IMA Transition Update & Redeployment Strategy March 2017 Aon - - PowerPoint PPT Presentation

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IMA Transition Update & Redeployment Strategy

March 2017

Aon Hewitt | Retirement and Investment Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.

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SDCERS Portfolio Overview

Portfolio Overview

(As of September 30, 2016)

Real Estate Portfolio Opportunity Portfolio Aggregate Number of Investments 25 3 28 Total Commitments $1,118.9 $90.0 $1,208.9 Unfunded Commitments $220.6 $21.9 $242.5 Market Value (NAV) $668.8 $69.9 $738.7

Real Estate Debt 100% Value-Add 21% Opportunistic 79%

Opportunity Portfolio Strategy by NAV

As of Q3 2016 Real Estate Equity 100% IMA 57% Core 23% Value- Add 7% Opportunistic 13%

Real Estate Portfolio Strategy by NAV

As of Q3 2016

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IMA Liquidation Plan

I.M.A. Assets Sell Individually

(9 assets totaling ~$166 million in NAV)

Potential Exchange for Shares

(10 assets totaling ~$219 million in NAV)

LOW HIGH Assets Likely of Interest to Open-End Funds

• SDCERS’ remains invested in Core

with no loss of allocation

• Limited transaction fees
• Bidding offered to all AHIC buy

rated open end core funds

• Offers to be evaluated by multiple

factors including price offered, portfolio construction fit, potential exchange restrictions e.g. lockups, etc.

• Longer execution time (3-5 years)
• Potentially “out of Core market”

while liquidated dollars are re- invested (if entry queues exist)

• Pure market pricing achieved
• Potentially significant transaction

costs

Rationale

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IMA “Exchange for Shares” Process Update

Buy-Rated Funds Fund Selection

• DAM is holding second round

bidding and is expected to have final recommendation in March

SDCERS Investment Committee Approval Direct Sales

• 3 IMA assets are expected to be

individually sold by April 2017

• Approx. $60 million to be

redeployed with new allocation to PRISA and PRIME

• Going forward quarterly

monitoring of sales activity will drive additional core real estate commitments

• DAM has established an

Oversight Committee, which excludes the PM team, to ensure all parties are treated equally

• AHIC distributed bid invitations to

potential bidders

Bidding & Negotiation

• DAM’s PM team is reviewing bids.

Any assets not receiving a successful bid will be moving to direct sales

• Will seek approval to proceed with

TBD finalist, subject to successful due diligence and legal agreement

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$0 $50,000,000 $100,000,000 $150,000,000 $200,000,000 $250,000,000 $300,000,000 Sales in 2017 Sales in 2018 Sales in 2019 Sales in 2020 Sales beyond 2020

DAM IMA – Estimated Disposition Timeline

Currently in Market: Eagan Town Centre (3/16) Metropolitan Business (3/9) Fremont Business (bids) New Ridge/Benson (just in market) Towers, Caballero I & II (swap bids) Sales to be explored over balance of 2017: 67 Pacella Landing on Mohegan Airport 100 Country Club Plaza 700 S. Washington Rancho Hills 2018: Foothills 2019: 4040 N Central Tigard 2020: 100 Apollo Windsor Commons Beyond 2020: Latitudes Source: AHIC, DAM (Data as of 2/24/2017)

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SDCERS Core Profile – New Commitment Overview

DAM IMA $377.5M

Average Asset Size Relative Risk Average Asset Size Relative Risk

MS Prime $30.0M UBS TPF $42.1M DAM IMA $312.3M MS Prime $45.0M JPM SPF $114.3M JPM SPF $114.3M Prudential PRISA $45.0M Diversified Fund $XXM

Current SDCERS Core Portfolio SDCERS Portfolio Including Core Fund Recommendations

Italics represents SDCERS NAV or Commitment Amount

0% 5% 10% 15% 20% 25% 30% Index DAM IMA JPM SPF UBS TPF MS Prime Leverage Non-Stabilized UBS TPF $42.1M

Index

0% 5% 10% 15% 20% 25% 30% Index DAM IMA JPM SPF UBS TPF MS Prime Diversified Fund PRISA Leverage Non-Stabilized Source: AHIC, Managers

