third quarter real estate performance review

Aon Hewitt Retirement and Investment

Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.

Nothing in this document should be construed as legal or investment advice. Please consult with your independent professional for any such advice. To protect the

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Third Quarter 2016 Real Estate Performance Review San Diego City Employees’ Retirement System

Aon Hewitt | Retirement and Investment

Proprietary & Confidential

Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 1

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Agenda

Section 1 Executive Summary

Section 2 Market Overview

Section 3 Real Estate Portfolio Update

Section 4 Opportunity Portfolio Update

Section 5 Glossary




Real Estate Markets Performance and Overview

As of September 30, 2016

Quarter Fiscal YTD 1 Year 3 Years 5 Years

NFI-ODCE (Net) 1.8% 1.8% 9.1% 11.4% 11.3%

NPI 1.8 1.8 9.2 11.3 11.2

FTSE NAREIT U.S. Equity

REIT -1.4 -1.4 19.9 14.2 15.9

FTSE EPRA/NAREIT Global

Developed REIT 1.5 1.5 15.9 8.6 13.2

Note: Please see Glossary for Index Definitions

The NFI-ODCE returned 1.8% (net of fees) in the third quarter of 2016, down marginally quarter-over-

quarter. The index has moderated meaningfully over the last year. The trailing one-year return of 9.1%

(net of fees) is down meaningfully from 3Q15 when the Index returned 13.9% (net of fees). Continued

moderation is expected.

Post-Brexit, the global property market regained some composure and recovered throughout much of

the quarter as economic data proved to be stronger than anticipated, especially in China and Europe.

In the third quarter, global property stocks posted modest gains (+1.5%) as strength in Europe and

Asia were modestly offset by weakness in North America.




Portfolio Funding Status and Composition

PORTFOLIO OVERVIEW

(As of September 30, 2016)

$ in millions

Number of

Investments 25

Total Commitments $1,118.9

Unfunded

Commitments2

$220.6

Total Paid-In Capital $939.9

Total Distributions $659.1

Market Value (Net

Asset Value or NAV)

$668.8

PORTFOLIO COMPOSITION TO TARGETS


Target Tactical Range

Unfunded

Commitments +

Funded (NAV)

Funded

(NAV)

Target R.E Allocation 11% 6%-16% 12.3% 9.3%

Private 90% 100% 100.0% 99.9%

Public N/A N/A 0.0% 0.1%3

Portfolio Style Composition

Core 70% 60% - 80% 67.9% 79.8%

Non-Core 30% 20% - 40% 32.1% 20.2%

Value-Added1 0% - 40% 8.0% 6.7%

Opportunistic 0% - 20% 24.1% 13.5%

Leverage 50% N/A 32.5%

The funded real estate allocation, currently at 9.3%, is within tactical range, but below the target allocation

of 11%

– Brookfield Global REIT was given formal notice of termination in August 2016 and the portfolio was

liquidated in September 2016

– The Funded allocation will increase as capital from new commitments is drawn down over the

coming quarters

The Portfolio is in compliance with its Strategic Plan with respect to style composition

1Value-Added category contains REIT exposure

2Amount includes capital of $16.3 million that is not expected to be called

3 For all practical purposes, the Public Market Portfolio has been liquidated. A balance of $377,084.55 remains in the account for the purpose of satisfying any outstanding expenses.




SDCERS’ Real Estate Performance

The Real Estate Portfolio has delivered strong absolute performance over all time periods and

outperformed on a relative basis over the near term

The Real Estate Portfolio slightly underperformed the benchmark by 40 basis points in the third quarter

− The Core portfolio was the primary driver of the total portfolio’s performance in the third quarter

returning 1.7%

− The Public Market Portfolio, consisting solely of Brookfield’s Global REIT, positively contributed

to the total Portfolio’s performance over the quarter, outperforming the benchmark by 80 bps.

The Portfolio was liquidated in September 2016 Note: Total Real Estate Benchmark currently consists of 90% NFI-ODCE plus 50 basis points and 10% FTSE EPRA/NAREIT Global REIT Developed. Prior to the third quarter 2011, it consisted of 75% NFI-ODCE plus

50 basis points and 25% FTSE EPRA/NAREIT Global REIT Developed.

