Real Estate Update February 20, 2019

Transcription

1 Real Estate Update February 20, 2019

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. Manager Concentration Cost Efficiency Performance Core Non Core Unfunded Commitment Pacing X. Investment Strategy Initiatives XI. Appendix NCRS Investment Approach Total Performance vs. REITs Leverage Property Type Diversification Geographic Diversification Example Investment Characteristics 2

3 Real Estate Team Troy March, CCIM, MBA Portfolio Manager Tinh Phan, Licensed Broker Portfolio Manager 5.5 Years with IMD 17 Years Industry Experience 5 Years with IMD 19 Years Industry Experience Jack Wilson Analyst 1 Year with IMD 3 Years Industry Experience 3

4 Real Estate Market Conditions Overall tough to find value especially through Core acquisition strategies Capital continues to be plentiful, supporting current pricing levels, cap rates expected to remain neutral in 2019 Core income continues to be strong but appreciation will likely be modest Lots of dry powder in debt strategies, terms remain prudent but need to be monitored closely for loosening of lending standards Multifamily Office Retail Industrial Hotel Other Niches Strong job growth helped absorb elevated supply in Demographic trends continue to provide tailwinds and long term drivers of demand remain relevant. Healthy macroeconomic drivers, but fundamentals are decelerating. Supply growth is mostly in check while densification continues to be a drag on demand growth. Class A/A+ and small strip center retail are surviving, and may even present investment opportunity now. B/C malls and big box power centers continue to weaken. Demand continues to outpace record levels of new supply creating strong rent growth, especially in the in fill markets. Build to Core offers the best expected go forward return. Strong economy and healthy consumers continue to hold up demand. Supply and demand roughly in balance. RevPar continues to grow faster than inflation. Becoming more mainstream. Positive spread to primary sectors is tightening. Data centers and Cell Towers are strong; Student, Senior, Medical Office, Self Storage are all stable. 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 10.00% Legislative Cap for RE as % of Total Plan: 10.0% 11.0% Non Core Core % of Plan 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 0.72% Policy Target as % of Total Plan: 8.0% REITs Core 5.76% Non-Core 3.42% 5.04% 0.47% 0.67% 2.28% Private Core Special Situations Value Add 1 Strategy 2 Substrategy 3 4 Opportunistic % of Plan 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 7.9% 6, % 7, % 8, % 8, % 8, % 4.6% 5.1% 5.2% 5.8% 3,096 4,014 4,525 5,076 5, % 4.3% 4.2% 3.4% 3.4% 3,880 3,730 3,714 3,315 3,227 4Q14 4Q15 4Q16 4Q17 4Q18 NCRS data as of 12/31/18 Special Situations Build to Core Strategy Plan MV $ in millions 88,801 86,571 89,104 98,264 94,226 YE 2018 allocation increase is attributable to investment gains and denominator effect 6

7 Real Estate Cash Flow 2.1 Funding Distributions Investment Strategy High quality assets Strong market locations Meet or exceed benchmarks 1.4 $ Billions Commitments ($M): 380 1,205 1,885 1, ,265 1,005 1,211 1,798 1,575 1, NCRS data through 12/31/18 Net realized distributions year-to-date (12/31/18) of ~$475 million. 7

8 Manager Concentration (excludes REITs) Contribution to Return 3 Year 5 Year 7 Year Private Core High Conviction Others Non Core High Conviction Others Investment Strategy High quality assets 7 Strong market locations Meet or exceed benchmarks Market Value ($ Billions) % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% % of RE Portfolio (ex REITS) * High Conviction Managers are identified by the Real Estate Team as General Partners with the highest probability of meeting/exceeding expected fund level returns High Conviction Managers Other Private RE Managers HC % Other % NCRS data through 12/31/18 83% of private market value is with high conviction managers Concentration helps reduce complexity and fees, increases transparency and maximizes returns. 8

9 Cost Efficiency 2.2% 2.1% 2.0% Management Fee Fee % of MV % 12.0% Incentive Fee 5 Year Net Return Percent of Market Value 1.9% 1.8% 1.7% 1.6% 1.5% 1.4% 1.3% 1.2% 1.1% Management Fee ($M) Time Weighted Net Return 9.0% 6.0% 3.0% 0.0% 3.0% Incentive Fee ($M) 1.0% 0.9% % % % 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. 9

10 Performance: Core Real Estate Core Contribution to Return 3 Year Contribution Private Core RE 6.8 REITs 0.7 Total Core 7.5 Major Drivers Vintage PC NorthRock Core PC BPP PC NorthRock II Core Year Contribution Private Core RE 7.0 TIme Weighted Net Return 14.0% Investment Strategy High quality assets 12.0% Strong market locations Meet or exceed benchmarks 10.0% 8.0% 6.0% 4.0% 5.7% 3.7% 7.5% 6.8% 8.7% 8.2% 9.7% 9.4% Core Benchmark* 7.4% 6.6% 6.6% 7.0% 6.7% 5.9% REITs 1.3 Total Core % Major Drivers Vintage PC NorthRock Core PC JP Morgan SPF PC BREP Edens NCRS data through 12/31/18 0.0% 1 Yr 3 Yr 5 Yr 7 Yr 10 Yr 15 Yr 20 Yr * 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. 10