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Core Portfolio - Property Type and Geographic Diversification

• The chart below assumes the following:
• (3) DAM IMA industrial assets sold to a Diversified core property Fund
• $45 million committed to Prudential’s PRISA
• An additional $15 million committed to MS Prime
• Under these assumptions, the diversification of the SDCERS Core Portfolio becomes increasingly

benchmark aware with respect to diversification

Source: AHIC, SDCERS 9/30/2016 (gross assets)

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% Office Apartment Retail Industrial Hotel Other West East Midwest South Current Future NFI-ODCE

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Long-Term Strategy – Core Equity Execution

Average Asset Size Relative Risk

MS Prime JPM SPF UBS TPF Prudential PRISA

Long-Term Execution

• As the DAM liquidation progresses, SDCERS’ equity core portfolio is expected to become fully

allocated, on an approximate value weight bases, to the Big 4 open end Core funds

• Creates a “index” approach to achieving real estate returns in line with the NFI-ODCE Index

DAM IMA $377.5M

Average Asset Size Relative Risk

MS Prime $30.0M UBS TPF $42.1M JPM SPF $114.3M

Current SDCERS Core Portfolio

Index

Source: AHIC

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Rolling 3 Year Tracking Error

• The table shows the rolling three year tracking errors of a series of Funds starting with the largest

Fund alone – As additional large cap funds are combined the tracking error reduces quickly and significantly – Benefit of additional holdings reduces quickly after the Big 4

• A portfolio of the four smallest funds, “Small 4”, has much higher tracking error to the index
• 0.50

1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00

Tracking Error (Rolling 3-Year)

Big 1 Big 2 Big 3 Big 4 Small 4

Source: AHIC, Managers

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Natural Resources Timber, Farmland, Infrastructure, Energy, etc.; helpful diversifier PE Value Added More balanced risk/return profile between income and appreciation Debt Opportunities Public & Private. Expand risk- adjusted return

• pportunities

PE Opportunistic Tactical

• pportunities

driven by creating appreciation; highest risk Terms/Structures Alignment of interest; Funds,

• Sep. Accts, FoFs,

co-investments… Leverage Judicious use allows for exploiting

• pportunities for

enhanced returns REITs/REOCs Added return

• potential. Liquid

but lower diversification benefits

Core Private RE (index beta) Overall Portfolio Structure – Core Satellite Approach

Real Estate Toolkit for Portfolio Structure

• Reflects policy goals for real estate portfolio…focus on generating income and providing

diversification benefits to the total portfolio, while providing competitive returns relative to the benchmark

• Complement Portfolio with return-seeking and risk-mitigation tools and investments; over- and

underweight at tactical points in the real estate cycle

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• As real estate cycle matures, risk mitigation tools should expand and portfolio should lean towards the

upper end of its Core policy range.

• As the real estate cycle nears its trough, return seeking tools should expand; increasing the portfolio’s

allocation to non core investments.

Portfolio Structure – Tactical Allocations

Real Estate “Equity” Portfolio Opportunity “Debt” Portfolio Policy Ranges % Equity Portfolio Equity $M Debt $M % Total Portfolio 60%-80% 80% 534 CORE 70% 20%-40% 7% 45 VA 20 9% 13% 90 OPP 70 21% SDCERS’ Real Estate Exposure $M % Total Equity Portfolio 669 88% Debt Portfolio 90 12% Total RE Exposure 759

% Debt / Preferred Equity Investments % Core Investments % Use of Leverage Cycle Trough Cycle Peak Sector Risks

Source: AHIC, SDCERS (data as of 9/30/2016)

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Core Satellite Approach – Recommendations

• Pursue core index approach for bulk of core real estate allocation

− Bigger commitments to large cap managers − Fees will be lower with larger commitments (often above $100 million) − Complement equity exposure with lower risk debt investments for downside protection, especially important at current point in cycle

• Non-Core commitments to focus on alpha generation for the real estate portfolio

− Complement current non core exposures to ensure no unintended concentrations − Ensure use of leverage is appropriate for Strategy − New commitments will likely need to ride out a down cycle

Source: SDCERS 9/30/2016 (gross assets), AHIC