2016 Real Estate Asset Class Review

Transcription

1 2016 Real Estate Asset Class Review June 23-24, 2016 Tom Masthay, Director Real Assets Eddie Schultz, Investment Analyst Rachel Cleak, Investment Analyst

2 Agenda I. Executive Summary II. Performance & Implementation Review III. IPS Compliance & Portfolio Review IV. Real Estate Market Update V. Milestones & Initiatives VI. Appendix: Manager Scorecards 2

3 I. Executive Summary

4 Real Estate Asset Class Objectives IPS Stated Objective for the Real Estate Portfolio To enhance total return and provide diversification to the overall investment portfolio. A primary goal of the annual review presentation is to discuss the real estate portfolio and market conditions relative to IPS stated performance goals: Long term performance objective is a real rate of return (adjusted for inflation) of five percent (5%) net of investment management fees. The market update addresses the nature of this objective. The real estate portfolio is expected to generate returns, net of all fees and expenses, in excess of their respective indices, over rolling five year investment time horizons. The performance review section analyzes this objective and associated benchmark indices. 4

5 Comprehensive Annual Review Process Why do we conduct annual reviews? Per the TMRS IPS, comprehensive reviews are to be conducted and documented at least annually. The goal is to formally review managers performance, current investment strategy or style relative to that which was communicated, and other issues related to the managers organization, personnel, or investment philosophy. The annual review process is part of the IPS manager retention framework. The annual review & ongoing monitoring processes may include but are not limited to: SEC Form ADV reviews SSAE16 and other operational audit reviews Compliance Certifications Detailed Performance Analyses Manager Meetings Quarterly Monitoring Documentation Manager Annual Meetings Limited Partnership Advisory Committees Strategic Portfolio Reviews Meetings with comparable managers Market Research Attending Conferences The Annual Review process holds TMRS accountable for being self-critical of its portfolio management process in order to preempt manager specific, strategic, or other potential problems. 5

6 Real Estate Timeline Review ( ) Q1-Q Consultant RFP process completed and contract with Courtland Partners signed. Q Board approves 8 new real estate funds for approximately $800 million in new commitments. Q December 2015 Board Meeting: Board approves 2016 Real Estate Search processes in an amount up to $600 million in new commitments. Q1-Q Board approves 3 new real estate funds totaling $475 million in new commitments to bring the portfolio to approximately 100% implemented. A comprehensive discussion of the timeline implementation of the real estate portfolio is provided for in the following section. 6

7 Real Estate Portfolio has Reached Full Allocation Blue-scale: Core Mandates Purple-scale: Value-Add Orange-scale: Opportunistic Manager Selection Priorities Seeking top performing managers to form beneficial partnerships for the TMRS real estate portfolio. The number of partnerships is being watched closely so monitoring and maintenance does not become an undue cost. Sizing of manager relationships remains critical, based upon portfolio needs, manager capabilities & opportunity set. This pie-chart is built off of through the remainder of the presentation to assess portfolio risk and implementation progress from a data-oriented perspective. 7

8 Market Value & Unfunded Commitment Summary TMRS Real Estate portfolio on a market value basis is approximately 6% of the total portfolio today. The following section takes a more detailed look at investment pacing and how the time dimension is incorporated into decision making. *Source: Courtland Partners *As of Q the total number of real estate investment vehicles is 27 (with the addition of DivcoWest V, Blackstone PP, Kildare EP II, Rubenstein PF III, and H/2 Core debt) and updated unfunded commitments are $1,641,665. 8

9 II. Performance & Implementation Review Performance Review as of December 31, 2015 *Unless otherwise noted in this section, performance presentations do not include Harrison Street Securities, TMRS only public securities mandate in the real estate programs history. This mandate was terminated by the Board at the July 29-30, 2015 Board meeting and subsequently closed out of in August 2015.

10 Remember the J-Curve! The J-curve exists in large part due to fees and expenses being a high percentage of capital deployed early in a fund life. Conservative early marks being applied to portfolio investments can also contribute. $150 J-Curve Effect 50% $100 $50 Outlay Inflows IRRs 25% Cash Flows $0 ($50) 0% IRRs ($100) J-Curve representation is that of a private equity fund. -25% ($150) Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10-50% Think of the J-Curve not just in terms of performance, but diversification as well. Portfolios early in their lives tend to be very concentrated as few deals have been completed. Note 1: The Diversification J-Curve is more relevant to early stages of investing in a new product core fund. Capital is drawn sequentially from fund investors early investors fund the first deals and as more deals are added more investors are added to the pools. Diversification thus comes later. 10

11 Sector/Strategy Returns by Manager *Only managers with capital deployed as of 12/31/15 are included in this table; Source: Courtland Partners Returns can vary greatly depending on the stage of portfolio development a fund is in. This concept can apply to portfolios of funds as well. 11

