Real Estate Update November 16, 2017

Transcription

1 Real Estate Update November 16, 2017

2 Agenda I. Real Estate Team II. III. IV. Real Estate Market Conditions Role and Objectives Core and Non-Core Comparison Real Estate Allocation V. Real Estate Cash Flow VI. VII. VIII. IX. Unfunded Commitment Pacing Manager Concentration Cost Efficiency Performance Non-Core Core X. Investment Strategy Initiatives XI. Appendix NCRS Investment Approach Total Performance vs. REITs Leverage Example Investment Characteristics 2

3 Real Estate Team Vacant Director of Real Estate Troy March, CCIM, MBA Portfolio Manager 4.5 Years with IMD 16 Years Industry Experience Tessa Tanis, CPA, MSA Portfolio Manager 2 Years with IMD 16 Years Industry Experience Tinh Phan, Licensed Broker Portfolio Manager 4 Years with IMD 18 Years Industry Experience Sean Incremona Analyst 2 Years with IMD 2 Years Industry Experience/ 7 Years Economist 3

4 Real Estate Market Conditions 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 Multifamily Office Retail Industrial Hotel Other Niches New completions are a near-term headwind for rent growth, but starts have slowed and long-term drivers of demand remain relevant. Maturing economic cycle and pockets of supply are having an impact on leasing, but income continues to be solid. Challenging landscape from rise of e-commerce and evolving consumer preferences. Value is concentrated in high-quality, well-located assets. Top-performing sector underpinned by strong rent growth on robust demand for logistics and limited new supply, especially in the in-fill markets. Somewhat more balanced after dealing with pressure from elevated supply in recent years. Student/senior housing and storage are producing attractive income returns. Market specific issues related to new construction and the pace of rent growth. 4

5 Role and Objectives 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 Investment Strategy High Quality Well Located Strong Risk-Adjusted Returns Non-Core Thesis To achieve attractive risk-adjusted net returns through appreciation and income from a diversified portfolio, planning for strategic exit optionality Core Inflation hedge Non-Core Growth diversifier High current income Opportunity to add value Stabilized occupancy Renovation, development, leasing Credit tenancy Stabilized upon completion Long-term return > fixed income Long-term appreciation and returns Minimal risk/downside protection Low correlation to fixed income 5

6 Real Estate Allocation 10.0% Legislative Cap for RE as % of Total Plan: 10.0% 11.0% Core Non-Core 9.0% 8.0% 7.0% Policy Target as % of Total Plan: 8.0% 0.7% Core REITs 10.0% 9.0% 8.0% 7.9% 8.9% 9.3% 8.5% % of Plan 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 4.9% Non-Core 3.6% 4.2% 0.3% 0.8% 2.5% Private Core Special Situations Value Add % of Plan 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 4.6% 5.1% 3.5% 4.4% 4.3% 4.2% 4.9% 3.6% 0.0% 1 Strategy 2 Substrategy 3 4 Opportunistic 0.0% 4Q14 4Q15 4Q16 3Q17 NCRS data as of 9/30/17 Special Situations Build-to-Core Strategy Allocation decrease is attributable to year-to-date net receipts of ~$800 million and the growth of the overall plan. 6

7 Real Estate Cash Flow Investment Strategy High quality assets Strong market locations Meet or exceed benchmarks Commitments ($M): 380 1,205 1,885 1, ,265 1,005 1,211 1,798 1,575 1,965 0 NCRS data through 10/31/17 with Projected 2017 Net realized distributions year-to-date (10/31/17) of ~$800 million. 7

8 Unfunded Commitment Pacing Contribution Pacing by Vintage Year (excludes REITs) 1,600 1,400 1, (96% 96%) 2005 (95% 95%) Investment 2006 Strategy (82% 82%) 2007 (91% 91%) 2008 (87% 87%) High quality 2009 assets (N/A N/A) 2010 (86% 88%) 2011 (87% 90%) Strong market 2012 locations (89% 96%) Meet or exceed benchmarks 2013 (81% 88%) 2014 (80% 94%) 2015 (58% 93%) 2016 (24% 93%) 1,000 $ in Millions Historical Projection *Vintage (% Called % To be Called) 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. 8

9 Manager Concentration (excludes REITs) Contribution to Return 3 Year 5 Year Private Core High Conviction Others Non Core High Conviction Others Market Value ($ Billions) 8 Investment Strategy High quality assets High Conviction Managers 7 Strong market locations Other Private RE Managers Meet or exceed benchmarks * 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 74% of private market value with high conviction managers reduce complexity and fees, increase transparency and maximize returns. 9

10 Cost Efficiency 2.2% Management Fee Fee % of MV $ % Incentive Fee 5 Year Net Return $ % $ % $120 $75 Percent of Market Value 1.8% 1.6% 1.4% 1.2% $70 $65 $60 $55 Management Fee ($M) Time Weighted Net Return 9.0% 6.0% 3.0% 0.0% $100 $80 $60 $40 Incentive Fee ($M) $50 1.0% $45-3.0% $20 0.8% $40-6.0% $0 NCRS data through 12/31/ : Convergence of delayed realization of GFC funds, early realization of post GFC funds, and an Industrial manager selling their entire platform Leverage relationships and scale to minimize costs and enhance alignment. 10

