70 Brookfield Real Estate Finance V BREF V Eric Rovelli, CFA Alexander Campbell, CAIA Chris Alexander
Investment Recommendation Up to $100M commitment to BREF V BREF V is a $3B real estate debt vehicle Value-Add Strategy targeting 9-10% net returns $400M commitment from Brookfield Property Partners RSIC invested in BREF III ($75M) & BREF IV ($50M) 71 Fund Terms: 4-Year Commitment Period 10-year Fund Term (+2) 1.4% Management Fee on invested capital 15% Carried Interest above a 6% Preferred Return European waterfall (all assets aggregated) 50/50 Catchup; Clawback guaranteed by BAM Seat on LPAC RSIC ODD pass AHIC rates the Fund a Buy 2
Portfolio Fit Strategy Diversification Prior to Debt Fund Allocation Post-Debt Fund Allocation 72 VA-Equity 6% Opp-Equity 27% Debt 10% REITs 16% Core/Core+ 41% VA-Equity 6% Opp-Equity 26% Debt 14% REITs 15% Core/Core+ 39% Core vs. Non-core Post Debt Fund Allocation REITs 15% Debt 14% Core/Core+ 39% Non-Core 32% 3
73 RE Debt Market Opportunity 4
Market Opportunity 74 Post-GFC changes to regulatory landscape: Basel III Risk weighting capital requirements HVCRE requires 150% capital charge Banks focusing more on core, stabilized assets Gap in funding to transitional and development assets Equity gap on pre-crisis loans being refinanced Dodd Frank CMBS Risk Retention Sponsors must retain a slice of the stack New issuance roughly half of pre-crisis peak Increased transaction volumes 5
Outstanding Mortgages by Originator ($B) 2011 2016 75 $310 10% $603 19% $286 9% $144 5% $277 9% $1,506 48% Commercial Banks Non-Regulated Lenders CMBS Insurance Co's GSE Other Fed $407 11% $382 10% $390 11% $413 11% $179 5% Commercial Banks $1,936 52% Non-Regulated Lenders CMBS Insurance Co's GSE Other Fed Shifting Origination Market 2011-2016 60% 40% 20% 0% 29% 49% 31% 36% 24% -20% -40% -37% -60% Commercial Banks Non-Regulated Lenders CMBS Insurance Co's GSE Other Fed Source: Federal Reserve 6/30/2016 6
Transaction Volume 76 7
77 Background on Brookfield 8
78 Brookfield Investment Platform 9
Brookfield Real Estate Platform 79 10
80 BREF Investment Strategy 11
BREF Value-Add Strategy 81 Originate Whole Loans on well located assets Syndicate Senior loan to 3 rd party Retain ~60-80% LTV Tranche Mezzanine loan Focus on U.S. assets in primary markets Across property types with emphasis on Office Prior Funds Snapshot* Avg GAV of properties: $329M Avg fund equity exposure: $43M Weighted Avg LTV: 67% Foreclosures: 2 Syndications: 27 Warehouse facility: 1 Mezzanine originations: 7 Asset status at investment: Transitional: 21 Stabilized: 7 Redevelopment: 4 Development: 2 *BREF III and IV 12
Capital Structure Relative to Returns Typical Capital Structure (LTV) Estimated Current Gross Returns 82 75-100% Equity 16% Value-Add Equity 50-75% 0-50% Mezzanine Loan Senior Loan Loan to Value (LTV) 12 13% 3 5% Mezzanine Loan Senior Loan IRR & Risk 13
Mezzanine Loan Characteristics 10% Loss Scenario Mezzanine Loan Progression 83 $25M Borrower Equity 25% -$10M $15M Loss in Value Equity 17% Equity 8% Mezz Loan 17% Equity 25% $25M Mezz Loan 25% $25M Mezz Loan 28% Mezz Loan 25% Senior Loan 75% $50M Senior Loan 50% $50M Senior Loan 55% Senior Loan 50% $100M $90M Mezz 1.0 (pre-2008) Mezz 2.0 (post-2008) 14
Structured Loan Example 84 $25M Equity Equity $100M Building $25M B-Note / Mezz Loan 50 75% LTV $75M First Mortgage $50M A-Note or Senior 0 50% LTV Originate Sell Senior 15
Structured Loan Example 85 $25M Equity Equity $75M First Mortgage L + 4.50% $25M B-Note / Mezz Loan $50M A-Note / Senior L + 8.50% L + 2.50% Originate Sell Senior 16
86 BREF Performance 17
Prior Fund Performance 87 Fund Vintage # of Loans Contributions Distributions NAV Gross TVPI Net TVPI Gross IRR Net IRR BREF I 2004 41 $1,580 $1,581 $853 1.54x 1.47x 13.8% 10.5% BREF II 2007 9 $696 $868 $0 1.25x 1.18x 8.8% 5.3% BREF III 2011 11 $396 $462 $37 1.26x 1.19x 14.8% 11.1% BREF IV 2014 23 $996 $276 $859 1.14x 1.1x 13.2% 11.3% Grand Total 84 $3,669 $3,187 $1,750 1.35x 1.28x *As of 9/30/16 $mm 18
Foreclosures 6 of 84 loans resulted in foreclosure: 88 $450 3.0x $400 $350 2.48x 2.53x 2.5x $300 2.0x $ millions $250 $200 $150 1.00x 1.32x 1.17x 1.5x 1.0x $100 $50 $0 0.13x Loan 1 Loan 2 Loan 3 Loan 4 Loan 5 Loan 6 0.5x 0.0x Invested Capital (LHS) TVPI (RHS) 19
Property Strategy by % of Capital Invested 89 70% 1.15x 60% 50% 1.30x 40% 1.26x 30% 20% 10% 1.23x 1.21x 1.09x 1.15x 1.11x 0% Stabilized Transitional Redevelopment Development BREF III BREF IV 20