11 Performance: Non Core Real Estate Non Core Contribution to Return 3 Year Contribution Opportunistic 8.1 Value Add 4.4 Total Non Core 12.5 Major Drivers Vintage O NorthCreek O BREP Europe IV V DRA GIF VII Year Contribution Opportunistic 9.0 Value Add 5.4 Total Non Core 14.3 Major Drivers Vintage O NorthCreek O BREP VII V Northrock II Time Weighted Net Return 16.0% 14.3% Investment Strategy 14.0% High 13.3% quality assets 13.2% Non Core Benchmark* Strong market locations 12.5% 12.0% Meet or exceed benchmarks 10.0% 8.8% 9.0% 8.1% 8.0% 7.2% 7.3% 7.3% 7.1% 7.4% 6.0% 4.3% 4.0% 2.1% 2.0% 0.0% 1 Yr 3 Yr 5 Yr 7 Yr 10 Yr 15 Yr 20 Yr NCRS data through 12/31/18 * 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). Non-core portfolio continues to outpace the benchmark by a significant margin due to strong performance in separate accounts and high conviction managers. 11

12 Unfunded Commitment Pacing Contribution Pacing by Vintage Year (excludes REITs) 1,600 1,400 1,200 1, (96% 96%) 2005 (95% 95%) 2006 (82% 82%) Investment Strategy 2007 (91% 91%) 2008 (87% 87%) High quality 2009 assets (N/A N/A) 2010 (88% 88%) 2011 (87% 88%) Strong market 2012 locations (96% 97%) 2013 (83% 84%) 2014 (86% Meet 89%) or exceed 2015 benchmarks (83% 95%) 2016 (74% 95%) 2017 (N/A N/A) 2018 (53% 92%) 2019 (0% 93%) $ in Millions Historical Projection *Vintage (% Called % To be Called) Of the $2.2 billion in unfunded commitments at 12/31/18, we project $850 million will be called by 2021 and approximately $440 million will be held as reserves and is unlikely to be called. 12

13 Investment Strategy Initiatives High Conviction Managers Continue to increase allocation to high conviction managers and reduce manager count More attractive terms (e.g. fee discounts for loyalty and size) Greater control and transparency (e.g. Separate Accounts, custom solutions, founding Limited Partner) Cost Efficiency 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. Property Type Diversification v. Geographic Diversification vi. 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 18.0% TIme Weighted Net Return 13.0% 8.0% 3.0% NCRS Real Estate NCRS RE ex REITs FTSE E/N Developed REIT FTSE E/N Global REIT Investment Strategy High quality assets 11.6% Strong market locations 11.1% 11.1% Meet or exceed 10.8% benchmarks 10.0% 10.1% 9.6% 8.6% 4.4% 3.7% 5.3% 5.4% 8.2% 8.1% 4.5% 4.0% 10.5% 10.4% 8.6% 7.6% 6.8% 6.8% 6.6% 6.7% 2.0% 7.0% 4.7% 5.6% 1 Year 3 Year 5 Year 7 Year 10 Year 15 Year 20 Year NCRS data through 12/31/18 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% 42% Investment Strategy High quality assets Strong market locations Meet or exceed benchmarks 41% 47% 47% 47% 43% 40% 35% 30% 20% 10% 0% Private Core REITs Total Core Opportunistic Value Total Non Core Total Real Estate Source: Courtland Partners NCRS 2Q18 PMR Maintaining prudent levels of leverage and retaining ability to adjust through our Separate Accounts. 17

18 Property Type Diversification 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 36.3% 35.0% Total Real Estate Core NFI ODCE 32.3% 30.1% 26.2% 25.0% 18.6% 17.4% 17.3% 14.4% 11.0% 9.7% 9.0% 7.1% 4.5% 3.6% 2.0% 0.3% Office Residential Retail Industrial Hotel Other 40.0% 35.0% 30.0% 25.0% 32.3% 25.7% 28.8% 30.1% 36.5% 25.0% Total Real Estate Non Core Courtland Non Core 20.0% 15.0% 10.0% 5.0% 14.4% 9.6% 9.9% 9.7% 7.5% 7.8% 8.5% 4.5% 13.6% 11.1% 6.5% 6.6% 5.7% 3.8% 2.4% 0.0% Office Residential Retail Industrial Hotel Mixed Use Other Source: Courtland Partners NCRS 3Q18 PMR 18

19 Geographic Diversification 45.0% 40.0% 35.0% 30.0% 35.9% 38.7% 40.6% 31.4% Total Real Estate Core NFI ODCE 37.6% 31.9% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 18.6% 15.9% 13.4% 11.2% 9.0% 11.6% 3.3% 0.9% 0.0% West East South Midwest Foreign/Global 40.0% 35.0% 35.9% 31.4% Total Real Estate Non Core Courtland Non Core 31.4% 32.4% 30.0% 25.0% 20.0% 15.0% 24.9% 21.7% 19.3% 13.4% 16.8% 16.6% 15.9% 22.9% 10.0% 5.0% 3.3% 7.2% 6.8% 0.0% West East South Midwest Foreign/Global Source: Courtland Partners NCRS 3Q18 PMR 19

20 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% 20