Download - San Joaquin County Employees’ Retirement Association · San Joaquin County Employees’ Retirement Association CtldPt LtdCourtland Partners, Ltd. ... 2016 2020 2020 w. New 48% 28%

San Joaquin County Employees’ Retirement Association

C tl d P t LtdCourtland Partners, Ltd.Institutional Real Asset Advisor

Real Estate Strategy and Proposed Implementation Plan – June 2017

Table of Contents

1- Real Estate Strategy, Courtland Portfolio Model, andProposed Implementation Plan

2- Real Estate Securities

3 R l E t t M k t C diti3- Real Estate Market Conditions

1 | Courtland Partners, Ltd.

Strategy and Implementation

1 – Real Estate Strategy, Courtland Portfolio Model, and Proposed Implementation PlanModel, and Proposed Implementation Plan


SJCERA Current Real Estate Exposure

Total SJCERA Plan Assets $2.5 billion

Over 20% of the

Total SJCERA Plan Assets $2.5 billion

Real Estate Equity MV, 12/31/16 (mil) % of SJCERA

Private - Core, Value and Opportunistic 255.8$ 10.2%

Public - Domestic and International 57.5$ 2.3%

SJCERA Plan is invested in real estate

related assets

Total 313.3$ 12.5%

Real Estate Debt MV, 12/31/16 (mil) % of SJCERA

Doubleline (Mortgage Backed Securities) 71.6$ 2.9%

PRIMA (Commercial Mortgages) 96.7$ 3.9%

Mesa West Funds (Leveraged Com. Mortgages) 27.3$ 1.1%

Total 195.6$ 7.9%

Real Estate Equity Real Estate Debt Estimated Unfunded Commitments = $58 mil.

• Includes $30 million GAP VIII commitment Distrib tions are e pected to increase

Interest income is being distributed as earned New $50 million commitment to Mesa West IV

Distributions are expected to increase:• 2007-2009 vintage funds• Assets ready for disposition

will increase exposure


SJCERA Private Real Estate Portfolio

E i tin Cl d End M n r P t nti l f r In tm nt in N t F ndExisting Closed-End Managers - Potential for Investment in Next FundManager New Fund in the Market? Attractive Opportunity?Almanac Later in 2017 Yes

Angelo Gordon 2018 YesColony Probably within next 18 months Maybe

SteelWave No N/A


Sarofim No N/AGreenfield No N/A

Miller Global Yes UnlikelyWalton Street No N/A

Results of 2016 Implementation Plan

2016 Objective Result Comments

Private Real Estate:Commit up to $60 million in PrivateReal Estate, adding Value-Added orOpportunistic to the portfolio

• $30 million commitment toGAP VIII

Maintains portfolio’sopportunisticexposure

Public Real Estate:Monitor and consider rebalancing

• No activity in 2016 None

where appropriate


Policy Risk/Return Targets

Investment and Portfolio Risk/Return Ranges

Risk/Return Nominal Net ReturnActual

Exposure12/31/16

ProjectedExposure

Per Model**

Target Tactical

AllocationPolicyRange

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 yearsy p y

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


Courtland Portfolio Model

Courtland sent out questionnaires to each manager requesting portfolio dataforecasted over the 2017 – 2020 periods based on in place business plans. Expected capital calls

E t d it l di t ib ti Expected capital distributions Property type diversification Geographic diversification

C tl d il d thi d t i t fi i l d l t d t i tf li Courtland compiled this data into a financial 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 withoutnew investment allocations over the next several years.

The Model does not make any income accrual or appreciation assumptions forindividual investments.

Current real estate exposure is 12.5%. Assuming no new investments are madethe exposure is projected to be 11% (2017), 10% (2018), 10% (2019), and 9%(2020).


SJCERA Historical Capital Contributions

Gross Capital Contributions Since Inception

80 $

50

60

70 $ Millions

10

20

30

40

-

10

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: Courtland Partners

• For private and public real estate equity investments only


Portfolio Model- Allocation Exposures

Portfolio With New 2017 and 2018 Allocations

70%2016 2020 2020 w. New

48%

28%

61%

47%

33%40%50%60%70%

28% 24%22%17% 20%

0%10%20%30%

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 toOpportunistic in 2017 and 2018 No future year allocations are assumed at this time

Core Value Opportunistic

Opportunistic in 2017 and 2018. 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, and13% Opportunistic.

Current real estate exposure is 12.5%. Assuming proposed 2017-2018 allocationsare made the exposure is projected to be 11% (2017) 11% (2018) 12% (2019) and


are made the exposure is projected to be 11% (2017), 11% (2018), 12% (2019), and12% (2020).

2017 and 2018 Proposed Implementation Plan

Long Term Potential NewLong-TermTarget 2017 and 2018

Objectives

Potential New Allocations Managers

Core 40% Continue to monitor domesticREITs.

