State Universities Retirement System of Illinois

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1 State Universities Retirement System of Illinois Serving Illinois Community Colleges and Universities 1901 Fox Drive Champaign, IL (217) (217) (FAX) Investment Department To: Investment Committee From: Douglas C. Wesley, CFA, Kimberly K. Pollitt, CFA and Joseph M. Duncan Date: November 28, 2011 Re: Executive Summary of the Real Estate Investment Trusts (REITs) Asset Class Real Estate Investment Trusts (REITs) are one of two components of SURS real estate portfolio. The initial allocation to U.S. REITs funded BlackRock Institutional Trust Company (BTC), then known as BGI, CBRE Clarion Securities (CBRE Clarion), then known as ING Clarion, and RREEF during March In December 2006, the Board approved an allocation to global REITs in recognition of the diversification opportunities and potential for enhanced returns in the global REIT marketplace. To fund the new allocation, approximately $208.5 million was transferred from the three domestic REIT accounts to global REIT accounts with RREEF and ING CRES and an international REIT account with BTC. The global REIT accounts were funded in early-to-mid The REIT allocation in SURS portfolio is detailed in the table, below. Account Market Value ($ in millions) % of Total REITs Asset Class U.S. REITs CBRE Clarion Securities $ RREEF Real Estate Securities % BTC REIT Fund % Total U.S. REITs $ % Global/International REITs CBRE Clarion Global REITs $ RREEF Global REITs % BTC International REIT Fund Total Global/International REITs $ % Total REITs $ % Portfolio Structure U.S. REITs As shown in the preceding table, over 60% of the SURS REIT allocation is invested in U.S. REIT portfolios with the remainder invested in global and international REIT portfolios. The U.S. REIT portfolio is broadly diversified, with exposure to each of the sectors in the benchmark index. The following chart illustrates the sector allocation of the U.S. REIT portfolio, as of September 30, 2011.

2 U.S. REIT Portfolio Sector Allocation Apartments Healthcare Hotels Industrial Office Regional Malls Retail Self Storage Other 2% 0% 7% 1 14% 21% 20% 22% 1 2 0% 10% 1 20% 2 30% Portfolio Weighting SURS U.S. REIT Portfolio DJ U.S. Select R.E. Securities Index The graphic below provides the geographic breakdown of the U.S. REIT portfolio, as of September 30, Geographic Region Distribution Mountain West East North Pacific North Central Central 10% Northeast 24% Mideast 1 Non U.S. Southeast 1 Southwest Percentages may not add to 100% due to rounding.

3 Portfolio Structure Global REITs Like the U.S. REIT portfolio, the global REIT portfolio is diversified among sectors, as shown in the following chart. Global REIT Portfolio Sector Allocation Diversified Property Holdings Residential Healthcare Hotels Industrial Office Retail Self Storage Other 7% 4% 2% % 20% 2 27% 0% 10% 1 20% 2 30% Portfolio Weighting SURS Global REIT Portfolio FTSE EPRA/NAREIT Developed Index Organizational Issues In July 2011 RREEF announced that the CEO and CIO roles for the Real Estate and Infrastructure Securities business were separated to align with the direct investment businesses. As a result, John Vojticek assumed the role of CIO for the Real Estate and Infrastructure Securities business from John Robertson. John Robertson now devotes the majority of his time and efforts to business development and to managing the Global Securities internal and external relationships. Jerry Ehlinger, formerly Co-Head of Americas with John Vojticek, is the sole Head of Americas. John Hammond, Head of Europe, and Danny Ekins, Head of Asia Pacific and Global Portfolio Manager, round out the group s senior leadership team. On July 1, 2011, ING Clarion s parent company, ING Group, finalized the sale of ING Clarion Real Estate Securities to CB Richard Ellis Group, Inc (NYSE: CBG). CB Richard Ellis is a commercial real estate services company, with approximately 31,000 employees in developed and emerging markets, and over 400 professionals involved in real estate market research. After the close of the transaction, ING Clarion merged with CBRE Investors, an independently operated business unit of CB Richard Ellis. At the close of the transaction, the firm name changed to CBRE Clarion Securities. By joining CB Richard Ellis, CBRE Clarion is now the real estate securities manager within the world s largest real estate platform.

4 Performance Issues For the one-year period ended September 30, 2011, the total REIT portfolio returned -2.4, exceeding the custom benchmark return of -2.60% by 17 basis points. The U.S. REIT portfolio returned 1.8 over the same time period, leading the Dow Jones U.S. Select Real Estate Securities Index return of 1.64%. The -8.9 global REIT portfolio return for the one-year period lead the -9.07% custom benchmark return by 14 basis points. September-11 Incep (1) 1 YR (2) 1 YR (2) 3 YR (2) 3 YR (2) 5 YR (2) 5 YR (2) U.S. REITs CBRE Clarion U.S. REIT Mar % -0.54% -2.30% -1.20% -3.3 RREEF Securities Mar % 1.64% % -2.32% -3.3 Total U.S. REITs Mar % -1.39% -2.30% Global REITs CBRE Clarion Global REIT Apr % % % -9.22% RREEF Global REIT Aug % % % -7.4 Total GLOBAL REITs Apr % -0.67% -1.42% TOTAL REAL ESTATE INVESTMENT TRUSTS TOTAL REITs Mar % (1) inception date of account (2) or since inception, whichever is less As shown in the table above, the return of the CBRE Clarion U.S. REIT portfolio exceeded the Dow Jones U.S. Select Real Estate Securities Index return by 41 basis points over the past year. Stock selection was the largest contributor to relative performance, most notably in the Malls and Office sectors. Sector allocation decisions were also additive, with the overweight to Malls and the underweight to the Office sector being most beneficial. For the three-, five-, and ten-year periods, the portfolio outperformed the benchmark by 176 basis points, 213 basis points, and 114 basis points respectively. For the one year ending September 30, 2011, the CBRE Clarion Global REIT portfolio exceeded the FTSE EPRA/NAREIT Developed Index return by 91 basis points. Stock selection was positive across all regions, but the biggest positive driver during the year resulted from holdings in the Asia Pacific region. Over the three-year period the CBRE Clarion Global REIT portfolio has exceeded the benchmark by 82 basis points annually. Since inception in March 2007, the portfolio has outperformed the benchmark by 225 basis points on an annual basis. RREEF s U.S. REIT portfolio exceeded the Dow Jones U.S. Select Real Estate Securities Index (RESI) by 25 basis points for the year ending September 30, For the three-, and five-, and ten-year periods, the portfolio outperformed the benchmark by 82 basis points, 101 basis points, and 124 basis points respectively. Over each of these time periods, RREEF s performance has benefited primarily from strong stock selection.

5 During the twelve-month period ending September 2011, the RREEF Global REIT portfolio exceeded its benchmark, the FTSE EPRA/NAREIT 1 Developed Index, by 14 basis points. Returns for the three-year period exceeded the benchmark by 47 basis points. Since inception in August 2007, the RREEF Global REIT portfolio has lagged the benchmark by 18 basis points on an annual basis. Both stock selection and regional allocation impacted performance for the past year. Recommendations SURS staff and Callan Associates jointly recommend: That CBRE Clarion Securities be retained as a U.S. REIT manager. That CBRE Clarion Securities be retained as a global REIT manager. That RREEF be retained as a U.S. REIT manager. That RREEF be retained as a global REIT manager. 1 European Public Real Estate Association / National Association of Real Estate Investment Trusts