opportunistic Value Total Non-Core Total Real Estate
Source: Courtland Partners NCRS PMR Q1 2017
LTV as of Q1 2017
17
Investment Management Division
Example Investment Characteristics
StrategyTotal Gross
ReturnDistribution
Income/Appreciation Leverage
Core 7 - 9% 80/20 < 40%
Core Plus 9 - 11% 70/30 < 50%
Value-Add (Non-Core) 11 - 16 % 30/70 up to 60%
Opportunistic (Non-Core) > 16% 10/90 up to 75%
18