San Joaquin County Employees Retirement Association C Courtland - - PowerPoint PPT Presentation

San Joaquin County Employees’ Retirement Association

C tl d P t Ltd Courtland Partners, Ltd.

Institutional Real Asset Advisor

Real Estate Strategy and Proposed Implementation Plan – June 2017

Table of Contents 1- Real Estate Strategy, Courtland Portfolio Model, and Proposed Implementation Plan 2- Real Estate Securities 3 R l E t t M k t C diti 3- Real Estate Market Conditions

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Strategy and Implementation

1 – Real Estate Strategy, Courtland Portfolio Model, and Proposed Implementation Plan Model, and Proposed Implementation Plan

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SJCERA Current Real Estate Exposure

Total SJCERA Plan Assets $2.5 billion

Over 20% of the

Total SJCERA Plan Assets $2.5 billion Real Estate Equity MV, 12/31/16 (mil) % of SJCERA

Private - Core, Value and Opportunistic 255.8 $ 10.2% Public - Domestic and International 57.5 $ 2.3%

SJCERA Plan is invested in real estate related assets

Total 313.3 $ 12.5%

Real Estate Debt MV, 12/31/16 (mil) % of SJCERA

Doubleline (Mortgage Backed Securities) 71.6 $ 2.9% PRIMA (Commercial Mortgages) 96.7 $ 3.9% Mesa West Funds (Leveraged Com. Mortgages) 27.3 $ 1.1% Total 195.6 $ 7.9%

Real Estate Equity Real Estate Debt

 Estimated Unfunded Commitments = $58 mil.

• Includes $30 million GAP VIII commitment

 Distrib tions are e pected to increase  Interest income is being distributed as earned  New $50 million commitment to Mesa West IV  Distributions are expected to increase:

• 2007-2009 vintage funds
• Assets ready for disposition

will increase exposure

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SJCERA Private Real Estate Portfolio

E i tin Cl d End M n r P t nti l f r In tm nt in N t F nd Existing Closed-End Managers - Potential for Investment in Next Fund Manager New Fund in the Market? Attractive Opportunity?

Almanac Later in 2017 Yes Angelo Gordon 2018 Yes Colony Probably within next 18 months Maybe SteelWave No N/A 4 | Courtland Partners, Ltd. Sarofim No N/A Greenfield No N/A Miller Global Yes Unlikely Walton Street No N/A

Results of 2016 Implementation Plan

2016 Objective Result Comments

Private Real Estate: Commit up to $60 million in Private Real Estate, adding Value-Added or Opportunistic to the portfolio

• $30 million commitment to

GAP VIII Maintains portfolio’s

• pportunistic

exposure Public Real Estate: Monitor and consider rebalancing

• No activity in 2016

None where appropriate

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Policy Risk/Return Targets

Investment and Portfolio Risk/Return Ranges

Risk/Return Nominal Net Return Actual Exposure 12/31/16 Projected Exposure Per Model** Target Tactical Allocation Policy Range Core 6.0%-8.0% 48% 61% 40% 10-70% Value 9.0%-11.0% 28% 22% 40% 10-60% Opportunistic 13.0%+ 24% 17% 20% 10-40% REITs* 18% 23% 0-30% 0-30%

* Domestic REITs included as Core; International REITs included as Value. ** Projected exposure includes $30 million commitment to GAP VIII and does not include any new 2017/2018 allocations.

Maintain the Target Tactical Allocation: Core 40%, Value 40% and Opp. 20%

• Consistent with activity over past few years

y p y

• Continue to believe this long-term target best meets SJCERA’s objectives for real estate
• Continue to seek managers with a strong current income component

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Courtland Portfolio Model

 Courtland sent out questionnaires to each manager requesting portfolio data forecasted over the 2017 – 2020 periods based on in place business plans.