12 Income vs. Appreciation Analysis 20.00% Performance Attribution: Income vs. Appreciation (by gross returns) 18.00% 16.00% 14.00% 12.00% 10.00% 11.90% 9.80% 12.09% Appreciation 8.00% 7.90% Income 6.00% Source: Private Edge 4.00% 2.00% 4.40% 4.30% 5.30% 5.28% 0.00% TMRS portfolio returns can be broken down into income and appreciation return streams. The market has generally seen income come down as cap rates have compressed. Note 1:Private Edge data was used for this analysis in lieu of Courtland Partners due to the explicit itemization of income figures into templates utilized by Private Edge and therefore the more direct accounting of income vs. appreciation. Courtland Partners data, shows opposite directionality of income growth noting income of 4.70% in 2015 and a 3 year aggregate income of 5.20%. The conclusion to draw is that income has been in the % range % since the inception of the portfolio. 12

13 Portfolio Cash Flow Activity & Evolution 500,000, ,000,000 Annual Aggregate Cash Flow & Performance Attribution 391,034, ,353, ,000, ,000, ,000,000 - (100,000,000) 97,000, ,677,962 (6,028,342) 259,013,948 (50,278,024) (102,363,822) Net Inflows means dollars going into a fund vehicle, i.e. TMRS sends money to a fund. Net Outflows means dollars coming out of a fund, i.e. TMRS receives money from a fund. (200,000,000) (173,137,461) (300,000,000) Net Inflows Net Cash Outflows Net Income & Appreciation As time has progressed, income and appreciation have picked up commensurately with cash flow activity. 13

14 Analyzing Portfolio Implementation Understanding the current portfolio, its performance, and expectations portfolio requires understanding its history. Key Metrics of Analysis Active Commitments Real estate commitments approved by the board and currently a component of TMRS real estate portfolio. Adjusted Commitments* Not all commitments are created equal. A core open-end equity fund and an opportunistic fund have very different evolutions in fund market values. In order to accommodate this at any single point in time, a conversion factor is applied to closed-end funds. The adjustment translates the concept of a commitment to an expected market value which is a more meaningful data point when managing a portfolio. Effective Vintage Commitments TMRS has approved many follow-on commitments to previously approved funds. This figure consolidates follow-ons into the initial approval year. EVC is a decision assessment tool used to help understand the higher order effects of the initial decision to invest in a manager by allocating portfolio implementation progress to that period. This figure helps assess IPS compliance by being an input into the metric noted below. Vintage Year Contribution VYC assesses today s portfolio and the role various effective vintage commitments have on it. The IPS limits vintage year exposure concentrations this metric is a more meaningful way to assess TMRS portfolio than commitments by themselves. *Greater detail on the Adjusted Commitment methodology is provided in Board real estate recommendation memorandums from 2015 & In summary, the adjustment removes explicit visual representation of time dimensionality from a pacing model for simplification of presentation. 14

15 2011 Real Estate Implementation Summary 82% 2011 Real Estate Investment Activity (by Adj. Commitments) 5% 5% 3% 3% 2% Stockbridge SmartMarkets (2011) Harrison Street Core Fund (2011) Greenfield Acquisition Partners VI (2011) Miller Global VII (2011) Walton Street Equity VII (2011) 2011 Unallocated 2011 Investments Stockbridge Smart Markets ($100mm) Harrison St. Core ($100mm) Greenfield AP VI ($75mm) Miller Global VII ($75mm) Walton St. REF VII ($50mm) $400mm Active Commitments Implementation Progress Approved Pacing Target: $500mm Total Approved Commitments: $500mm Total Adj. Commitments: $330mm Effective Vintage Commitments: $496mm Vintage Yr. Contribution (%): 27% TMRS focused on pursuing differentiated core exposures and fee discounts by founding new investment products. Non-Core program focused on smaller funds with diversified mandates. Note 1: Stockbridge ($50mm), Harrison St. ($50mm), and Walton St. ($25mm) all had mandates increased through 2012 approval process. Stockbridge ($50mm) was additionally increased in the 2013 approval process. Note 2: H/2 Core Debt was initially approved in an amount of $100mm but the contract was not sucessfully executed. H/2 Core Debt was re-approved in 2015, subsequently underwritten, approved, and contract terms agreed to and executed. 15

