Real Estate Search Process and Recommendation May 19-20, 2016 Tom - - PowerPoint PPT Presentation

May 19-20, 2016

Tom Masthay, Director of Real Estate & Real Return Eddie Schultz, Investment Analyst, Real Estate & Real Return Rachel Cleak, Alternative Investment Analyst Courtland Partners, Real Estate Consultant

Real Estate Search Process and Recommendation

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Agenda

I. Real Estate Search Process Timeline & Allocation Objectives II. Manager Search Process III. Portfolio Construction IV. Manager Selection & Recommendation* V. Requested Board Action

*Names used in this presentation are a shortened version that is used for ease of communication purposes throughout this

• document. The formal recommendations to the Board on the last page of this presentation reflect the full legal name of the

investment.

• I. Real Estate Search Process Timeline &

Allocation Objectives

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Real Estate Search Process Timeline

Dec 2015

• TMRS staff presented and Board Approves the 2016 Real Estate Pacing Plan recommending a commitment of up to $600 million of net new

real estate exposure. Dec 2015

• TMRS Staff formally launched the search process, in concert with Courtland.

Q1 2016– Ongoing

• Conduct manager reviews through a multi-phase evaluation process for all candidates.
• Multiple conference calls /meetings with Courtland to score and determine best candidates for TMRS, as well as incorporate their sourcing

and due diligence. Q1 2016

• March 2016 Board Meeting: TMRS Board approves investments in two real estate funds for a total of $375 million in new real estate

commitments. Q2 2016

• May 2016 Board Meeting: TMRS and Courtland will present to the board the search process utilized for the Real Estate search as well as

manager recommendations. One recommendation for $100 million will be presented.

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Real Estate Search Process Objectives

• Portfolio Diversification
• Work towards an appropriately balanced portfolio with an efficient

number of partnerships for TMRS oversight purposes.

• Build a portfolio with suitable geographic and economic concentrations to

achieve decreased volatility in returns while providing access to alpha producing opportunities where accretive and cognizant of risk.

• Portfolio Partnerships
• Identify best in class managers currently in fundraising capable of

investing in uncertain market with strong alignment of interests.

• Targeted Commitment Level
• The targeted Real Estate Pacing Plan for 2016 is up to $600 million.

However, pacing plan considerations may lower total recommendations for the year.

• II. Manager Search Process

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Manager Search Process

Sourcing (Y/N) Preliminary Due Diligence (1/2) Prioritization (A,B,C) Comprehensive Due Diligence (Score) Staff Recommendation Board Approval

Manager Screen & Universe Analysis Scoring Scoring Category Score / Outcome Manager Screen

• Is vehicle consistent w/ TMRS'
• bjectives?

Yes - Take Meeting; No - Don't Take Meeting

Manager Analysis

• Does vehicle have

adequate capacity and timeline?

• PPPST* Preliminary Review

1 - Advance; 2 - Stop Research

*PPPST – People, Process, Performance, Strategy, Terms

Semi-Finalist Scoring Matrix Scoring Category Score Finalist Manager Review

• Questionnaire Review
• Detailed PPPST* Review
• In-depth Manager Qualifications

Review

• Compliance with TMRS IPS
• Verification of Research, References,

Further Market Research A - Prioritize for Final Due Diligence B - Perform More Research C - Stop Research / Manager not Selected

Final Due Diligence Scoring Matrix Scoring Category Possible Points People (Firm & Team) 0 - 40 points Process (Sourcing, Underwriting and Managing) 0 - 40 points Performance (Historical / Expected) 0 - 40 points Strategy (Attractiveness of Opportunity / Portfolio Fit) 0 - 20 points Terms (Fees, Liquidity, etc.) 0 - 20 points Total 100†

†Selected managers standardized to a score of 100 to allow comparability among selected managers.

