2016 Real Estate Asset Class Review June 23-24, 2016 Tom Masthay, - - PowerPoint PPT Presentation

June 23-24, 2016 Tom Masthay, Director – Real Assets Eddie Schultz, Investment Analyst Rachel Cleak, Investment Analyst

2016 Real Estate Asset Class Review

Agenda

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I. Executive Summary II. Performance & Implementation Review III. IPS Compliance & Portfolio Review IV. Real Estate Market Update V. Milestones & Initiatives VI. Appendix: Manager Scorecards

• I. Executive Summary

Real Estate Asset Class Objectives

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IPS Stated Objective for the Real Estate Portfolio

“To enhance total return and provide diversification to the overall investment portfolio.”

A primary goal of the annual review presentation is to discuss the real estate portfolio and market conditions relative to IPS stated performance goals:

 Long term performance objective is a real rate of return (adjusted for

inflation) of five percent (5%) net of investment management fees. The market update addresses the nature of this objective.

 The real estate portfolio is expected to generate returns, net of all

fees and expenses, in excess of their respective indices, over rolling five year investment time horizons. The performance review section analyzes this objective and associated benchmark indices.

Comprehensive Annual Review Process

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Why do we conduct annual reviews?

Per the TMRS IPS, comprehensive reviews are to be conducted and documented at least

• annually. The goal is to formally review managers’ performance, current investment strategy
• r style relative to that which was communicated, and other issues related to the managers’
• rganization, personnel, or investment philosophy. The annual review process is part of the

IPS manager retention framework.

The annual review & ongoing monitoring processes may include but are not limited to:

SEC Form ADV reviews SSAE16 and other operational audit reviews Compliance Certifications Detailed Performance Analyses Manager Meetings Quarterly Monitoring Documentation Manager Annual Meetings Limited Partnership Advisory Committees Strategic Portfolio Reviews Meetings with comparable managers Market Research Attending Conferences

The Annual Review process holds TMRS accountable for being self-critical of its portfolio management process in order to preempt manager specific, strategic, or other potential problems.

Real Estate Timeline Review (2015-2016)

• Consultant RFP process completed and contract with Courtland Partners

signed.

Q1-Q2 2015

• Board approves 8 new real estate funds for approximately $800

million in new commitments.

Q3 2015

• December 2015 Board Meeting: Board approves 2016 Real Estate

Search processes in an amount up to $600 million in new commitments.

Q4 2015

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• Board approves 3 new real estate funds totaling $475 million in new

commitments to bring the portfolio to approximately 100% implemented.

Q1-Q2 2016

A comprehensive discussion of the timeline implementation of the real estate portfolio is provided for in the following section.

Real Estate Portfolio has Reached Full Allocation

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Manager Selection Priorities

Seeking top performing managers to form beneficial partnerships for the TMRS real estate portfolio. The number of partnerships is being watched closely so monitoring and maintenance does not become an undue cost. Sizing of manager relationships remains critical, based upon portfolio needs, manager capabilities &

• pportunity set.

Blue-scale: Core Mandates Purple-scale: Value-Add Orange-scale: Opportunistic

This pie-chart is built off of through the remainder of the presentation to assess portfolio risk and implementation progress from a data-oriented perspective.

Market Value & Unfunded Commitment Summary

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*Source: Courtland Partners *As of Q1 2016 the total number of real estate investment vehicles is 27 (with the addition of DivcoWest V, Blackstone PP, Kildare EP II, Rubenstein PF III, and H/2 Core debt) and updated unfunded commitments are $1,641,665.

TMRS’ Real Estate portfolio on a market value basis is approximately 6% of the total portfolio today. The following section takes a more detailed look at investment pacing and how the time dimension is incorporated into decision making.

• II. Performance & Implementation Review

Performance Review as of December 31, 2015

*Unless otherwise noted in this section, performance presentations do not include Harrison Street Securities, TMRS’ only public securities mandate in the real estate programs history. This mandate was terminated by the Board at the July 29-30, 2015 Board meeting and subsequently closed out of in August 2015.

Remember the J-Curve!

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• 50%
• 25%

0% 25% 50% ($150) ($100) ($50) $0 $50 $100 $150 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10

IRRs Cash Flows

J-Curve Effect

Outlay Inflows IRRs

The J-curve exists in large part due to fees and expenses being a high percentage of capital deployed early in a fund life. Conservative early marks being applied to portfolio investments can also contribute. Think of the J-Curve not just in terms of performance, but diversification as well. Portfolios early in their lives tend to be very concentrated as few deals have been completed.

J-Curve representation is that of a private equity fund.

Note 1: The “Diversification J-Curve” is more relevant to early stages of investing in a new product core fund. Capital is drawn sequentially from fund investors – early investors fund the first deals and as more deals are added more investors are added to the pools. Diversification thus comes later.

Sector/Strategy Returns by Manager

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*Only managers with capital deployed as of 12/31/15 are included in this table; Source: Courtland Partners

Returns can vary greatly depending on the stage of portfolio development a fund is in. This concept can apply to portfolios of funds as well.

