San Joaquin County Employees Retirement Association

Transcription

1 San Joaquin County Employees Retirement Association Courtland Partners, Ltd. Institutional Real Asset Advisor Real Estate Strategy and Proposed Implementation Plan June 2017

2 Table of Contents 1- Real Estate Strategy, Courtland Portfolio Model, and Proposed Implementation Plan 2- Real Estate Securities 3- Real Estate t Market Conditions 1 Courtland Partners, Ltd.

3 Strategy and Implementation 1 Real Estate Strategy, Courtland Portfolio Model, and Proposed Implementation Plan 2 Courtland Partners, Ltd.

4 SJCERA Current Real Estate Exposure Total SJCERA Plan Assets $2.5 billion Real Estate Equity MV, 12/31/16 (mil) % of SJCERA Private - Core, Value and Opportunistic $ % Public - Domestic and International $ % Total $ % Real Estate Debt MV, 12/31/16 (mil) % of SJCERA Doubleline (Mortgage Backed Securities) $ % Over 20% of the SJCERA Plan is invested in real estate related assets PRIMA (Commercial Mortgages) $ % Mesa West Funds (Leveraged Com. Mortgages) $ % Total $ % Real Estate Equity Estimated Unfunded Commitments = $58 mil. Includes $30 million GAP VIII commitment Distributions tions are expected to increase: vintage funds Assets ready for disposition Real Estate Debt Interest income is being distributed as earned New $50 million commitment to Mesa West IV will increase exposure 3 Courtland Partners, Ltd.

5 SJCERA Private Real Estate Portfolio Existing Closed-End Mn Managers - Potential lfor Investment ntinn Next tfund 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 Sarofim No N/A Greenfield No N/A Miller Global Yes Unlikely Walton Street No N/A 4 Courtland Partners, Ltd.

6 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 opportunistic exposure Public Real Estate: Monitor and consider rebalancing where appropriate No activity in 2016 None 5 Courtland Partners, Ltd.

7 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 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 6 Courtland Partners, Ltd.

8 Courtland Portfolio Model Courtland sent out questionnaires to each manager requesting portfolio data forecasted over the periods based on in place business plans. Expected capital calls Expected capital distributions ib ti Property type diversification Geographic diversification Courtland compiled this data into afinancial i 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). 7 Courtland Partners, Ltd.

9 SJCERA Historical Capital Contributions Gross Capital Contributions Since Inception $ Millions Source: Courtland Partners For private and public real estate equity investments only 8 Courtland Partners, Ltd.

10 Portfolio Model- Allocation Exposures Portfolio With New 2017 and 2018 Allocations 70% 60% 50% 40% 30% 20% 10% 0% 48% w. New 61% 47% 33% 28% 22% 24% 17% 20% Core Value Opportunistic 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 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 allocations are made the exposure is projected to be 11% (2017), 11% (2018), 12% (2019), and 12% (2020). 9 Courtland Partners, Ltd.

11 2017 and 2018 Proposed Implementation Plan Long-Term Target 2017 and 2018 Objectives Core 40% Continue to monitor domestic REITs. Value 40% Consider opportunities with a strong current income component and long-term return potential. Potential New Allocations None Up to $90 million Managers None Up to three managers Opportunistic 20% Consider unique opportunities Up to $30 million Up to one manager that expect to capitalize on market opportunity. REITs 0%-30% Standard monitoring of allocation for potential modifications. International 0%-20% Consider funds with Ttl Total international exposure. Consider moving some of the domestic REIT position into international REIT. $0 N/A Part of value and opportunistic 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 managers 10 Courtland Partners, Ltd.

12 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.

13 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.

14 Portfolio Model - Public/Private Exposure Portfolio With New 2017 and 2018 Allocations Public market values held steady throughout the modeling process 13 Courtland Partners, Ltd.

15 U.S. Investment 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. 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 based retail as coming to market in defensive strategy. select cities. High street retail pricing has increased due to favorable urban lifestyle demographics; be selective due to current pricing. Selectively consider class-a malls given current values; historically have provided a consistent income return resilient to market downturns. coastal markets has rebounded in pricing; be selective given current valuations. Fundamentals continue to be strong as companies build out supply chain management systems. Focus on infill locations, be selective in NY/NJ and Southern California due to pricing. Monitor NOI growth and new supply. Selectively invest at steep discounts by focusing on properties with significant capital needs (e.g., leasing costs or physical improvements) that cannot be met under the existing capital structure. Class B assets in gateway markets; Class A assets in other markets. class A assets has been pushed to record highs. Focus on urban infill and development constrained markets. Selectively develop if yield to cost reasonably exceeds current market cap rates. Focus on markets that are not likely to be negatively affected by new supply. Monitor NOI growth and new supply. portions of capital structure which do not provide adequate control or protection provisions. Exploit inefficiencies in capital markets by providing debt on transitional assets. Exploit inefficiencies in capital markets by providing liquidity to distressed capital structures. Evaluate use of leverage by debt managers. continues to remain a fragmented asset type with many inefficiencies. Senior housing/medical office to take advantage of demographics (aging population, need for assisted living facilities). Student housing: new products provide better amenities demanded by incoming students. 14 Courtland Partners, Ltd.

16 Core Recent Client Recommendations Harrison Street Core Fund, Mesa West Core Lending Fund, Blackstone Property Partners (Core Plus), USAA Eagle Fund, Brookfield Premier Real Estate Partners (Core Plus) Value 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 *These funds represent a cross section of client commitments over the past six to nine months and may not be currently available. 15 Courtland Partners, Ltd.

17 Real Estate Securities 2 Real Estate Securities 16 Courtland Partners, Ltd.

18 Courtland Partners REIT Score REIT Metrics Market Indicator is currently located in Consider Adding territory Continue to monitor for potential modifications 17 Courtland Partners, Ltd.

19 U.S. REIT Capitalization Rate 18 Courtland Partners, Ltd.

20 Global REIT Dividend Yield 19 Courtland Partners, Ltd.

21 Global REIT Premium/Discount to NAV 20 Courtland Partners, Ltd.

22 Global REIT FFO Multiple 21 Courtland Partners, Ltd.

23 Real Estate Market Conditions 3 - Real Estate Market Conditions 22 Courtland Partners, Ltd.

24 Cap Rates Compressed Slightly (-8 bps) Treasuries came off of their low, bi bringingi the caprate spread to 2.11% 23 Courtland Partners, Ltd.

25 Historically Low Cap Rates NPI, Industrial, Office, and Retail cap rates are at all-time lows 24 Courtland Partners, Ltd.

26 NOI Growth is Still Above Average Retail is lagging in NOI growth 25 Courtland Partners, Ltd.

27 Both NPI and Industrial vacancy are at 10 year lows Vacancies Continue to Fall 26 Courtland Partners, Ltd.

28 Supply and Demand by Property Type Note: REIS reports for the Industrial sector on an annual basis. 27 Courtland Partners, Ltd.

29 Record Level of Dry Powder 28 Courtland Partners, Ltd.

30 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 29 Courtland Partners, Ltd.

31 Super Regional Malls Have Performed Very Well 30 Courtland Partners, Ltd.

32 Current Valuations are a Key Issue Investor Views on the Key Issues Facing Real Estate in Courtland Partners, Ltd.