16 2012 Real Estate Implementation Summary 71% 2012 Real Estate Investment Activity (by Adj. Commitments) 16% 6% 4% 1% 2% 2011 Commitments 2012 Follow On Commitments Stockbridge VA Fund I (2012) Rubenstein PF II (2012) Abacus Multi-Family Fund II (2012) 2012 Unallocated 2012 Investments Stockbridge VA Fund I ($75mm) Rubenstein PF II ($50mm) Abacus MF II ($50mm) Follow On-Commitments ($125mm) $300mm Active Commitments Implementation Progress Approved Pacing Target: $600mm Approved Commitments: $500mm Total Adj. Commitments: $256mm Effective Vintage Commitments: $156mm Vintage Yr. Contribution (%): 7% TMRS focused on leveraging existing relationships and expanded its focus into smaller, sector focused non-core funds. Note 1: Stockbridge Smart Markets ($50mm), Harrison St. ($50mm), and Walton St. ($25mm) all had mandates increased through 2012 approval process. Smart Markets ($50m) was additionally increased in 2013 approval process. Rubenstein PF II ($25mm) has its commitment increased in the 2014 approval process. Note 2: Harrison St. Securities was approved for $100mm in 2012 and a follow on of $50mm in HSS was terminated for poor performance, organizational concerns and strategic incongruence in Note 3: Mesa West Core Debt was approved in an amount of $100mm but the contract was not successfully executed. 16

17 2013 Real Estate Implementation Summary 2013 Real Estate Investment Activity (by Adj. Commitments) 23% 2011 Commitments 2012 Commitments 2013 Follow On Commitments Invesco US Core Income Fund (2013) 2013 Investments Invesco Core Income Fund ($100mm) Abacus Core Income Fund I ($75mm) Greenfield AP VII ($75mm) Stockbridge VA II ($75mm) Lubert-Adler VII ($75mm) Follow On-Commitments ($50mm) $450mm Active Commitments 55% 2% 7% 2% 5% 2% 2% 2% Abacus CIF I (2013) Greenfield Acquisition Partners VII (2013) Stockbridge VA Fund II (2013) Lubert-Adler Fund VII (2013) Unallocated Implementation Progress Approved Pacing Target: $500mm Approved Commitments: $500mm Total Adj. Commitments: $345mm Effective Vintage Commitments: $377mm Vintage Yr. Contribution (%): 16% TMRS continued its focus on leveraging existing relationships and founding differentiated core strategies. Note 1: Stockbridge Smart Markets ($50m) was increased in 2013 approval process. Greenfield VII ($25mm), Lubert-Adler ($25mm), and Invesco ($50mm) had allocation increases approved in Note 2: Harrison St. Securities ($50mm) was increased in HSS was terminated in Note 3: Abacus Core Income fund is closed-end fund structure. All other core funds approved to date were open end fund structures. 17

18 2014 Real Estate Implementation Summary 42% 2% 2% 2014 Real Estate Investment Activity (by Adj. Commitments) 3% 4% 25% 16% 6% 2011 Commitments 2012 Commitments 2013 Commitments 2014 Follow On Commitments Walton Street Debt I (2014) Abacus Multi-Family Fund III (2014) Moorfield Real Estate Fund III (2014) Unallocated 2014 Investments Walton St. Debt Fund I ($100mm) Abacus Multi-Family Fund III ($75mm) Moorefield Fund III ( 50mm) Follow On-Commitments ($125mm) ~$375mm Active Commitments Implementation Progress Approved Pacing Target: $600mm Approved Commitments: $475mm Total Adj. Commitments: $259mm Effective Vintage Commitments: $161mm Vintage Yr. Contribution (%): 7% TMRS continued its focus on leveraging existing relationships and initiated an international program through a UK-only fund. Note 1: Rubenstein II ($25mm), Greenfield VII ($25mm), Lubert-Adler ($25mm), and Invesco ($50mm) had allocation increases approved in Note 2: Westbrook X ($100mm) was approved but contract was not successfully executed. Note 3: Walton St. Debt Fund is closed-end fund structure. It and Abacus CIF I are the only closed-end funds classified as core in TMRS portfolio. Note 4: $/GBP exchange rate was approximately $1.46/GBP as of June 1,

19 2015 Real Estate Implementation Summary 1% 1% 3% 2% 2% 3% 5% 2015 Real Estate Investment Activity (by Adj. Commitments) 11% 14% 7% 17% 27% 7% 2011 Commitments 2012 Commitments 2013 Commitments 2014 Commitments USAA Eagle Fund (2015) H/2 Credit Partners (2015) H/2 Core Debt (2015) Rubenstein PF III (2015) Torchlight DOF V (2015) Alcion Ventures III (2015) TPG Realty Fund II (2015) Tristan EPISO IV (2015) Unallocated 2015 Investments USAA Eagle Fund ($250mm) H/2 Credit Partners ($125mm) H/2 Core Debt ($75mm) Rubenstein PF III ($75mm) Torchlight DOF V ($75mm) Alcion REF III ($50mm) TPG RE II ($100mm) Tristan EPISO IV ( 30mm) ~$800mm Active Commitments Implementation Progress Approved Pacing Target: $600/$800mm Approved Commitments: $800mm Total Adj. Commitments: $667mm Effective Vintage Commitments: $667mm Vintage Yr. Contribution (%): 28% TMRS pursued 4 primary themes: 1) Move up the US capital structure; 2) gain major market exposure at price conscious entry points; 3) get statistical exposure/beta to European real estate; 4) pursue structures that enable TMRS to hold real estate through a larger part of value cycle. Note 1: HSS was terminated. Account balance at termination was approximately $190mm. Note 2: $/Euro exchange rate was approximately $1.11/Euro as of June 1, Note 3: Original pacing target was $600mm. It was approved to be increased to $800mm. Net commitments after accounting for the HSS termination were approximately $600mm. 19