Income vs. Appreciation Analysis

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TMRS’ portfolio returns can be broken down into income and appreciation return streams. The market has generally seen income come down as cap rates have compressed.

4.40% 4.30% 5.30% 5.28% 7.90% 11.90% 9.80% 12.09% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% 20.00% 2012 2013 2014 2015

Performance Attribution: Income vs. Appreciation

(by gross returns) Appreciation Income Note 1:Private Edge data was used for this analysis in lieu of Courtland Partners due to the explicit itemization of income figures into templates utilized by Private Edge and therefore the more direct accounting of income vs. appreciation. Courtland Partners’ data, shows opposite directionality of income growth noting income of 4.70% in 2015 and a 3 year aggregate income of 5.20%. The conclusion to draw is that income has been in the 4.3 – 5.3% range % since the inception of the portfolio. Source: Private Edge

Portfolio Cash Flow Activity & Evolution

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97,000,000 230,677,962 259,013,948 391,034,314 462,353,288 (6,028,342) (50,278,024) (102,363,822) (173,137,461) (300,000,000) (200,000,000) (100,000,000)

• 100,000,000

200,000,000 300,000,000 400,000,000 500,000,000

Annual Aggregate Cash Flow & Performance Attribution

Net Inflows Net Cash Outflows Net Income & Appreciation “Net Inflows” means dollars going into a fund vehicle, i.e. TMRS sends money to a fund. “Net Outflows” means dollars coming out of a fund, i.e. TMRS receives money from a fund.

As time has progressed, income and appreciation have picked up commensurately with cash flow activity.

Analyzing Portfolio Implementation

Key Metrics of Analysis

Active Commitments – Real estate commitments approved by the board and currently a component of TMRS’ real estate portfolio. Adjusted Commitments* – Not all commitments are created equal. A core open-end equity fund and an opportunistic fund have very different evolutions in fund market values. In order to accommodate this at any single point in time, a conversion factor is applied to closed-end funds. The adjustment translates the concept of a commitment to an expected market value which is a more meaningful data point when managing a portfolio. Effective Vintage Commitments – TMRS has approved many follow-on commitments to previously approved funds. This figure consolidates follow-ons into the initial approval year. EVC is a decision assessment tool used to help understand the higher order effects of the initial decision to invest in a manager by allocating portfolio implementation progress to that period. This figure helps assess IPS compliance by being an input into the metric noted below. Vintage Year Contribution – VYC assesses today’s portfolio and the role various effective vintage commitments have on it. The IPS limits vintage year exposure concentrations – this metric is a more meaningful way to assess TMRS’ portfolio than commitments by themselves.

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Understanding the current portfolio, its performance, and expectations portfolio requires understanding its history.

*Greater detail on the Adjusted Commitment methodology is provided in Board real estate recommendation memorandums from 2015 & 2016. In summary, the adjustment removes explicit visual representation of time dimensionality from a pacing model for simplification of presentation.

2011 Real Estate Implementation Summary

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2011 Investments

Stockbridge Smart Markets ($100mm) Harrison St. Core ($100mm) Greenfield AP VI ($75mm) Miller Global VII ($75mm) Walton St. REF VII ($50mm) $400mm Active Commitments

Implementation Progress

Approved Pacing Target: $500mm Total Approved Commitments: $500mm Total Adj. Commitments: $330mm Effective Vintage Commitments: $496mm Vintage Yr. Contribution (%): 27%

TMRS focused on pursuing differentiated core exposures and fee discounts by founding new investment products. Non-Core program focused on smaller funds with diversified mandates.

Note 1: Stockbridge ($50mm), Harrison St. ($50mm), and Walton St. ($25mm) all had mandates increased through 2012 approval process. Stockbridge ($50mm) was additionally increased in the 2013 approval process. Note 2: H/2 Core Debt was initially approved in an amount of $100mm but the contract was not sucessfully executed. H/2 Core Debt was re-approved in 2015, subsequently underwritten, approved, and contract terms agreed to and executed. 5% 5% 3% 3% 2% 82%

2011 Real Estate Investment Activity

(by Adj. Commitments) Stockbridge SmartMarkets (2011) Harrison Street Core Fund (2011) Greenfield Acquisition Partners VI (2011) Miller Global VII (2011) Walton Street Equity VII (2011) 2011 Unallocated

2012 Real Estate Implementation Summary

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2012 Investments

Stockbridge VA Fund I ($75mm) Rubenstein PF II ($50mm) Abacus MF II ($50mm) Follow On-Commitments ($125mm) $300mm Active Commitments

Implementation Progress

Approved Pacing Target: $600mm Approved Commitments: $500mm Total Adj. Commitments: $256mm Effective Vintage Commitments: $156mm Vintage Yr. Contribution (%): 7%

TMRS focused on leveraging existing relationships and expanded its focus into smaller , sector focused non-core funds.