Property Type by % of Capital Invested 90 35% 1.20x 30% 25% 1.09x 20% 1.16x 1.37x 1.18x 1.34x 1.14x 15% 1.22x 1.12x 1.15x 10% 5% 1.17x 0% Office Retail Hospitality Apartment Condos Mixed Land BREF III BREF IV 21
91 Investment Considerations 22
Considerations Increase in fund size: Mitigant: Staff size has nearly doubled since the fundraise of BREF IV and the manager intends to hire several more at junior level. Have an extra year to invest and will continue to target same loan sizes but do more loans. 92 Increased competition from debt funds: Mitigant: Most of the new capital will be targeting loans to smaller assets on account of concentration issues and lack of track record and relationships. Debt funds constitute a small percentage of total origination volume. Bank deregulation under current administration: Mitigant: Any changes are likely to take several years to institute and several banks have indicated an interest to keep regulations in place. 23
Investment Recommendation Up to $100M commitment to BREF V BREF V is a $3B real estate debt vehicle Value-Add Strategy targeting 12-13% Gross returns $400M commitment from Brookfield Property Partners RSIC invested in BREF III ($75M) & BREF IV ($50M) 93 Fund Terms: 4-Year Commitment Period 10-year Fund Term (+2) 1.4% Management Fee on invested capital 15% Carried Interest above a 6% Preferred Return European waterfall (all assets aggregated) 50/50 Catchup; Clawback guaranteed by BAM Seat on LPAC RSIC ODD pass AHIC rates the Fund a Buy 24
94 Appendix 25
Market Opportunity Anticipated Loan Maturities 95 Source: GSAM CMBS Issuance Source: Commercial Mortgage Alert 26
Comparative Risk and Return 96 100% 90% 80% Debt Mezz Equity 25% 16% 25% 20% Loan to Value 70% 60% 50% 80% 8% 25% 12-13% 40% 30% 20% 50% 75% 10% 0% 20% Building ODCE Value-Add Mezz Opportunistic Risk Level 27
Brookfield Real Estate Finance Fund V (THE FUND or BREF V ) INVESTMENT SUMMARY 97 RSIC Investment Staff RSIC ODD Rating: AonHewitt ( AHIC ) AHIC ODD Staff recommends a commitment of $100 million to BREF V as outlined in the Summary Terms Chart. Pass Buy Rating Pass Summary; Investment Expectations: BREF V is a value add strategy that will primarily structure floating rate, interest only loans on assets located in the United States, with flexibility to lend up to 20% in select countries internationally, and across property types. The Fund will target well located real estate assets to originate whole loans, syndicate the senior loan to a third party, and retain the mezzanine tranche for the Fund. (See Figure 1) BREF will utilize the broader Brookfield real estate platform to source and underwrite investment opportunities in areas where it believes it possesses a comparative advantage. The RSIC is an investor in the prior two funds, BREF III and BREF IV. Investment Rationale: Staff believes real estate debt investments are sensible given that we are in the latter stages of the current credit cycle and this will allow us to position ourselves in a more defensive posture while still achieving attractive returns. The market for mezzanine loans has evolved since the financial crisis. Today, the market requires a greater equity investment by the borrower/sponsor, which reduces risk for the mezzanine lender while still creating a compelling return. (See Figure 2) Since the financial crisis, bank regulations have reduced the amount of credit available to borrowers, particularly in the mezzanine tranche. The senior leadership has worked together since the initial BREF fund in 2004 and demonstrated its ability to operate through a credit cycle. This continuity gives us confidence to forecast continued strong returns. Brookfield is the second largest real estate manager in the world with over $145 billion in assets under management globally. The Brookfield Property Group manages over 400 million square feet across office, retail, multifamily, hospitality, and industrial. This provides the BREF team with real time market analytics to assist in underwriting and sourcing loans. In a downside scenario, the broader operating platform is available to step in and protect the Fund s capital when BREF forecloses on a property and assumes the equity position. Across all 84 loans since the inception of the strategy, there have been only 5 foreclosures and, in