20 2016 Real Estate Implementation Summary 2016 Real Estate Investment Activity (by Adj. Commitments) 12% 2% 0% 3% 26% 2011 Commitments 2012 Commitments 2013 Commitments 2016 Investments Blackstone Property Partners ($300mm) Kildare European Partners II ($100mm) DivcoWest Fund V ($75mm) $475mm Active Commitments 27% 17% 6% 2014 Commitments 2015 Commitments Blackstone Property Partners (2016) DivcoWest V (2016) Kildare EP II (2016) Unallocated Implementation Progress Approved Pacing Target: $600mm Approved Commitments: $475mm Total Adj. Commitments: $414mm Effective Vintage Commitments: $414mm Vintage Yr. Contribution (%): 18% 7% TMRS builds on 2015 themes, focusing efforts on the balance of finding strategies that enable TMRS to scale its portfolio up to full allocation and may be less pro-cyclical due to manager skill and/or opportunity set. Note 1: Plan Balance as of April 30, 2016 is approximately $24.1 billion. Note 2: It was communicated at the May 2016 Board meeting that the full $600 million in commitments may not be pursued due to pacing model considerations. The pacing model is discussed later in this presentation. 20

21 Manager & Investment Vehicle Concentration Compliance Blue-scale: Core Mandates Purple-scale: Value-Add Orange-scale: Opportunistic 21

22 Real Estate Pacing Model What 100% Allocated Means Pacing Model: Expected Real Estate Market Value (By Dollar Value [left axis]; by % of Total Portfolio [right axis]) 700,000, % 600,000, % Net Core Commitments (left axis) 500,000, % Non-Core Commitments (left axis)) 400,000, ,000, % Stratetic Target for Real Estate (right axis) Assumed Return 75th Percentile (right axis) 200,000, % Assumed Return 6.75% Deterministic (right axis) Assumed Return 25th Percentile (right axis) 100,000, % 6.00% *Assumed total portfolio returns based on RVK 2015 asset allocation model inputs. Pacing models incorporate detailed fund by fund expectations for capital activity and market values this is the foundation of sizing decisions. TMRS faces a range of outcomes regarding the real estate percentage of the total portfolio due to the implementation complexities of the asset class. TMRS may or may not allocate more real estate capital during Note 1: This chart was first provided in the March 2016 Real Estate recommendation presentation and memorandum. 22

23 Harrison Street Securities - History Manager Selection & Implementation On December 6, 2012, the TMRS board approved an initial $100 million allocation to Harrison Street Securities. In January 2013 the account was funded. The first full month of account performance was February, A $50 million add-on commitment was approved in September of TMRS/HSS Separate Account REIT Mandate Performance Period Ending HSS LTM Benchmark LTM Difference 12/31/ % 28.0% -5.7% 3/31/ % 22.7% -5.2% Period Ending HSS ITD Benchmark ITD Difference 12/31/ % 14.8% -3.2% 3/31/ % 13.7% -3.2% a) Benchmark is the FTSE NAREIT Equity Index REITS HSS was terminated by approval of the Board on July 30, 2015 for reasons of poor performance, organizational concerns and strategic fit. The positions with the manager were fully exited by August 14, Note 1: Performance chart is as presented at the July 2015 Board Meeting when termination was approved. 23

24 Performance & Implementation Conclusions TMRS real estate portfolio performance has been in line with benchmark performance. TMRS real estate portfolio is higher return seeking than the benchmark, albeit the early implementation phase has faced J-curve effects. A initiative is to take a deeper look at benchmarking. Manager selections originating in 2011 have had the largest impact on performance to date given the core nature of those investments and 2016 allocations have added significant core allocations to the portfolio. A initiative is to consider rebalancing initiatives within the core portfolio. Manager selections from have focused on appropriate scaling and efficiency of capital deployment and reaching beyond TMRS existing manager base for new mandates. As a result, TMRS has reached 100% allocation within the real estate portfolio. Reductions in net capital activity are expected going forward. Continued net new capital commitments to noncore real estate will be required due to the nature of fund structures. 24

25 III. IPS Compliance & Portfolio Review

26 Sector/ Strategy Compliance % 90.00% 10% Real Estate Portfolio Composition (by Market Value / Projected MV) 15% 19% 20% 80.00% 70.00% 25% 21% 21% 20% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 65% 64% 61% 60% Current 2016E 2017E 2018E Opportunistic % Value Add % Core The current Real Estate portfolio is in compliance with IPS guidelines pertaining to sector/strategy. Core must be % of the portfolio. Value-Add may be no more than 50% of the portfolio. Opportunistic strategies may be no more than 25% of the portfolio. 26