Note 1: Stockbridge Smart Markets ($50mm), Harrison St. ($50mm), and Walton St. ($25mm) all had mandates increased through 2012 approval process. Smart Markets ($50m) was additionally increased in 2013 approval process. Rubenstein PF II ($25mm) has its commitment increased in the 2014 approval process. Note 2: Harrison St. Securities was approved for $100mm in 2012 and a follow on of $50mm in 2013. HSS was terminated for poor performance, organizational concerns and strategic incongruence in 2015. Note 3: Mesa West Core Debt was approved in an amount of $100mm but the contract was not successfully executed. 16% 6% 4% 1% 2% 71%

2012 Real Estate Investment Activity

(by Adj. Commitments)

2011 Commitments 2012 Follow On Commitments Stockbridge VA Fund I (2012) Rubenstein PF II (2012) Abacus Multi-Family Fund II (2012) 2012 Unallocated

2013 Real Estate Implementation Summary

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2013 Investments

Invesco Core Income Fund ($100mm) Abacus Core Income Fund I ($75mm) Greenfield AP VII ($75mm) Stockbridge VA II ($75mm) Lubert-Adler VII ($75mm) Follow On-Commitments ($50mm) $450mm Active Commitments

Implementation Progress

Approved Pacing Target: $500mm Approved Commitments: $500mm Total Adj. Commitments: $345mm Effective Vintage Commitments: $377mm Vintage Yr. Contribution (%): 16%

TMRS continued its focus on leveraging existing relationships and founding differentiated core strategies.

Note 1: Stockbridge Smart Markets ($50m) was increased in 2013 approval process. Greenfield VII ($25mm), Lubert-Adler ($25mm), and Invesco ($50mm) had allocation increases approved in 2014. Note 2: Harrison St. Securities ($50mm) was increased in 2013. HSS was terminated in 2015. Note 3: Abacus Core Income fund is closed-end fund structure. All other core funds approved to date were open end fund structures. 23% 7% 2% 5% 2% 2% 2% 2% 55%

2013 Real Estate Investment Activity

(by Adj. Commitments)

2011 Commitments 2012 Commitments 2013 Follow On Commitments Invesco US Core Income Fund (2013) Abacus CIF I (2013) Greenfield Acquisition Partners VII (2013) Stockbridge VA Fund II (2013) Lubert-Adler Fund VII (2013) Unallocated

2014 Real Estate Implementation Summary

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2014 Investments

Walton St. Debt Fund I ($100mm) Abacus Multi-Family Fund III ($75mm) Moorefield Fund III (£50mm) Follow On-Commitments ($125mm) ~$375mm Active Commitments

Implementation Progress

Approved Pacing Target: $600mm Approved Commitments: $475mm Total Adj. Commitments: $259mm Effective Vintage Commitments: $161mm Vintage Yr. Contribution (%): 7%

TMRS continued its focus on leveraging existing relationships and initiated an international program through a UK-only fund.

Note 1: Rubenstein II ($25mm), Greenfield VII ($25mm), Lubert-Adler ($25mm), and Invesco ($50mm) had allocation increases approved in 2014. Note 2: Westbrook X ($100mm) was approved but contract was not successfully executed. Note 3: Walton St. Debt Fund is closed-end fund structure. It and Abacus CIF I are the only closed-end funds classified as core in TMRS’ portfolio. Note 4: $/GBP exchange rate was approximately $1.46/GBP as of June 1, 2016. 25% 6% 16% 4% 3% 2% 2% 42%

2014 Real Estate Investment Activity

(by Adj. Commitments)

2011 Commitments 2012 Commitments 2013 Commitments 2014 Follow On Commitments Walton Street Debt I (2014) Abacus Multi-Family Fund III (2014) Moorfield Real Estate Fund III (2014) Unallocated

2015 Real Estate Implementation Summary

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2015 Investments

USAA Eagle Fund ($250mm) H/2 Credit Partners ($125mm) H/2 Core Debt ($75mm) Rubenstein PF III ($75mm) Torchlight DOF V ($75mm) Alcion REF III ($50mm) TPG RE II ($100mm) Tristan EPISO IV (€30mm) ~$800mm Active Commitments

Implementation Progress

Approved Pacing Target: $600/$800mm Approved Commitments: $800mm Total Adj. Commitments: $667mm Effective Vintage Commitments: $667mm Vintage Yr. Contribution (%): 28%

TMRS pursued 4 primary themes: 1) Move up the US capital structure; 2) gain major market exposure at price conscious entry points; 3) get statistical exposure/beta to European real estate; 4) pursue structures that enable TMRS to hold real estate through a larger part of value cycle.

Note 1: HSS was terminated. Account balance at termination was approximately $190mm. Note 2: $/Euro exchange rate was approximately $1.11/Euro as of June 1, 2016. Note 3: Original pacing target was $600mm. It was approved to be increased to $800mm. Net commitments after accounting for the HSS termination were approximately $600mm. 27% 7% 17% 7% 11% 5% 3% 2% 2% 1% 3% 1% 14%

2015 Real Estate Investment Activity

(by Adj. Commitments)

2011 Commitments 2012 Commitments 2013 Commitments 2014 Commitments USAA Eagle Fund (2015) H/2 Credit Partners (2015) H/2 Core Debt (2015) Rubenstein PF III (2015) Torchlight DOF V (2015) Alcion Ventures III (2015) TPG Realty Fund II (2015) Tristan EPISO IV (2015) Unallocated

2016 Real Estate Implementation Summary

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2016 Investments

Blackstone Property Partners ($300mm) Kildare European Partners II ($100mm) DivcoWest Fund V ($75mm) $475mm Active Commitments

Implementation Progress

Approved Pacing Target: $600mm Approved Commitments: $475mm Total Adj. Commitments: $414mm Effective Vintage Commitments: $414mm Vintage Yr. Contribution (%): 18%

TMRS builds on 2015 themes, focusing efforts on the balance of finding strategies that enable TMRS to scale its portfolio up to full allocation and may be less pro-cyclical due to manager skill and/or opportunity set.