For the purpose of time weighted returns, the transitions between the real estate portfolio and the opportunity portfolio are effective as of 1/1/2016. No changes have been made to the historical time weighted return

series

The All Real Estate Return includes both the Real Estate Portfolio and the Opportunity Portfolio

1.5 1.5

13.5

11.6 12.2

4.8

8.3

1.6 1.6

13.6

11.8 12.3

4.9

8.3

1.9 1.9

10.2

11.7 12.1

5.8

8.3

0

2

4

6

8

10

12

14

16

Quarter Fiscal YTD 1 Year 3 Years 5 Years 10 Years Since Inception(4Q90)

Tota

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Retu

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%)

Total SDCERS Real Estate (As of September 30, 2016)

SDCERS All Real Estate Total Real Estate Benchmark




SDCERS’ Real Estate Performance: Private versus Public

The Private Market Portfolio lagged the benchmark over the quarter by 60 bps

− The Core Portfolio was the strongest driver of overall portfolio performance over the quarter,

returning 1.7%, driven primarily by the DAM IMA. Core returns across the marketplace have

moderated in recent quarters; a trend that is expected to continue going forward

− The Opportunistic and Value-Add Portfolios also contributed positively, returning 1.5% and 0.7%

respectively

The Public Market Portfolio out performed the benchmark over the quarter by 80 bps

− The Public Market Portfolio was liquidated in September 2016

Note: Relative column measures SDCERS’ performance relative to Benchmark;

See Glossary for Benchmark definitions

*For the purpose of time weighted returns, the transitions between the real estate portfolio and the opportunity portfolio are effective as of 1/1/2016. No changes have been made to the historical time weighted

return series.

1.4 1.4

13.5 12.5 12.4

4.3

8.5

2.0 2.0

9.6 12.0 11.9

5.6 8.1

-0.6 -0.6

3.9

0.5 0.5

-1.3

0.4

-15

-10

-5

0

5

10

15

20

25

Quarter Fiscal YTD 1 Year 3 Years 5 Years 10 Years SinceInception(1Q99)

Tota

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%)

Private Performance (As of September 30, 2016)

SDCERS NFI-ODCE + 50 bps Relative

2.3 2.3

13.8

4.9

11.3

4.3

11.3

1.5 1.5

15.9

8.6

13.2

3.6

10.4

0.8 0.8

-2.1 -3.7

-1.9

0.7 0.9

-15

-10

-5

0

5

10

15

20

25


Tota

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Retu

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%)

Public Performance (As of September 30, 2016)

SDCERS




Real Estate Portfolio – Private Market Equivalent (PME) Analysis

Given the IRR driven nature of real estate, especially within the non-Core space, a Private Market

Equivalent (PME) Analysis examines how the addition of such investments are accretive to the overall

portfolio when compared to the NFI-ODCE, a Core real estate benchmark

– NFI-ODCE time weighted return (TWR) measures are essentially converted to IRRs

TVPI, or Total Value to Paid-In ratio, is the ratio of total value from an investment, including

distributions, to total invested capital and provides a reasonable measure of a portfolio’s performance

While Core strategies are expected to perform generally in line with the index, non-Core strategies are

expected to add alpha over the Core index, with the goal of generating outperformance that is

accretive to the total portfolio, given their heightened risk/return profile relative to Core

– The addition of non-Core real estate strategies has been accretive to the SDCERS Real Estate

portfolio, which is outperforming the NFI-ODCE index on both an IRR and TVPI basis

• On an IRR basis, the Real Estate Portfolio outperforms by 139 basis points

• On a TVPI basis, the Real Estate Portfolio outperforms by 0.11x

SDCERS Total Real Estate Portfolio Portfolio IRR PME IRR Over/Under PME Portfolio TVPI PME TVPI Under/Over PME

vs. NFI ODCE 9.18% 7.79% 1.39% 1.41x 1.30x 0.11x




Change in Real Estate Market Value

The value decrease of $93.61 is primarily driven by the liquidation of Brookfield’s Global REIT in the

amount of $90.39 million in addition to fees of $2.27 million; all of which was offset by contributions of