• Expected capital calls

E t d it l di t ib ti

• Expected capital distributions
• Property type diversification
• Geographic diversification

 C tl d il d thi d t i t fi i l d l t d t i tf li  Courtland compiled this data into a financial model to determine portfolio exposures (e.g., risk/return strategies, property type, geographic) over the next several years.  The results on the following slides illustrate the projected portfolio with and without new investment allocations over the next several years.  The Model does not make any income accrual or appreciation assumptions for individual investments.  Current real estate exposure is 12.5%. Assuming no new investments are made the exposure is projected to be 11% (2017), 10% (2018), 10% (2019), and 9% (2020).

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SJCERA Historical Capital Contributions

Gross Capital Contributions Since Inception

80

$

50 60 70

$ Millions

10 20 30 40

• 10

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: Courtland Partners

• For private and public real estate equity investments only

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Portfolio Model- Allocation Exposures

Portfolio With New 2017 and 2018 Allocations

70% 2016 2020 2020 w. New 48% 28% 61% 47% 33% 40% 50% 60% 70% 28% 24% 22% 17% 20% 0% 10% 20% 30%

Note: Core includes U.S. REITs; Value includes Non-U.S. REITs; Excludes Mortgages

 Model assumes $60 million in allocations to Value and $30 million in allocations to Opportunistic in 2017 and 2018 No future year allocations are assumed at this time

Core Value Opportunistic

Opportunistic in 2017 and 2018. No future year allocations are assumed at this time.  If all $90 million is allocated to Value, the exposures would be 47% Core, 40% Value, and 13% Opportunistic.  Current real estate exposure is 12.5%. Assuming proposed 2017-2018 allocations are made the exposure is projected to be 11% (2017) 11% (2018) 12% (2019) and

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are made the exposure is projected to be 11% (2017), 11% (2018), 12% (2019), and 12% (2020).

2017 and 2018 Proposed Implementation Plan

Long Term Potential New Long-Term Target 2017 and 2018 Objectives Potential New Allocations Managers Core 40%

Continue to monitor domestic REITs. None None

Value 40%

Consider opportunities with a strong current income component and long-term return potential. Up to $90 million Up to three managers

Opportunistic 20%

Consider unique opportunities Up to $30 million Up to one manager

Opportunistic 20%

q pp that expect to capitalize

• n

market opportunity. p p g

REITs 0%-30%

Standard monitoring

• f

allocation for potential modifications. $0 N/A

International 0%-20%

Consider funds with international exposure. Consider moving some of the domestic REIT position into international REIT. Part of value and

• pportunistic

T t l

Up to $90 million

Total

Up to $90 million

• Maintain flexibility within REITs based upon market conditions
• No region/sector specific needs that must be addressed with new allocations; however, monitor industrial exposure levels when

considering new opportunities

• Courtland will bring opportunities for SJCERA’s consideration throughout the year and will consider opportunities with existing

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managers

Portfolio Model - Property Type Exposures

Portfolio With New 2017 and 2018 Allocations

*Includes mixed-use, self-storage, operating companies, senior housing, CMBS, private debt, land, timber, and healthcare. ** Impact of potential increased allocations is not material on expected exposure due to the generic funds included in the model. 11 | Courtland Partners, Ltd.

Portfolio Model - Geographic Exposures

Portfolio With New 2017 and 2018 Allocations

*Impact of potential increased allocations is not material on expected exposure due to the generic funds included in the model. 12 | Courtland Partners, Ltd.

Portfolio Model - Public/Private Exposure

Portfolio With New 2017 and 2018 Allocations

• Public market values held steady throughout the modeling process

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U.S. Investment Themes

Strategies and Themes Strategies and Themes

• Build out a more defensive portfolio via the inclusion of income and recession-resistant strategies.
• Core equity pricing is competitive as pricing for prime location, high quality assets currently exceeds pre-GFC peak levels.
• Selectively consider core-plus opportunities where the manager is focused on going-in yield and lower property cost versus fully

valued core properties.

• Consider debt-oriented strategies that are protected by 25%-35% borrower equity in a first loss position.

Consider debt oriented strategies that are protected by 25% 35% borrower equity in a first loss position.

• Seek opportunistic funds that provide liquidity to sectors of the market that are most in need of capital; examples are financial

institutions in need of recapitalized balance sheets.