Note 1: Plan Balance as of April 30, 2016 is approximately $24.1 billion. Note 2: It was communicated at the May 2016 Board meeting that the full $600 million in commitments may not be pursued due to pacing model considerations. The pacing model is discussed later in this presentation. 26% 6% 17% 7% 27% 12% 2% 3% 0%

2016 Real Estate Investment Activity

(by Adj. Commitments)

2011 Commitments 2012 Commitments 2013 Commitments 2014 Commitments 2015 Commitments Blackstone Property Partners (2016) DivcoWest V (2016) Kildare EP II (2016) Unallocated

Manager & Investment Vehicle Concentration Compliance

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Blue-scale: Core Mandates Purple-scale: Value-Add Orange-scale: Opportunistic

Real Estate Pacing Model

What 100% Allocated Means

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6.00% 7.00% 8.00% 9.00% 10.00% 11.00% 12.00% 100,000,000 200,000,000 300,000,000 400,000,000 500,000,000 600,000,000 700,000,000 2015 2016 2017 2018 2019

Pacing Model: Expected Real Estate Market Value

(By Dollar Value [left axis]; by % of Total Portfolio [right axis])

Net Core Commitments (left axis) Non-Core Commitments (left axis)) Stratetic Target for Real Estate (right axis) Assumed Return 75th Percentile (right axis) Assumed Return 6.75% Deterministic (right axis) Assumed Return 25th Percentile (right axis)

Pacing models incorporate detailed fund by fund expectations for capital activity and market values – this is the foundation of sizing decisions. TMRS faces a range of outcomes regarding the real estate percentage of the total portfolio due to the implementation complexities of the asset

• class. TMRS may or may not allocate more real estate capital during 2016.

Note 1: This chart was first provided in the March 2016 Real Estate recommendation presentation and memorandum. *Assumed total portfolio returns based on RVK 2015 asset allocation model inputs.

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Harrison Street Securities - History

• Manager Selection & Implementation
• On December 6, 2012, the TMRS board approved an initial $100 million allocation

to Harrison Street Securities.

• In January 2013 the account was funded. The first full month of account performance

was February, 2013.

• A $50 million add-on commitment was approved in September of 2013.

TMRS/HSS Separate Account REIT Mandate Performance

Period Ending HSS LTM Benchmark LTM Difference 12/31/2014 22.3% 28.0%

• 5.7%

3/31/2015 17.5% 22.7%

• 5.2%

Period Ending HSS ITD Benchmark ITD Difference 12/31/2014 11.6% 14.8%

• 3.2%

3/31/2015 10.5% 13.7%

• 3.2%

a) Benchmark is the FTSE NAREIT Equity Index REITS

Note 1: Performance chart is as presented at the July 2015 Board Meeting when termination was approved.

HSS was terminated by approval of the Board on July 30, 2015 for reasons of poor performance, organizational concerns and strategic fit. The positions with the manager were fully exited by August 14, 2016.

Performance & Implementation Conclusions

• TMRS real estate portfolio performance has been in line with benchmark
• performance. TMRS’ real estate portfolio is higher return seeking than the

benchmark, albeit the early implementation phase has faced J-curve effects. A 2016-17 initiative is to take a deeper look at benchmarking.

• Manager selections originating in 2011 have had the largest impact on

performance to date given the core nature of those investments. 2015 and 2016 allocations have added significant core allocations to the portfolio. A 2016-2017 initiative is to consider rebalancing initiatives within the core portfolio.

• Manager selections from 2015-16 have focused on appropriate scaling and

efficiency of capital deployment and reaching beyond TMRS’ existing manager base for new mandates. As a result, TMRS has reached 100% allocation within the real estate portfolio. Reductions in net capital activity are expected going forward. Continued net new capital commitments to non- core real estate will be required due to the nature of fund structures.

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• III. IPS Compliance & Portfolio Review

Sector/ Strategy Compliance

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The current Real Estate portfolio is in compliance with IPS guidelines pertaining to sector/strategy. Core must be 50-100% of the portfolio. Value-Add may be no more than 50% of the portfolio. Opportunistic strategies may be no more than 25% of the portfolio.

65% 64% 61% 60% 25% 21% 21% 20% 10% 15% 19% 20% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% 100.00% Current 2016E 2017E 2018E

Real Estate Portfolio Composition

(by Market Value / Projected MV) Opportunistic % Value Add % Core

Geographic Compliance

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TMRS is within Geographic Compliance guidelines. The IPS requires professional judgment in the assessment of geographic diversification. Recent mandate approvals are likely to increase East and West Coast

• exposure. Additionally, no more than 20% of the portfolio may be

invested internationally.