None None

Value 40% Consider opportunities with astrong current incomecomponent and long-termreturn potential.

Up to $90 million Up to three managers

Opportunistic 20% Consider unique opportunities Up to $30 million Up to one managerOpportunistic 20% q ppthat expect to capitalize onmarket opportunity.

p p g

REITs 0%-30% Standard monitoring ofallocation for potentialmodifications.

$0 N/A

International 0%-20% Consider funds withinternational exposure.Consider moving some of thedomestic REIT position intointernational REIT.

Part of value and opportunistic

T t l Up to $90 millionTotal 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

Portfolio Model - Property Type Exposures


*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.


Portfolio Model - Geographic Exposures


*Impact of potential increased allocations is not material on expected exposure due to the generic funds included in the model.


Portfolio Model - Public/Private Exposure


• Public market values held steady throughout the modeling process


U.S. Investment Themes

Strategies and ThemesStrategies 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.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 ybased retail as defensive strategy.

• High street retail pricing has increased due to favorable urban

jcoastal markets has rebounded in pricing; be selective given current valuations.

• Fundamentals

pp ycoming to market in select cities.

• Selectively invest at steep discounts by focusing on properties with

g pclass A assets has been pushed to record highs.

• Focus on urban infill and development constrained markets.

portions of capital structure which do not provide adequate control or protection provisions.

gcontinues to remaina fragmented asset type with many inefficiencies.

• Senior housing/medicalfavorable urban

lifestyle demographics; be selective due to current pricing.

• Selectively consider class-A malls given

Fundamentals continue to be strong as companies build out supply chain management systems.

• Focus on infill

properties with significant capital needs (e.g., leasing costs or physical improvements) that cannot be met under the existing capital

constrained markets.

• Selectively develop if yield to cost reasonably exceeds current market cap rates.

• Exploit inefficiencies in capital markets by providing debt on transitional assets.

• Exploit inefficienciesin capital markets by

housing/medical office to take advantage of demographics (aging population, need for assisted living facilities). class A malls given

current values; historically have provided a consistent income return resilient to market downturns.

Focus on infill locations, be selective in NY/NJ and Southern California due to pricing.

• Monitor NOI growth

structure.

• Class B assets in gateway markets; Class A assets in other markets.

• Focus on markets that are not likely to be negatively affected by new supply.

• Monitor NOI growth

in capital markets by providing liquidity todistressed capital structures.

• Evaluate use of leverage by debt managers

• Student housing: new products provide better amenities demanded by incoming students.


• Monitor NOI growth and new supply. and new supply. managers.

Recent Client Recommendations

Core Harrison Street Core Fund, Mesa West Core Lending Fund, Blackstone Property

Partners (Core Plus), USAA Eagle Fund, Brookfield Premier Real Estate Partners (CorePlus)Plus)

Value Stockbridge Value III, Bristol Value Fund III, Ares U.S. Real Estate Fund IX, AG EuropeStockbridge 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, PCCPCredit IX

Opportunistic Carlyle VIII, Blackstone VII, H/2 Special Opportunities Fund, Cerberus IV

* f f*These funds represent a cross section of client commitments over the past six to ninemonths and may not be currently available.


Real Estate Securities

2 – Real Estate Securities


Courtland Partners REIT Score

REIT Metrics Market Indicator is currently located in “Consider Adding” territory


Continue to monitor for potential modifications

U.S. REIT Capitalization Rate


Global REIT Dividend Yield


Global REIT Premium/Discount to NAV


Global REIT FFO Multiple


Real Estate Market Conditions

3 - Real Estate Market Conditions


Cap Rates Compressed Slightly (-8 bps)

T i ff f th i l b i i th t d t 2 11%Treasuries came off of their low, bringing the cap rate spread to 2.11%


Historically Low Cap Rates

NPI, Industrial, Office, and Retail cap rates are at all-time lows


NOI Growth is Still Above Average

Retail is lagging in NOI growth


Vacancies Continue to Fall

B th NPI d I d t i l t 10 lBoth NPI and Industrial vacancy are at 10 year lows


Supply and Demand by Property Type

27 | Courtland Partners, Ltd.Note: REIS reports for the Industrial sector on an annual basis.

Record Level of “Dry Powder”


Dry Powder Leading to Competition for Deals

Fund Manager Views on How Institutional InvestorAppetite for Private Real Estate Has Changed over the Past

12 Months by Investor Location


Super Regional Malls Have Performed Very Well


Current Valuations are a Key Issue

Investor Views on the Key Issues Facing Real Estate in 2017


Download - San Joaquin County Employees’ Retirement Association · San Joaquin County Employees’ Retirement Association CtldPt LtdCourtland Partners, Ltd. ... 2016 2020 2020 w. New 48% 28%

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