27 Geographic Compliance *Source: Courtland Partners TMRS is within Geographic Compliance guidelines. The IPS requires professional judgment in the assessment of geographic diversification. Recent mandate approvals are likely to increase East and West Coast exposure. Additionally, no more than 20% of the portfolio may be invested internationally. 27

28 Property Type Compliance *Source: Courtland Partners TMRS is within Property Type compliance guidelines. No more than 40% of the portfolio may be invested in Office, 35% in multi-family, 35% in Retail, 35% in industrial, and 30% in other property types. 28

29 Manager & Investment Vehicle Concentration Compliance TMRS is in compliance with its investment manager and investment product limitations requirements. No more than 20% of the Real Estate portfolio may be invested in any one manager. No more than 15% of the Real Estate portfolio may be invested in any one product of a manager. Blue-scale: Core Mandates Purple-scale: Value-Add Orange-scale: Opportunistic 29

30 Leverage Compliance Investment Leverage Review (for period ended December 31,2016) Leverage Leverage Investment Strategy Market Value (counting Credit Facilities) (not counting Credit Facilities) Harrison Street Core Property Core $ 205,281, % 26.52% Stockbridge Smart Markets Core $ 285,409, % 31.73% USAA Eagle REF Core $ 99,792, % 37.80% Invesco US Income Core $ 169,128, % 41.26% Abacus Core Income I Core $ 54,946, % 47.36% Walton Street RE Debt* Core $ 19,624, % 64.70% H2 Credit Partners* Core $ 123,093, % 56.20% Stockbridge Value I Value-Add $ 50,338, % 45.82% Alcion REPF III Value-Add $ 3,670, % 52.27% Torchlight Debt Opportunity V Value-Add $ 10,739, % 53.82% Rubenstein Properties II Value-Add $ 29,940, % 54.81% Abacus Multi-Family III Value-Add $ 18,257, % 56.77% Miller Global VII Value-Add $ 44,776, % 57.14% Greenfield Acquisition VI Value-Add $ 57,282, % 60.20% Stockbridge Value II Value-Add $ 40,784, % 60.68% Abacus Multi-Family II Value-Add $ 40,281, % 64.08% Greenfield Acquisition VII Value-Add $ 66,179, % 67.80% Moorfield REF III Opportunistic $ 17,249, % 33.70% WaltonStreet RE VII Opportunistic $ 69,632, % 55.81% Lubert-Adler VII Opportunistic $ 38,182, % 67.95% Tristan European PISO IV Opportunistic $ 1,645, % 68.58% TPG Real Estate Partners II Opportunistic $ 12,585, % 68.58% *Debt fund or inclusive of core debt funds Guideline Leverage Limit Core Portfolio Leverage* < 50% 40.13% 37.65% Value Add Portfolio Leverage < 70% 60.69% 58.81% Opportunistic Portfolio Leverage < 80% 63.87% 57.71% Aggregate Portfolio Leverage 65% IPS Leverage Limit 47.50% 44.82% Total Portfolio Values Total $ 1,458,824, Core $ 957,277, VA $ 362,250, Opp $ 139,296, TMRS is within leverage guidelines. The TMRS IPS limits total portfolio leverage to 65%. 30

31 Additional IPS Compliance Items Vintage Year Concentration TMRS has not breached the 30% concentration limit in any calendar year. Public Security Limits TMRS is within the public security limitations of the IPS. TMRS currently holds no separately managed accounts of public securities. Commercial Mortgage Limitation TMRS is in compliance of the commercial mortgage limitation. TMRS holds no commercial mortgages in separately managed accounts. Co-Investment TMRS is within co-investment guidelines. TMRS has no coinvestments. Valuation Policy TMRS managers are in compliance with IPS valuation policy requirements. 31

32 IV. Real Estate Market Update

33 Core US Real Estate Market Performance NCREIF-ODCE Gross Returns 4.50% 4.00% 3.50% 3.00% 2.50% 2.82% 2.58% 2.77% 2.35% 2.68% 3.86% 3.56% 3.17% 2.52% 2.93% 3.24% 3.26% 3.39% 3.82% 3.68% 3.34% 2.18% 2.12% 2.00% 1.50% 1.00% 0.50% 0.00% Income Appreciation Total Return Core real estate returns since the inception of the TMRS real estate program have been driven by appreciation of assets post Global Financial Crisis (GFC), in contrast to historical core returns that are predominantly from income. * Data Source: NCREIF 33

34 US Real Estate Valuation Moody s / RCA Commercial Property Price Indices Major Market Index National All Property Index Non-Major Market Index Commercial property valuations have reached historical peak levels but performance across different metro areas has varied considerably. Recent indications show a pull back in the higher performing markets. * Data Source: Bloomberg Monthly Index Data (12/31/2000 3/31/2016) 34