*Source: Courtland Partners

Property Type Compliance

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TMRS is within Property Type compliance guidelines. No more than 40% of the portfolio may be invested in Office, 35% in multi-family, 35% in Retail, 35% in industrial, and 30% in other property types.

*Source: Courtland Partners

Manager & Investment Vehicle Concentration Compliance

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TMRS is in compliance with its investment manager and investment product limitations requirements. No more than 20% of the Real Estate portfolio may be invested in any one manager. No more than 15% of the Real Estate portfolio may be invested in any one product of a manager.

Blue-scale: Core Mandates Purple-scale: Value-Add Orange-scale: Opportunistic

Leverage Compliance

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TMRS is within leverage guidelines. The TMRS IPS limits total portfolio leverage to 65%.

Investment Leverage Review

(for period ended December 31,2016) Investment Strategy Market Value Leverage

(counting Credit Facilities)

Leverage

(not counting Credit Facilities)

Harrison Street Core Property Core $ 205,281,364.00 32.40% 26.52% Stockbridge Smart Markets Core $ 285,409,835.00 31.73% 31.73% USAA Eagle REF Core $ 99,792,432.00 38.30% 37.80% Invesco US Income Core $ 169,128,607.00 47.90% 41.26% Abacus Core Income I Core $ 54,946,934.00 47.36% 47.36% Walton Street RE Debt* Core $ 19,624,860.00 64.70% 64.70% H2 Credit Partners* Core $ 123,093,632.00 56.20% 56.20% Stockbridge Value I Value-Add $ 50,338,434.00 48.40% 45.82% Alcion REPF III Value-Add $ 3,670,897.00 78.14% 52.27% Torchlight Debt Opportunity V Value-Add $ 10,739,041.00 53.82% 53.82% Rubenstein Properties II Value-Add $ 29,940,794.00 54.81% 54.81% Abacus Multi-Family III Value-Add $ 18,257,558.00 81.00% 56.77% Miller Global VII Value-Add $ 44,776,349.00 57.14% 57.14% Greenfield Acquisition VI Value-Add $ 57,282,745.00 60.20% 60.20% Stockbridge Value II Value-Add $ 40,784,084.00 61.00% 60.68% Abacus Multi-Family II Value-Add $ 40,281,243.00 64.08% 64.08% Greenfield Acquisition VII Value-Add $ 66,179,843.00 67.80% 67.80% Moorfield REF III Opportunistic $ 17,249,216.00 72.20% 33.70% WaltonStreet RE VII Opportunistic $ 69,632,624.00 55.81% 55.81% Lubert-Adler VII Opportunistic $ 38,182,970.00 67.95% 67.95% Tristan European PISO IV Opportunistic $ 1,645,804.00 82.40% 68.58% TPG Real Estate Partners II Opportunistic $ 12,585,556.00 82.20% 68.58%

*Debt fund or inclusive of core debt funds

Guideline Leverage Limit Core Portfolio Leverage* < 50% 40.13% 37.65% Value Add Portfolio Leverage < 70% 60.69% 58.81% Opportunistic Portfolio Leverage < 80% 63.87% 57.71% Aggregate Portfolio Leverage 65% IPS Leverage Limit 47.50% 44.82% Total Portfolio Values Total $ 1,458,824,822.00 Core $ 957,277,664.00 VA $ 362,250,988.00 Opp $ 139,296,170.00

Additional IPS Compliance Items

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Vintage Year Concentration – TMRS has not breached the 30% concentration limit in any calendar year. Public Security Limits – TMRS is within the public security limitations of the IPS. TMRS currently holds no separately managed accounts of public securities. Commercial Mortgage Limitation – TMRS is in compliance of the commercial mortgage limitation. TMRS holds no commercial mortgages in separately managed accounts. Co-Investment – TMRS is within co-investment guidelines. TMRS has no co- investments. Valuation Policy – TMRS’ managers are in compliance with IPS valuation policy requirements.

• IV. Real Estate Market Update

Core US Real Estate Market Performance

NCREIF-ODCE Gross Returns

Core real estate returns since the inception of the TMRS real estate program have been driven by appreciation of assets post Global Financial Crisis (GFC), in contrast to historical core returns that are predominantly from income.

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2.82% 2.58% 2.77% 2.35% 2.68% 3.86% 3.56% 3.17% 2.52% 2.93% 3.24% 3.26% 3.39% 3.82% 3.68% 3.34% 2.18% 2.12% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% Income Appreciation Total Return

* Data Source: NCREIF

US Real Estate Valuation

Moody’s / RCA Commercial Property Price Indices

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Commercial property valuations have reached historical peak levels but performance across different metro areas has varied considerably. Recent indications show a pull back in the higher performing markets.

