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  • 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

    la n

    REITs

    Private Core

    Special Situations

    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 %

    o f

    P la

    n

    Core Non-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

    TW R

    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

    TW R

    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

    C o

    m m

    it m

    en ts

    ( $

    M )

    N et

    R et

    u rn

    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

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