35 US Real Estate Fundamentals Growth in Market Revenue per Available Foot (M-RevPAF) 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% % -6.00% -8.00% % % Occupancy and rental growth are healthy with recent news being mostly positive, but the rate of growth has decelerated. * Data Source: Green Street Advisors (top 30 US markets, 4 major sectors on equal weighted basis) 35

36 US Real Estate Supply & Demand Impact of Changing US Consumer % 14.0% /1/99 8/1/00 6/1/01 4/1/02 2/1/03 12/1/03 10/1/04 8/1/05 6/1/06 4/1/07 2/1/08 12/1/08 10/1/09 8/1/10 6/1/11 4/1/12 2/1/13 12/1/13 10/1/14 8/1/ % 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 1/1/80 10/1/81 7/1/83 4/1/85 1/1/87 10/1/88 7/1/90 4/1/92 1/1/94 10/1/95 7/1/97 4/1/99 1/1/01 10/1/02 7/1/04 4/1/06 1/1/08 10/1/09 7/1/11 4/1/13 1/1/ % 12.0% 11.0% 10.0% 9.0% 8.0% -0.1 E-Commerce % of Retail Total Retail Sales Growth Personal Savings Rate % of DPI (Left Axis) Household Debt Service Payment % of DPI (Right Axis) Post GFC the US consumer has maintained its central role in US & global economy but has altered its consumption and spending patterns forcing real estate supply to adapt in a short amount of time. Data Source: Green Street Advisors, Bureau of Economic Analysis Note: DPI Disposable Personal Income 36

37 European Real Estate Market Overview Prime Yields vs. Respective 10-Yr The European real estate market is really a conglomeration of many separate markets with different exposures and discrete economic cycles. 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Amsterdam Berlin London Munich Paris Stockholm Warsaw Office Retail Industrial 10-Yr Economic indicators are more positive than negative across the region but political uncertainty surrounding the UK s potential exit from the EU has stalled investment and capex activity. * Data Source: Cushman & Wakefield, Bloomberg 37

38 V. Milestones & Initiatives

39 Milestones & Metrics Key Real Asset Milestones & Metrics 17 new investment vehicles have been approved (11 Real Estate, 6 Real Return) in the last 12 months. 16 have close on legal docs to date. The portfolios had 17 total vehicles prior. $2.4 billion of new investment mandates approved ($1.3B Real Estate, $1.1B Real Return) in the last 12 months. In 12 months, Real Asset (RA) team took 450 manager meetings: 283 In-Person meetings in Austin; 38 domestic travel meetings; 34 international travel meetings; 95 manager presentation calls. Real Estate progressed from approximately 55% allocated to 100% allocated in trailing 12 months. Real Return progressed from approximately 41% allocated to 84% allocated in trailing12 months. 1-year estimated fee savings of $3.1 million on managers approved in last 12 months. The RA team now serves on 23 Limited Partnership Advisory Committees. Analyst Eddie Schultz, Esq., earned the CFA Designation in fall of The RA team currently consists of three individuals. Rachel Cleak has focused on RA as a third team member since joining in January She commenced the CFA program this June. Note 1: Portfolio progress presented as percentage allocated are based on numbers previously presented to the Board. 39

40 Real Assets An Incredibly Productive Year TMRS Portfolio Activity Statistics (compared by multiple of avg. comparable plan) 11.3 Among 17 Public Pension Plan Respondents managing real estate & real assets TMRS: Ranked #1 in total number of fund commitments Ranked #2 in total dollars committed (#1 was $100B+ plan) - Ranked #1 in total funds committed per investment professional employed - Investment Professionals Funds Managed per Professional 2015 # of Commitments 2015 $ of Commitments 2015 # of Commitments per Professional 2015 $ of Commitments per Professional - Ranked #1 in total dollars committed per professional - Average Respondent Plan Size: $50 billion - Median Respondent Plan Size: $27 billion - Avg Commitment Level: $550 million TMRS: $2.4 billion - 16 of 17 plans more active in 2015 than 3 yr. avg. - Avg. Plan has more mature portfolios than TMRS - Average 2015 # of Commitments: 6.3 TMRS: 17 *TMRS Statistics prepared on Last Twelve Months basis (July 2015 June 2016) 40

41 Real Asset Goals Real Estate & Real Return Initiatives Get Better TMRS Vision Statement: TMRS will be the preferred provider of competitive retirement benefits and excellent customer service by improving plan funding, investment return, communication, and education. Allocate greater time resources to manager, market and portfolio research. Enhance operational & reporting functionalities. Initiate benchmark review project for real estate, and benchmark enhancement study for real return. Comprehensively re-evaluate core real estate portfolio and consider rebalancing initiatives. Research Real Estate co-investment opportunities more extensively. Progress Real Return Portfolio to 100% Allocated: i) add additional public markets real return strategies to fully fund; ii) continue to diversify private real return portfolio. Research and pursue Real Return co-invest opportunities as deals with strategic fit are sourced. 41