$6.95 million, Income of $8.82 million, and appreciation of $5.68 million

*An additional $993,529 is not reflected in the Ending Market Value due to Carlyle VII and Long Wharf V accounting for/including future cash flows in current quarter valuations




SDCERS Real Estate Portfolio Highlights

Several commingled funds within the SDCERS Real Estate Portfolio made capital calls during the

third quarter, totaling $4.3 million

− Managers calling capital over the quarter include Carlyle Realty VII ($3.3 million), Long Wharf

Real Estate Fund V ($0.5 million), and Alcion Real Estate Partners Fund III ($0.5 million)

Within the Opportunity Portfolio, the only Fund to make a capital call over the quarter was Torchlight

Debt Opportunity Fund V ($1.0 million)

In the third quarter, the Real Estate Portfolio made a $30 million Core commitment to Morgan

Stanley Prime Property Fund

Subsequent to quarter-end, the SDCERS Board approved two new commitments totaling $40

million

− $20 million non-Core commitment to CBRE Strategic Partners U.S. Value 8

− $20 million non-Core commitment to Landmark Real Estate Fund VIII




Significant Events

In July 2016, the SDCERS Board voted to move forward with the liquidation of the Deutsche Asset

Management Separate Account. AHIC and SDCERS staff will explore and vet liquidation strategies

and opportunities and report back to the Board on the most appropriate process implementation and

strategy execution.

In August 2016, Brookfield Global Real Estate Securities Alpha was given formal notice of termination.

The portfolio was liquidated in September 2016.

Normandy Real Estate Debt Fund announced that it will be terminating by December 31, 2016.

Torchlight announced that one of its senior team members, Bill Stasiulatis, would be taking a one-year

sabbatical. Mr. Stasiulatis’s seat on the investment committee will be filled by Luca Montalti during his

absence.

Long Wharf has requested an extension of fund life for Fidelity Real Estate Growth Fund III through

December 31, 2017. Management Fees will be reduced by 50% beginning January 1, 2017 and

waived at the earlier of June 30, 2017 or sale of the final asset.

JP Morgan received a temporary one-year QPAM exemption effective December 15, 2016 which will

allow them to continue managing ERISA assets, like those held within the Core real estate Strategic

Property Fund, in light of the Firm’s felony conviction on currency fixing that occurred between 2010

and 2013. JP Morgan has moved for an additional five-year exemption which will allow the Firm to

continue managing ERISA assets following the expiration of the current one-year exemption.




Agenda





Section 5 Glossary




U.S. Real Estate Market Update – Q3 2016

As the economy is now in its eighth year of expansion, the real estate cycle is mature. But despite minimal GDP growth and diminishing (albeit still

solid) job growth, there are minimal indicators of a recession in the near future. The commercial real estate sector continued to demonstrate strong

underlying fundamentals over the quarter, but near-peak market jitters remained evident across many areas of the asset class.

Highlights from the quarter include:

Return momentum in the private Core market continued to wane. For the quarter, the NFI-ODCE returned 2.07% (gross of fees) with 1.12%

from income and 0.94% from appreciation. This is down slightly from the second quarter’s return of 2.13%. On a trailing one-year basis, the

index lowered to 10.08% (4.57% income and 5.32% appreciation), down from 11.8% last quarter; and as expected, the index is quickly

reverting to the sector’s long run average during 2016.

For non Core investments, capital remains readily available and the volume of new non Core fund offerings is robust. Lower target return

expectations persist continuing to make new Manager and Strategy selection key to portfolio construction.