50 100 150 200 250 300 Major Market Index National All Property Index Non-Major Market Index

* Data Source: Bloomberg Monthly Index Data (12/31/2000 – 3/31/2016)

US Real Estate Fundamentals

Growth in Market Revenue per Available Foot (M-RevPAF)

Occupancy and rental growth are healthy with recent news being mostly positive, but the rate of growth has decelerated.

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• 12.00%
• 10.00%
• 8.00%
• 6.00%
• 4.00%
• 2.00%

0.00% 2.00% 4.00% 6.00% 8.00% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

* Data Source: Green Street Advisors (top 30 US markets, 4 major sectors on equal weighted basis)

US Real Estate Supply & Demand

Impact of Changing US Consumer

Post GFC the US consumer has maintained its central role in US & global economy but has altered its consumption and spending patterns forcing real estate supply to adapt in a short amount of time.

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• Data Source: Green Street Advisors, Bureau of Economic Analysis
• Note: DPI – Disposable Personal Income
• 0.1
• 0.05

0.05 0.1 0.15 10/1/99 8/1/00 6/1/01 4/1/02 2/1/03 12/1/03 10/1/04 8/1/05 6/1/06 4/1/07 2/1/08 12/1/08 10/1/09 8/1/10 6/1/11 4/1/12 2/1/13 12/1/13 10/1/14 8/1/15 E-Commerce % of Retail Total Retail Sales Growth 8.0% 9.0% 10.0% 11.0% 12.0% 13.0% 14.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 1/1/80 10/1/81 7/1/83 4/1/85 1/1/87 10/1/88 7/1/90 4/1/92 1/1/94 10/1/95 7/1/97 4/1/99 1/1/01 10/1/02 7/1/04 4/1/06 1/1/08 10/1/09 7/1/11 4/1/13 1/1/15 Personal Savings Rate % of DPI (Left Axis) Household Debt Service Payment % of DPI (Right Axis)

European Real Estate Market Overview

Prime Yields vs. Respective 10-Yr

The “European” real estate market is really a conglomeration of many separate markets with different exposures and discrete economic cycles.

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0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00%

Amsterdam Berlin London Munich Paris Stockholm Warsaw

Office Retail Industrial 10-Yr

* Data Source: Cushman & Wakefield, Bloomberg

Economic indicators are more positive than negative across the region but political uncertainty surrounding the UK’ s potential exit from the EU has stalled investment and capex activity.

• V. Milestones & Initiatives

Milestones & Metrics

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Key Real Asset Milestones & Metrics

• 17 new investment vehicles have been approved (11 Real Estate, 6 Real Return) in the last 12
• months. 16 have close on legal docs to date. The portfolios had 17 total vehicles prior.
• $2.4 billion of new investment mandates approved ($1.3B Real Estate, $1.1B Real Return) in

the last 12 months.

• In 12 months, Real Asset (RA) team took 450 manager meetings: 283 In-Person meetings in

Austin; 38 domestic travel meetings; 34 international travel meetings; 95 manager presentation calls.

• Real Estate progressed from approximately 55% allocated to 100% allocated in trailing 12

months.

• Real Return progressed from approximately 41% allocated to 84% allocated in trailing12

months.

• 1-year estimated fee savings of $3.1 million on managers approved in last 12 months.
• The RA team now serves on 23 Limited Partnership Advisory Committees.
• Analyst Eddie Schultz, Esq., earned the CFA Designation in fall of 2015.
• The RA team currently consists of three individuals. Rachel Cleak has focused on RA as a third

team member since joining in January 2016. She commenced the CFA program this June.

Note 1: Portfolio progress presented as “percentage allocated” are based on numbers previously presented to the Board.

Real Assets – An Incredibly Productive Year

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Among 17 Public Pension Plan Respondents managing real estate & real assets TMRS:

• Ranked #1 in total number of

fund commitments

• Ranked #2 in total dollars

committed (#1 was $100B+ plan)

• Ranked #1 in total funds

committed per investment professional employed

• Ranked #1 in total dollars

committed per professional

• Average Respondent Plan Size: $50 billion
• Median Respondent Plan Size: $27 billion
• 16 of 17 plans more active in 2015 than 3 yr. avg.
• Avg. Plan has more mature portfolios than TMRS
• Avg. 2015 Commitment Level: $550 million

TMRS: $2.4 billion

• Average 2015 # of Commitments: 6.3

TMRS: 17

0.4 1.9 2.7 4.4 7.0 11.3

• 2.0

4.0 6.0 8.0 10.0 12.0 Investment Professionals Funds Managed per Professional 2015 # of Commitments 2015 $ of Commitments 2015 # of Commitments per Professional 2015 $ of Commitments per Professional

TMRS Portfolio Activity Statistics

(compared by multiple of avg. comparable plan)

*TMRS Statistics prepared on Last Twelve Months basis (July 2015 – June 2016)

2016-2017 Real Asset Goals

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Real Estate & Real Return Initiatives

• Allocate greater time resources to manager, market and portfolio research.
• Enhance operational & reporting functionalities.
• Initiate benchmark review project for real estate, and benchmark enhancement

study for real return.