42 VI Appendix: Manager Scorecards

43 Annual Manager Report Card for: Abacus (Core & Value-Add Platforms) Assessment Area Grade Update & Comments Organization People Philosophy/Strategy/Process Portfolio(s) Performance Compliance Guideline Changes Risk Management Operations Client Service Other Abacus is generally meeting the expectations of TMRS in all material respects. Abacus Value Fund II has had very strong performance, the Core fund has performed as expected and Value Fund III has entered the J-Curve portion of the fund life resulting in lower performance numbers, but this is anticipated for a fund of this nature. Compliant The firm has had trouble raising additional capital in the core platform for the reasons TMRS Investment Staff suggested would be the primary issue with the vehicle structure that it is a closed-end vehicle. TMRS has been in contact with the other investors and are actively working toward a long term solution. Despite trouble raising capital, the investments within the fund are performing as anticipated. N/A Excellent In Good Standing Fair (working with manager) Unsatisfactory (remedial action being taken) Comprehensive Review 43

44 Annual Manager Report Card for: Alcion Assessment Area Grade Update & Comments Organization People Philosophy/Strategy/Process Portfolio(s) Performance Compliance Guideline Changes Risk Management Operations Client Service Other Alcion is meeting the expectations of TMRS in all material respects. Alcion is too early in the fund life for performance to be meaningful. Compliant N/A Excellent In Good Standing Fair (working with manager) Unsatisfactory (remedial action being taken) Comprehensive Review 44

45 Annual Manager Report Card for: Greenfield Assessment Area Grade Update & Comments Organization People Philosophy/Strategy/Process Portfolio(s) Performance Compliance Guideline Changes Risk Management Operations Client Service Other Greenfield is meeting the expectations of TMRS in all material respects. The firm is now fundraising for Greenfield VIII with a first close expected by year end. Greenfield has had satisfactory performance. Compliant N/A Excellent In Good Standing Fair (working with manager) Unsatisfactory (remedial action being taken) Comprehensive Review 45

46 Annual Manager Report Card for: H/2 Assessment Area Grade Update & Comments Organization People Philosophy/Strategy/Process Portfolio(s) Performance Compliance Guideline Changes Risk Management Operations Client Service Other H/2 is meeting the expectations of TMRS in all material respects. H/2 is early in its fund life and thus is too early to assess fund performance on a rolling basis. Compliant N/A Excellent In Good Standing Fair (working with manager) Unsatisfactory (remedial action being taken) Comprehensive Review 46

47 Annual Manager Report Card for: Harrison Street (Core Platform) Assessment Area Grade Update & Comments Organization People Philosophy/Strategy/Process Portfolio(s) Performance Compliance Guideline Changes Risk Management Operations Client Service Other Harrison Street is meeting the expectations of TMRS in all material respects. Harrison Street has had satisfactory performance. Compliant N/A Excellent In Good Standing Fair (working with manager) Unsatisfactory (remedial action being taken) Comprehensive Review 47

48 Annual Manager Report Card for: Invesco Assessment Area Grade Update & Comments Organization People Philosophy/Strategy/Process Portfolio(s) Performance Compliance Guideline Changes Risk Management Operations Client Service Other Invesco has made measured progress in fund raising, and the firm is generally meeting the expectations of TMRS in all material respects. The portfolio has developed with a large number of assets being located in or around major US cities due to the fund s ability to execute. This has produced a strong portfolio of durable cash flows as was the communicated goal of the fund. The manager has been able to accomplish this with greater proximity to major liquid markets than originally underwritten. Invesco has had satisfactory performance. Compliant N/A Excellent In Good Standing Fair (working with manager) Unsatisfactory (remedial action being taken) Comprehensive Review 48

49 Annual Manager Report Card for: Lubert-Adler Assessment Area Grade Update & Comments Organization People Philosophy/Strategy/Process Portfolio(s) Performance Compliance Guideline Changes Risk Management Operations Client Service Other Lubert-Adler is meeting the current administrative and investment expectations of TMRS. The firm has begun marketing an add-on fund to existing investors, but there have been few realizations to date within the existing portfolio. The firm has also expanded its offerings through related entities, in some instances seeking assets within the same sectors as the flashing fund is focusing on. Lubert-Adler performance has been satisfactory, the funds strategy has a slightly longer J-Curve effect thus current muted numbers were anticipated. Compliant N/A Excellent In Good Standing Fair (working with manager) Unsatisfactory (remedial action being taken) Comprehensive Review 49

50 Annual Manager Report Card for: Miller Global Assessment Area Grade Update & Comments Organization People Philosophy/Strategy/Process Portfolio(s) Performance Compliance Guideline Changes Risk Management Operations Client Service Other Miller Global is currently fundraising for the next iteration of their value fund line. The head of hotel acquisitions has left the firm, TMRS has been in communication with the firm regarding replacement. Currently there is no intention to fill the position due to the lack of opportunity in the hotel space. Portfolios have been constructed in a manner outside of what was communicated. Miller Global has had satisfactory investment performance. Compliant Client servicing is below average. N/A Excellent In Good Standing Fair (working with manager) Unsatisfactory (remedial action being taken) Comprehensive Review 50