aggregate, the manager has been able to outperform all other realized loans. Investment Considerations: Growth in fund size: BREF IV had roughly $1.5 billion in commitments while BREF V is raising $3 billion. The staff has nearly doubled in size since the fundraise for BREV IV and the manager intends to hire several more at the junior level. BREF V will operate with a 4 year investment period giving it an additional year to allocate capital. The Fund will operate under the same strategy as prior funds and will continue to target similar assets and loan sizes, but will execute more loans. Increased competition from new debt funds entering the market: Most of the new capital being raised is likely to target loans to smaller assets and, therefore, less in the primary markets. This is due to two reasons: most debt funds will not have the same scale and breadth as BREF V and will not be able to finance larger whole loans. As it relates to the total loan origination space, non regulated lenders (e.g. Debt Funds) still comprise just a small portion of the total loans originated. Additionally, transaction volumes, which will create a need for debt financing, have been steadily increasing. (See Figure 3) Further, this is a relationship driven business, and the lender s reputation, track record, and ability to close are important to borrowers/sponsors. The potential for bank deregulation under the current administration: Any changes to the current regulatory framework are likely to take several years to institute. Additionally, the Basel accords are an international agreement that the United States cannot unilaterally amend. Further, a number of banks have indicated an interest in keeping regulations in place, largely due to the amount of capital spent hiring new compliance personnel and the uncertainty it would create for their profit model. There is no method by which Limited Partners can remove the General Partner without cause: Though Brookfield has stated its intentions are solely to protect being removed from managing its $400 million investment into BREF V without a for cause event, there is still a for cause removal option available to Limited Partners. Also, Limited Partners may vote to terminate the investment period or to dissolve the Fund, should they so choose. Brookfield s $400 million commitment is non voting. Investment Performance: Returns on the types of loans in the BREF series are predominantly composed of current income and little anticipated appreciation. The funds will also earn fees from borrowers on originations, loan term extensions, and prepayments. Loans will tend to return cash quicker to investors and much earlier than equity funds. The most a lender can expect to yield on a loan is the interest payments and the return of loan principal. The exception coming in a foreclosure situation where the lender is able to take over the assets and rehabilitate them. The prior funds have been able to consistently achieve attractive returns. Since 2004, the BREF funds have invested over $3.6 billion in equity capital in 84 loans, achieving an aggregate multiple of invested capital equal to 1.35x. On the 5 foreclosed assets, BREF has attained a 1.7x multiple of invested capital. The lone underperforming fund is BREF II, which was invested near the peak of the market, but the manager was still able to return a 1.25x multiple of invested capital. The RSIC is an investor in BREF III and BREF IV, which have each performed well. BREF IV is still early in its fund life so returns should continue to improve as more loan interest payments are received. (See Figure 4)
98 Figure 1: Origination and Syndication Process Brookfield Real Estate Finance Fund V (THE FUND or BREF V ) INVESTMENT SUMMARY Figure 2: Mezzanine Loan Characteristics and Return Comparisons
99 Brookfield Real Estate Finance Fund V (THE FUND or BREF V ) INVESTMENT SUMMARY Figure 3: Market Analysis Figure 4: Investment Returns