• Comprehensively re-evaluate core real estate portfolio and consider rebalancing
• initiatives. Research Real Estate co-investment opportunities more extensively.
• Progress Real Return Portfolio to 100% Allocated: i) add additional public markets real

return strategies to fully fund; ii) continue to diversify private real return portfolio.

• Research and pursue Real Return co-invest opportunities as deals with strategic fit

are sourced.

“Get Better”

TMRS Vision Statement: TMRS will be the preferred provider of competitive retirement benefits and excellent customer service by improving plan funding, investment return, communication, and education.

VI – Appendix: Manager Scorecards

Annual Manager Report Card for: Abacus (Core & Value-Add Platforms)

43

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment Area Grade Update & Comments

Organization

Abacus is generally meeting the expectations of TMRS in all material respects.

People

No Change

Philosophy/Strategy/Process

No Change

Portfolio(s)

No Change

Performance

Abacus Value Fund II has had very strong performance, the Core fund has performed as expected and Value Fund III has entered the J-Curve portion of the fund life resulting in lower performance numbers, but this is anticipated for a fund of this nature.

Compliance

Compliant

Guideline Changes

The firm has had trouble raising additional capital in the core platform for the reasons TMRS Investment Staff suggested would be the primary issue with the vehicle structure – that it is a closed-end vehicle. TMRS has been in contact with the other investors and are actively working toward a long term solution. Despite trouble raising capital, the investments within the fund are performing as anticipated.

Risk Management

No Change

Operations

No Change

Client Service

No Change

Other

N/A

Annual Manager Report Card for: Alcion

44

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment Area Grade Update & Comments

Organization

Alcion is meeting the expectations of TMRS in all material respects.

People

No Change

Philosophy/Strategy/Process

No Change

Portfolio(s)

No Change

Performance

Alcion is too early in the fund life for performance to be meaningful.

Compliance

Compliant

Guideline Changes

No Change

Risk Management

No Change

Operations

No Change

Client Service

No Change

Other

N/A

Annual Manager Report Card for: Greenfield

45

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment Area Grade Update & Comments

Organization

Greenfield is meeting the expectations of TMRS in all material respects. The firm is now fundraising for Greenfield VIII with a first close expected by year end.

People

No Change

Philosophy/Strategy/Process

No Change

Portfolio(s)

No Change

Performance

Greenfield has had satisfactory performance.

Compliance

Compliant

Guideline Changes

No Change

Risk Management

No Change

Operations

No Change

Client Service

No Change

Other

N/A

Annual Manager Report Card for: H/2

46

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment Area Grade Update & Comments

Organization

H/2 is meeting the expectations of TMRS in all material respects.

People

No Change

Philosophy/Strategy/Process

No Change

Portfolio(s)

No Change

Performance

H/2 is early in its fund life and thus is too early to assess fund performance on a rolling basis.

Compliance

Compliant

Guideline Changes

No Change

Risk Management

No Change

Operations

No Change

Client Service

No Change

Other

N/A

Annual Manager Report Card for: Harrison Street (Core Platform)

47

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment Area Grade Update & Comments

Organization

Harrison Street is meeting the expectations of TMRS in all material respects.

People

No Change

Philosophy/Strategy/Process

No Change

Portfolio(s)

No Change

Performance

Harrison Street has had satisfactory performance.

Compliance

Compliant

Guideline Changes

No Change

Risk Management

No Change

Operations

No Change

Client Service

No Change

Other

N/A

Annual Manager Report Card for: Invesco

48

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment Area Grade Update & Comments

Organization

Invesco has made measured progress in fund raising, and the firm is generally meeting the expectations

• f TMRS in all material respects.

People

No Change

Philosophy/Strategy/Process

No Change

Portfolio(s)

The portfolio has developed with a large number of assets being located in or around major US cities due to the fund’s ability to execute. This has produced a strong portfolio of durable cash flows as was the communicated goal of the fund. The manager has been able to accomplish this with greater proximity to major liquid markets than originally underwritten.

Performance

Invesco has had satisfactory performance.

Compliance

Compliant

Guideline Changes

No Change

Risk Management

No Change

Operations

No Change

Client Service

No Change

Other

N/A

Annual Manager Report Card for: Lubert-Adler

49

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment Area Grade Update & Comments

Organization

Lubert-Adler is meeting the current administrative and investment expectations of TMRS. The firm has begun marketing an add-on fund to existing investors, but there have been few realizations to date within the existing portfolio. The firm has also expanded its offerings through related entities, in some instances seeking assets within the same sectors as the flashing fund is focusing on.

People

No Change

Philosophy/Strategy/Process

No Change

Portfolio(s)

No Change

Performance

Lubert-Adler performance has been satisfactory, the funds strategy has a slightly longer J-Curve effect thus current muted numbers were anticipated.

Compliance

Compliant

Guideline Changes

No Change

Risk Management

No Change

Operations

No Change

Client Service

No Change

Other

N/A

Annual Manager Report Card for: Miller Global

50

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment Area Grade Update & Comments

Organization

Miller Global is currently fundraising for the next iteration of their value fund line.

People

The head of hotel acquisitions has left the firm, TMRS has been in communication with the firm regarding

• replacement. Currently there is no intention to fill the position due to the lack of opportunity in the hotel

space.