51 Annual Manager Report Card for: Moorfield Assessment Area Grade Update & Comments Organization People Philosophy/Strategy/Process Portfolio(s) Performance Compliance Guideline Changes Risk Management Operations Client Service Other Moorfield is meeting the expectations of TMRS in all material respects. Moorfield performance has been satisfactory. Compliant N/A Excellent In Good Standing Fair (working with manager) Unsatisfactory (remedial action being taken) Comprehensive Review 51

52 Annual Manager Report Card for: Rubenstein Assessment Area Grade Update & Comments Organization People Philosophy/Strategy/Process Portfolio(s) Performance Compliance Guideline Changes Risk Management Operations Client Service Other Rubenstein is meeting the expectations of TMRS in all material respects. Rubenstein has had satisfactory performance inception to date. Compliant N/A Excellent In Good Standing Fair (working with manager) Unsatisfactory (remedial action being taken) Comprehensive Review 52

53 Annual Manager Report Card for: Stockbridge (Core & Value-Add Platforms) Assessment Area Grade Update & Comments Organization People Philosophy/Strategy/Process Portfolio(s) Performance Compliance Guideline Changes Risk Management Operations Client Service Other Stockbridge is meeting the expectations of TMRS in all material respects. The firm s co-head and founder has relinquished his role as head of Stockbridge in order for the firm to transition to the next generation of leadership. He remains heavily involved with the firm serving on the Core & Value Add investment committees. He and his replacement, a long time partner within the firm, have been to Austin both before and after the transition to ensure we were comfortable with the process. Stockbridge has had strong performance inception to date within its Value-Add platform and performance in line with expectations within its core program. Compliant N/A Excellent In Good Standing Fair (working with manager) Unsatisfactory (remedial action being taken) Comprehensive Review 53

54 Annual Manager Report Card for: Torchlight Assessment Area Grade Update & Comments Organization People Philosophy/Strategy/Process Portfolio(s) Performance Compliance Guideline Changes Risk Management Operations Client Service Other Torchlight is meeting the expectations of TMRS in all material respects. Torchlight is too early in the fund life for performance to be meaningful. Compliant N/A Excellent In Good Standing Fair (working with manager) Unsatisfactory (remedial action being taken) Comprehensive Review 54

55 Annual Manager Report Card for: TPG Assessment Area Grade Update & Comments Organization People Philosophy/Strategy/Process Portfolio(s) Performance Compliance Guideline Changes Risk Management Operations Client Service Other TPG is meeting the expectations of TMRS in all material respects. TPG is too early in the fund life for performance to be meaningful. Compliant N/A Excellent In Good Standing Fair (working with manager) Unsatisfactory (remedial action being taken) Comprehensive Review 55

56 Annual Manager Report Card for: Tristan Assessment Area Grade Update & Comments Organization People Philosophy/Strategy/Process Portfolio(s) Performance Compliance Guideline Changes Risk Management Operations Client Service Other Tristan is meeting the expectations of TMRS in all material respects. Tristan is too early in the fund life for performance to be meaningful. Compliant N/A Excellent In Good Standing Fair (working with manager) Unsatisfactory (remedial action being taken) Comprehensive Review 56

57 Annual Manager Report Card for: USAA Assessment Area Grade Update & Comments Organization People Philosophy/Strategy/Process Portfolio(s) Performance Compliance Guideline Changes Risk Management Operations Client Service Other USAA is meeting the expectations of TMRS in all material respects. TMRS USAA investment is too recent for performance to be meaningful. Compliant N/A Excellent In Good Standing Fair (working with manager) Unsatisfactory (remedial action being taken) Comprehensive Review 57

58 Annual Manager Report Card for: Walton St. (Equity & Debt Platforms) Assessment Area Grade Update & Comments Organization People Philosophy/Strategy/Process Portfolio(s) Performance Compliance Guideline Changes Risk Management Operations Client Service Other Walton St. is meeting the expectations of TMRS in all material respects. They are currently fundraising for their next iteration in the opportunity fund line. The Real Estate fund portfolio remains in compliance with the partnership agreement. Walton generally pursues a strategy that is higher risk than TMRS other non-core mandates. Walton St. has had satisfactory performance for the strategy it pursues. Compliant N/A Excellent In Good Standing Fair (working with manager) Unsatisfactory (remedial action being taken) Comprehensive Review 58

59 Disclosures TMRS periodically discloses public information that is not excepted from disclosure under Section (b) of the Texas Public Information Act. Information provided by a manager, a general partner or other data provider to TMRS or a TMRS service provider, and contained in these materials, may have been independently produced or modified by TMRS or the TMRS service provider. 59