Real Estate Update
Core Portfolio Presentation for IAC
November 18, 2015
Agenda
I. Real Estate Investment Portfolio Overview
II. Core & Non-Core Real Estate Performance
III. Core Real Estate Transitional Goals
IV. Market Conditions
V. Discussion Topics
2
Real Estate Allocation Overview (as of 9/30/15) 3
Strategic policy transition to 5% Core / 3% Non-Core of plan (60/40 within REIP), is well underway
4.2%
2.8%
1.0%
0.4%
4.5% 3.8%
0.7%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
1 2 3 4
% o
f P
lan
REITs
Private Core
SpecialSituations
Value Add
Opportunistic
Legislative Cap for RE as % of Total Plan: 10.0%
Policy Target as % of Total Plan: 8.0%
Valuation as of 9/30/15
Substrategy Strategy
Core
Non-Core 4.7%
4.2% 4.8%
3.0% 4.5%
4.3%
7.7%
8.7% 9.1%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
2Q14 3Q15 4Q15
Historical Forecast%
of
Pla
n
CoreNon-Core
Non-Core RE Performance (Net Returns) 4
Separate accounts and high-conviction managers are driving impressive returns
Non-Core Contribution to Return
1 Yr Contribution
Opportunistic 10.3
Value Add 7.3
Total Non-Core 17.7
Major Drivers Vintage
O NorthCreek 2011 2.6
O Blackstone VII 2011 1.7
O Lone Star II 2010 1.5
V NorthRock II 2012 1.2
O Blackstone VI 2007 1.0
3 Yr Contribution
Opportunistic 10.1
Value Add 5.6
Total Non-Core 15.7
Major Drivers Vintage
O Blackstone VI 2007 1.5
O NorthCreek 2011 1.5
O Blackstone VII 2011 1.4
V KTR II 2008 1.2
O Lone Star II 2010 1.1
NCRS data through 9/30/15 O = Opportunistic, V = Value Add
17.7%
15.7% 14.9%
-0.1%
4.6%
8.8%
11.7% 12.2%
-1.3%
4.7%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
1 Yr 3 Yr 5 Yr 7 Yr 10 Yr
TWR
Non-Core Benchmark
Core Real Estate Performance (Net Returns) 5
Core performance is expected to improve within 24 months as investments mature
Core Contribution to Return
1 Yr Contribution
Private Core RE 7.6
REITs 1.5
Total Core 9.1
Major Drivers Vintage
PC NorthRock Core 2008 2.4
PC JP Morgan SPF 1989 2.1
PC Blackstone Edens 2013 1.4
3 Yr Contribution
Private Core RE 8.4
REITs 2.0
Total Core 10.3
Major Drivers Vintage
PC NorthRock Core 2008 3.5
PC JP Morgan SPF 1989 2.3
NCRS data through 9/30/15
PC = Private Core Real Estate
9.1%
10.3% 10.8%
4.6% 5.3%
11.4%
11.0%
12.3%
3.9%
5.8%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
1 Yr 3 Yr 5 Yr 7 Yr 10 Yr
TWR
Core Benchmark
REITs & Private Core Performance (net returns) 6
Anticipated J-curve effect from significant recent commitments to Core Plus investments
is causing short term underperformance
Source: NCRS data through 9/30/15
0
500
1,000
1,500
2,000
2,500
3,000
3,500
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
1 Year 3 Years 5 Years 7 Years 10 Years
Co
mm
itm
ents
($
M)
Net
Ret
urn
s
Private Equity Core Real Estate
Custom NCREIF ODCE Net
Cumulative Commitments ($M)
REITs Private Core
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
1 Year 3 Years 5 Years 7 Years
Public Equity Real Estate
FTSE/EPRA/NAREIT Global Securities
Core Thesis 7
“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”
REITs
ODCE
SMA
Debt
Core Transition Plan 8
Private Core 9
5.5%
4.5% 4.2%
3.7%
4.4% 4.5%
5.0% 5.1% 5.2% 5.5%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
2017 2015 1-Year 2-Year 3-Year 5-Year
Forecast Historical
Private Core Gross Income Returns
NCRS ODCE Benchmark
Source: 2Q15 Courtland Report
As a result of implementing the Core Transition Plan, we expect core returns to increase steadily over the next couple of years
Total Core Leverage by Structure 10
Overall leverage is projected to move higher, however NCRS maintains control with Separate Accounts
24%
30%
43%
37%
33%
29%
37%
43%
40% 38%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
NCRS ODCE Funds Commingled Club Separate Total Core
Leverage
2015 2017
Real estate cash flow projection
Market Conditions 11
• Vacancy rates are low as solid demand outpaces new supply
• Fundamentals are driving rent increases above inflation and providing healthy NOI
• Elevated valuations are evident for high quality assets
• Financial market turbulence and market/industry specific risks are ever-present, but long-term fundamental drivers provide support for values
• Household formation and demographic trends favor apartments Multifamily
• Supply constrained CBDs and strong employment growth Office
• Urbanization and limited development Retail
• E-commerce and supply chain optimization with focus on the “last mile” Industrial
• Rising travel spending , prime locations generate high occupancy and pricing Hotel
IV. Topics for Discussion 12
• Increasing our investment in real estate will allow non-core real estate investments to offset underweight to Private Equity
Consider raising the overall cap on real estate
• Pros Challenges
• Pipeline access - Private Equity-type risk
• More efficient cost structure - Difficult to source
• Governance/control - More DST resources
Real Estate Operating Company (REOCs)
• Comfort level
• Leverage is accretive in current market environment
• Proper structure is key
Leverage
Thank You!
Together we can build and maintain a fiscally strong and prosperous North Carolina.
www.NCTreasurer.com