Philosophy/Strategy/Process

No Change

Portfolio(s)

Portfolios have been constructed in a manner outside of what was communicated.

Performance

Miller Global has had satisfactory investment performance.

Compliance

Compliant

Guideline Changes

No Change

Risk Management

No Change

Operations

No Change

Client Service

Client servicing is below average.

Other

N/A

Annual Manager Report Card for: Moorfield

51

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment Area Grade Update & Comments

Organization

Moorfield is meeting the expectations of TMRS in all material respects.

People

No Change

Philosophy/Strategy/Process

No Change

Portfolio(s)

No Change

Performance

Moorfield performance has been satisfactory.

Compliance

Compliant

Guideline Changes

No Change

Risk Management

No Change

Operations

No Change

Client Service

No Change

Other

N/A

Annual Manager Report Card for: Rubenstein

52

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment Area Grade Update & Comments

Organization

Rubenstein is meeting the expectations of TMRS in all material respects.

People

No Change

Philosophy/Strategy/Process

No Change

Portfolio(s)

No Change

Performance

Rubenstein has had satisfactory performance inception to date.

Compliance

Compliant

Guideline Changes

No Change

Risk Management

No Change

Operations

No Change

Client Service

No Change

Other

N/A

Annual Manager Report Card for: Stockbridge (Core & Value-Add Platforms)

53

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment Area Grade Update & Comments

Organization

Stockbridge is meeting the expectations of TMRS in all material respects.

People

The firm’s co-head and founder has relinquished his role as head of Stockbridge in order for the firm to transition to the next generation of leadership. He remains heavily involved with the firm serving on the Core & Value Add investment committees. He and his replacement, a long time partner within the firm, have been to Austin both before and after the transition to ensure we were comfortable with the process.

Philosophy/Strategy/Process

No Change

Portfolio(s)

No Change

Performance

Stockbridge has had strong performance inception to date within its Value-Add platform and performance in line with expectations within its core program.

Compliance

Compliant

Guideline Changes

No Change

Risk Management

No Change

Operations

No Change

Client Service

No Change

Other

N/A

Annual Manager Report Card for: Torchlight

54

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment Area Grade Update & Comments

Organization

Torchlight is meeting the expectations of TMRS in all material respects.

People

No Change

Philosophy/Strategy/Process

No Change

Portfolio(s)

No Change

Performance

Torchlight is too early in the fund life for performance to be meaningful.

Compliance

Compliant

Guideline Changes

No Change

Risk Management

No Change

Operations

No Change

Client Service

No Change

Other

N/A

Annual Manager Report Card for: TPG

55

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment Area Grade Update & Comments

Organization

TPG is meeting the expectations of TMRS in all material respects.

People

No Change

Philosophy/Strategy/Process

No Change

Portfolio(s)

No Change

Performance

TPG is too early in the fund life for performance to be meaningful.

Compliance

Compliant

Guideline Changes

No Change

Risk Management

No Change

Operations

No Change

Client Service

No Change

Other

N/A

Annual Manager Report Card for: Tristan

56

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment Area Grade Update & Comments

Organization

Tristan is meeting the expectations of TMRS in all material respects.

People

No Change

Philosophy/Strategy/Process

No Change

Portfolio(s)

No Change

Performance

Tristan is too early in the fund life for performance to be meaningful.

Compliance

Compliant

Guideline Changes

No Change

Risk Management

No Change

Operations

No Change

Client Service

No Change

Other

N/A

Annual Manager Report Card for: USAA

57

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment Area Grade Update & Comments

Organization

USAA is meeting the expectations of TMRS in all material respects.

People

No Change

Philosophy/Strategy/Process

No Change

Portfolio(s)

No Change

Performance

TMRS’ USAA investment is too recent for performance to be meaningful.

Compliance

Compliant

Guideline Changes

No Change

Risk Management

No Change

Operations

No Change

Client Service

No Change

Other

N/A

Annual Manager Report Card for: Walton St. (Equity & Debt Platforms)

58

Excellent In Good Standing Fair

(working with manager)

Unsatisfactory

(remedial action being taken)

Comprehensive Review

Assessment Area Grade Update & Comments

Organization

Walton St. is meeting the expectations of TMRS in all material respects. They are currently fundraising for their next iteration in the opportunity fund line.

People

No Change

Philosophy/Strategy/Process

No Change

Portfolio(s)

The Real Estate fund portfolio remains in compliance with the partnership agreement. Walton generally pursues a strategy that is higher risk than TMRS’ other non-core mandates.

Performance

Walton St. has had satisfactory performance for the strategy it pursues.

Compliance

Compliant

Guideline Changes

No Change

Risk Management

No Change

Operations

No Change

Client Service

No Change

Other

N/A

TMRS periodically discloses public information that is not excepted from disclosure under Section 552.0225(b)

• f the Texas Public Information Act. Information provided by a manager

, a general partner or other data provider to TMRS or a TMRS service provider , and contained in these materials, may have been independently produced or modified by TMRS or the TMRS service provider.

59

Disclosures