Retail Industrial Office Multifamily Debt Other

• Focus on necessity-
• Industrial in major
• New supply is
• Pricing for prime
• Avoid subordinated
• Self storage

y based retail as defensive strategy.

• High street retail

pricing has increased due to favorable urban j coastal markets has rebounded in pricing; be selective given current valuations.

• Fundamentals

pp y coming to market in select cities.

• Selectively invest at

steep discounts by focusing on properties with g p class A assets has been pushed to record highs.

• Focus on urban infill

and development constrained markets. portions of capital structure which do not provide adequate control or protection provisions. g continues to remain a fragmented asset type with many inefficiencies.

• Senior

housing/medical favorable urban lifestyle demographics; be selective due to current pricing.

• Selectively consider

class-A malls given Fundamentals continue to be strong as companies build out supply chain management systems.

• Focus on infill

properties with significant capital needs (e.g., leasing costs or physical improvements) that cannot be met under the existing capital constrained markets.

• Selectively develop

if yield to cost reasonably exceeds current market cap rates.

• Exploit inefficiencies

in capital markets by providing debt on transitional assets.

• Exploit inefficiencies

in capital markets by housing/medical

• ffice to take

advantage of demographics (aging population, need for assisted living facilities). class A malls given current values; historically have provided a consistent income return resilient to market downturns. Focus on infill locations, be selective in NY/NJ and Southern California due to pricing.

• Monitor NOI growth

structure.

• Class B assets in

gateway markets; Class A assets in

• ther markets.
• Focus on markets

that are not likely to be negatively affected by new supply.

• Monitor NOI growth

in capital markets by providing liquidity to distressed capital structures.

• Evaluate use of

leverage by debt managers

• Student housing:

new products provide better amenities demanded by incoming students. 14 | Courtland Partners, Ltd.

• Monitor NOI growth

and new supply. and new supply. managers.

Recent Client Recommendations

Core

• Harrison Street Core Fund, Mesa West Core Lending Fund, Blackstone Property

Partners (Core Plus), USAA Eagle Fund, Brookfield Premier Real Estate Partners (Core Plus) Plus)

Value

• Stockbridge Value III, Bristol Value Fund III, Ares U.S. Real Estate Fund IX, AG Europe

Stockbridge Value III, Bristol Value Fund III, Ares U.S. Real Estate Fund IX, AG Europe II, Oak Street IV, Mesirow Value Fund III, BlackRock Asia IV, RCG Longview Debt VI, Pramerica Real Estate Capital IV, Exeter Industrial Value IV, Crow Fund VIII, PCCP Credit IX

Opportunistic

• Carlyle VIII, Blackstone VII, H/2 Special Opportunities Fund, Cerberus IV

* f f *These funds represent a cross section of client commitments over the past six to nine months and may not be currently available.

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Real Estate Securities

2 – Real Estate Securities

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Courtland Partners REIT Score

REIT Metrics Market Indicator is currently located in “Consider Adding” territory

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• Continue to monitor for potential modifications

U.S. REIT Capitalization Rate

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Global REIT Dividend Yield

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Global REIT Premium/Discount to NAV

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Global REIT FFO Multiple

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Real Estate Market Conditions

3 - Real Estate Market Conditions

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Cap Rates Compressed Slightly (-8 bps)

T i ff f th i l b i i th t d t 2 11% Treasuries came off of their low, bringing the cap rate spread to 2.11%

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Historically Low Cap Rates

NPI, Industrial, Office, and Retail cap rates are at all-time lows

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NOI Growth is Still Above Average

Retail is lagging in NOI growth

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Vacancies Continue to Fall

B th NPI d I d t i l t 10 l Both NPI and Industrial vacancy are at 10 year lows

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Supply and Demand by Property Type

27 | Courtland Partners, Ltd. Note: REIS reports for the Industrial sector on an annual basis.

Record Level of “Dry Powder”

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Dry Powder Leading to Competition for Deals

Fund Manager Views on How Institutional Investor Appetite for Private Real Estate Has Changed over the Past 12 Months by Investor Location

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Super Regional Malls Have Performed Very Well

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Current Valuations are a Key Issue

Investor Views on the Key Issues Facing Real Estate in 2017

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