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Manager Search Process

Sourcing (Y/N) Preliminary Due Diligence (1/2) Prioritization (A,B,C) Comprehensive Due Diligence (Score) Staff Recommendation Board Approval

162 distinct real estate manager meetings taken Met with 45 international real estate managers (27.7% of 162) 3 international managers selected as finalists (6.7% of 45) 1 manager recommendation (2.2% of 45)

Final Selected Manager Scoring Matrix

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*Scoring matrices utilize difference calibrations depending on the strategy being utilized. †Selected managers standardized to a score of 100 to allow comparability among selected managers.

Final Due Diligence Scoring Matrix - Aggregated Results*

Recommended Manager/Fund Manager Score† Comparable

• Mgr. 1 Score

Comparable

• Mgr. 2 Score

Kildare European Partners II, L.P. (Kildare) 100 90 75

• III. Portfolio Construction

Manager Selection Portfolio Considerations

Strategy Diversification

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TMRS is approaching strategy diversification with a conservative mindset in order to ensure ongoing compliance with the IPS in a variety of plausible outcomes. Over time, the core portion of the portfolio will come to equilibrium around 60%, the IPS mandates a minimum of 50% core.

Manager Selection Portfolio Considerations

Manager Implementation

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

• pportunity set.

16% 12% 10% 8% 9% 7% 5% 5% 4% 3% 5% 3% 2% 2% 2% 1% 1% 2% 3%

Manager Diversification

(Post-Recommendation by Adjusted Commitments) Stockbridge Blackstone Property Partners USAA Eagle Fund H/2 Capital Partners Harrison Street Invesco US Core Income Fund Abacus Multi-Family Fund II Walton Street Rubenstein Partners Lubert-Adler Fund VII Greenfield Acquisition Partners VII TPG Realty Fund II Moorfield Real Estate Fund III Miller Global Torchlight DOF V Alcion Ventures III Tristan EPISO IV DivcoWest V Kildare II (new)

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Manager Selection Portfolio Considerations

Geographic Diversification

Geographic diversification lowers volatility in the portfolio by providing exposure to geographies and economies that are in different stages of their economic cycle. A mindful mix within the portfolio will provide diversity of cash flows and a wider

• pportunity set to incrementally increase attainable alpha.

• IV. Manager Selection & Recommendation

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Summary of Recommendation

Recommended Manager/Fund Strategy Classification Target Return Recommended Amount

Kildare European Partners II, L.P. Opportunistic 14% plus net $100 million

Total Net Recommendations: $100 million

Executive Summary of Manager Recommendation

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Top Candidate Characteristics – Kildare

$100 million Recommendation

Kildare Holdings organized its first fund in 2013 with capital commitments of approximately $1.9 billion under the direction of Mr. Ellis Short the former CEO and head of Asian operations for Lone Star. Kildare will execute the same strategy investing in real estate and real estate-related assets in Europe with a primary focus in Germany, the Netherlands, the UK and Italy. The principal strategy is to access commercial real estate debt and equity investments through distressed assets. Kildare looks at performing, sub-performing and non-performing loans secured directly or indirectly by commercial real estate assets which they can buy at a discount and work out of distress. Reasons to Invest

• Experience & expertise including in house special

servicer

• Large market opportunity - $2+ trillion non core

European commercial real estate on bank balance sheets

• Broad based high quality Western European exposure

Issues to Watch

• Only Fund II and Key man – team has long history &

fund I doing well

• Use of Leverage – currently using reasonable level
• Assets in foreign currency – currency risk is hedged

Scoring Matrix

Category Kildare

• Mgr. A
• Mgr. B

People 25 20 15 Process 20 20 20 Performance 20 20 15 Strategy 20 15 15 Terms 15 15 10 Total Points 100 90 75

• V. Requested Board Action

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Recommendation

 TMRS Staff and Courtland Partners recommend that the Board of Trustees

approve the selection of the following fund as referenced in the Board Communication Memo for investment in the specified fund below:

 Kildare European Partners II, L.P.

$100 million