South Carolina Retirement System Brookfield Real Estate Finance V Due Diligence Report May 25, 2017 100 Confidential Material SC Due Diligence Team: Eric Rovelli, CFA Senior Real Estate Officer Alexander Campbell, CAIA Investment Officer Summary Terms Chart Investment Officer Summary: Source Location: Manager Name: Brookfield Asset Management Private Institutional LPA Definitions 1.115 Capital Adviser US, LLC Fund/Investment Name: BROOKFIELD REAL ESTATE FINANCE FUND V, L.P. LPA Recitals Primary Custodian(s) or Safekeeping Agent(s) (together with point of JP Morgan Tom Ishikawa RSIC Operational Due Diligence Questionnaire P. 45 contact information if other than BONY Mellon): Email: Tom.y.ishikawa@jpmorgan.com Phone: 312.954.9084 RSIC Investment Size & Limitations $100 million (Commitment): Management Fee: 1.40% on invested LPA Definitions 1.114 Performance Fees/Carried Interest: 15% LPA Section 6.1(c) Hurdle Rate/Preferred Return: 6% LPA Section 6.1 (b) Organizational Expenses: $3 million LPA Section 4.3 (d) Other Expenses/Fees: Yes LPA Section 4.4 (b) Manager Commitment: $400 million by Brookfield Property Partners or LPA Section 3.1 (a) affiliate(s) Anticipated Investment Period: 4 years from Initial Close LPA Definitions 1.47 Anticipated Investment/Fund Term: 10 years from Initial Close (w/ 2 1 year ext options) LPA Section 2.4 Withdrawal Rights: Generally no limited LPA Section 3.4 Placement Agent Used in Obtaining Investment by RSIC: None used See Placement Agent Letter Page 1 of 29
101 Aon Hewitt Retirement and Inv estment Proprietary and Confidential Executive Summary Review Date Current Rating Prev ious Rating June 2016 Buy Not Rated Fund Strategy Summary Brookfield Real Estate Finance Fund V ( BREF or the Fund ) is a closed-end, commercial real estate debt fund seeking to originate loans as well as provide capital to acquire or recapitalize real estate investments located primarily in the U.S. The strategy will predominately focus on the mezzanine position of the capital stack, typically originating the whole loan and then selling off the senior debt while holding onto the subordinate piece, specifically in the 60 80% LTV tranche. Overall, Fund V is targeting a net IRR of 9%-10%, comprised predominantly of current income. Component Ratings Rating Previous Rating Overall Buy New Rating Business 3 New Rating Staff 3 New Rating Process 4 New Rating Risk 3 New Rating ODD A1 New Rating Performance 3 New Rating T&C 1 New Rating Fund Vintage Year Performance by Vintage Year % Realized Net IRR Quartile Net TVPI Quartile BREF I 2004 100% 10.5% 2 2.1x 2 BREF II 2007 100% 5.4% 3 1.2x 3 BREFIII 2011 73.1% 11.6% 4 1.2x 4 BREFIV 2014 4.4% 12.2% 3 1.1x 2 Fund Performance (USD) is net of fees relative to Burgiss Private iq Global Value-Added RE Universe for Funds I - IV as of 12/31/2015; Source: Manager, Burgiss Private iq Firm Summary Head Office Location Toronto, ON, New York, NY Parent Name Brookfield Asset Management Assets Under Mgmt $225 billion Investment Staff 700 Real Estate Real Estate AUM $144 billion Investment Staff 255 Portfolio Strategy Characteristics Team Location New York, NY Portfolio Manager Andrea Balkan Team Size / Strategy Inception 2004 Dedicated 11/0 Fund Size $2 billion (no hard cap) Target range of Holdings 30-40 assets Liquidity / Structure Close Ended Opportunity Set U.S. Real Estate Risk Level of Strategy Average Max/Target Leverage 35% Max Non-US Allocation 20% Max Development 10% Valuation Policy Performance Objective Client Restrictions Internal Quarterly 12%-13% Gross / 9%-10% Net IRR None Brookfield Real Estate Financing V Data is as of 12/31/2015, unless otherwise noted. 3
102 Memo To From South Carolina Retirement System Chae Hong Date June 20, 2017 Re Brookfield Real Estate Finance Fund V Rating Confirmation Brookfield Real Estate Finance Fund V ( BREF or the Fund ) is a closed-end, commercial real estate debt fund seeking to originate loans as well as provide capital to acquire or recapitalize real estate investments located primarily in the U.S. The strategy will predominately focus on the mezzanine position of the capital stack, typically originating the whole loan and then selling off the senior debt while holding onto the subordinate piece, specifically in the 60 80% LTV tranche. Overall, Fund V is targeting a net IRR of 9%-10%, comprised predominantly of current income. Aon Hewitt Investment Consulting ( AHIC ) gave the Fund a Buy rating in June of 2016. There have been no significant events or changes to the fund that would impact AHIC s initial rating. This memorandum is to confirm that the Buy rating still stands. Aon Hewitt Retirement and Investment 200 E. Randolph Street, Suite 1500 Chicago, IL 60601 t +1.312.381.1200 f +1.312.381.1366 aonhewitt.com Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company