11 Performance: Non-Core Real Estate Non-Core Contribution to Return 3 Year Contribution Opportunistic 7.9 Value Add 5.7 Total Non-Core 13.6 Major Drivers Vintage O NorthCreek V NorthRock II O BREP VII V DRA VII O Lone Star II Year Contribution Opportunistic 8.8 Value Add 5.2 Total Non-Core 14.0 Major Drivers Vintage O NorthCreek O BREP VII O BREP VI V NorthRock II O Lone Star II NCRS data through 9/30/17 Time Weighted Net Return 16.0% 14.0% 12.0% 10.0% Investment Strategy 13.6% High quality assets Strong market locations Meet or exceed benchmarks 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% 10.7% 7.5% 6.7% 14.0% 14.0% 9.2% 10.3% * 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). 2.7% Non-Core -0.2% 7.1% 6.6% Benchmark* 8.2% 8.0% 1 Yr 3 Yr 5 Yr 7 Yr 10 Yr 15 Yr 20 Yr Non-core portfolio continues to outpace the benchmark by a significant margin due to strong performance in separate accounts and other high conviction managers. 11

12 Performance: Core Real Estate Core Contribution to Return 3 Year Contribution Private Core 7.5 REITs 1.3 Total Core 8.8 Major Drivers Vintage NorthRock I JPM SPF BREP EDENS Year Contribution Private Core 8.0 REITs 1.7 Total Core 9.7 Major Drivers Vintage NorthRock I JPM SPF Time Weighted Net Return 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% Investment Strategy High quality assets Strong market locations Meet or exceed benchmarks 8.6% 6.5% 8.8% 10.0% 9.7% 10.3% 10.2% 11.4% 4.4% 4.2% Core Benchmark* 8.1% 7.3% 7.2% 6.6% 2.0% 0.0% 1 Yr 3 Yr 5 Yr 7 Yr 10 Yr 15 Yr 20 Yr NCRS data through 9/30/17 * The Core Real Estate Benchmark is comprised of 80% NCREIF ODCE Net and 20% FTSE EPRA NAREIT Global Index. Core real estate portfolio has started to outperform the benchmark as core plus investment strategy moves through the J curve. 12

13 Investment Strategy Initiatives High Conviction Managers Continue to increase allocation to high conviction managers and reduce manager count Cost Efficiency More attractive terms (e.g. fee discounts for loyalty and size) Greater control and transparency (e.g. Separate Accounts, custom solutions, founding Limited Partner) Minimize costs and maximize returns by favoring fee structures that optimize alignment Sector Allocation Target new commitments in property types that enhance portfolio construction Favorable long term risk/return profiles Diversification benefits 13

14 Appendix i. NCRS Investment Approach ii. Total Real Estate Performance vs. REITs iii. Leverage iv. Example Investment Characteristics 14

15 Investment Approach Stay the course with our investment strategy do not reach for yield Use thoughtful & deliberate portfolio construction Leverage the size of our plan & skill set of our team Invest meaningful amounts with fewer best-in-class managers Downside protection Eye toward current income for core or speed to income for opportunistic strategies Moderate leverage levels 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 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 Separate accounts Multiple strategies with single manager Fee benefits Take a long-term view toward investments and manager Be involved, be nimble and follow through Deliver results Be a leader among Limited Partners relationships 15

16 Performance: Total Real Estate vs. REITs 14.0% NCRS Real Estate FTSE EPRA/NAREIT Developed FTSE EPRA/NAREIT Global 12.0% 10.0% 9.5% 11.2% Investment Strategy High quality assets Strong market locations Meet or exceed benchmarks 12.0% 12.3% 10.4% Time Weighted Net Return 8.0% 6.0% 4.4% 7.3% 6.8% 8.4% 7.6% 7.6% 7.9% 6.2% 7.4% 7.4% 4.0% 2.0% 1.5% 2.9% 2.6% 2.4% 0.0% 1 Year 3 Year 5 Year 7 Year 10 Year 15 Year 20 Year 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. 16

17 Leverage 60% 50% 40% LTV as of Q % Investment Strategy High quality assets Strong market locations Meet or exceed benchmarks 39% 39% 50% 43% 41% 32% 30% 20% 10% 0% Private Core REITs Total Core Opportunistic Value Total Non-Core Total Real Estate Source: Courtland Partners NCRS PMR Q Maintaining prudent levels of leverage and retaining ability to adjust through our Separate Accounts. 17

18 Example Investment Characteristics Strategy Total Gross Return Distribution Income/Appreciation Leverage Core 7-9% 80/20 < 40% Core Plus 9-11% 70/30 < 50% Value-Add (Non-Core) % 30/70 up to 60% Opportunistic (Non-Core) > 16% 10/90 up to 75% 18