U.S. real estate securities. The U.S. REIT sector fell 1.4% in third quarter (FTSE NAREIT Equity REIT Index); resulting in a still robust 11.8%

gain year-to-date (YTD). REITs lost ground mid-quarter as a combination of concerns about interest rate movements, property valuations, and

new supply weighed on investors. Operating fundamentals, meanwhile remained healthy, as measured by favorable, but slowing, same-store

NOI growth. U.S. REITs ended the quarter trading at an approximate 7% premium to NAVs. Public valuations remained above Private

valuations largely due to sector’s perceived defensive characteristics; and/or their attractive dividends. Significant volatility is expected to

remain in public market pricing medium term.

Transaction volume rose year-over-year (YOY) for the quarter for the first time this year, up 5.9%; though YTD volume is still 6.6% below

2015. Apartment and Industrial sectors posted the largest gains YOY, up 8.5% and 7.4% respectfully, while CBD office and Retail continued to

have lower deal flow. Individual assets sales have remained fairly steady in 2016 to-date, while portfolio and entity sales are down sharply, off

18% and 40% respectively versus 2015. Market wise, secondary and tertiary momentum continues to grow, while the deal volume in the 6

Major Metros (6MM) was 8% lower YOY this quarter. At this point the cycle, institutional and private investors are still net buyers which is

expected to keep competition for higher quality assets high.

Political Uncertainty. The outcome of the U.S. election and Brexit, coupled with possible leadership changes in other European nations, has

created increased political uncertainty throughout the world. Policy direction and effectiveness are the main concerns with all of the political

alterations, but so far U.S. real estate has not illustrated any fundamental adjustments from these events with the exception of a handful of

firms with international exposure. The UK market, meanwhile, continues to have current strong fundamentals but is struggling with valuation

uncertainty.

Portfolio structure important. Overall, real estate fundamentals and pricing remain at a mature point in the cycle. Given that, it is important

to ensure that risk mitigation strategies are incorporated into the portfolio’s structure. Preferred equity and debt structures are important

investment considerations that can help mitigate medium term cyclical risks.

The following charts provide an update on select current market stats:




Current Market Factors

DRY POWDER BY REGION

AS OF 6/30/2016 (SOURCE: PREQIN, AON HEWITT)

Private commercial real estate’s total return continues to revert towards the sector’s long-run average.

Stabilizing to loosing fundamentals, rising interest rates, and a slowing of capital in-flows to ODCE funds are expected to support further moderating of sector returns.

Income will continue to provide a larger share of the sector’s total returns for the medium-term as appreciation returns have leveled off in many regions and property sectors.

The cap rate spread to Treasury’s is still wide versus historical trends, offering some cushion to the expected upcoming interest rate hikes.

Cap rate compression has generally been leveling off throughout 2016 as the market is mature and interest rates are expected to rise. Only suburban office and the apartment sector marked significant declines YOY as of Q3, both down 40 bps.

Subsequent to quarter end, interest rates rose by 25 bps for the second time since 2008, a move which was predicted to occur before year-end 2016.

As of 3Q2016, private real estate’s dry powder totaled $225bn, surpassing its peak of $210bn in 2015. The majority of the sector’s dry powder is in opportunistic and value add funds accounting for 44% and 24% of the total.

Despite political uncertainty throughout Europe, investors are continuing to show interest in the region illustrated through 2016 ‘s 12.5% YTD increase in the region’s dry powder

Capital flows into the U.S. commercial real estate sector have not been disrupted and investors continue to favor the U.S. at this point in cycle. However, the availability of cheap capital could reduce in the future with further interest rates hikes expected throughout 2017

CAP RATE SPREAD TO 10 YR TREASURY

AS OF 9/30/2016 (SOURCE: RCA)

0

100

200

300

400

500

600

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

All Property Spread (bps) 10yr UST All Property Cap Rate

0

50

100

150

200

250

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

North America Europe Asia & Rest of World

NFI-ODCE (NET) 4-QTR ROLLING RETURNS WITH COMPONENTS

AS OF 9/30/2016 (SOURCE: NCREIF, AHIC)




U.S. Real Estate Market Outlook

Relative U.S. economic strength, continued low interest rates, and still healthy real estate fundamentals suggests that the U.S. real

estate sector will remain attractive to capital allocators in 2016 relative to other regions and asset classes.

Factors to consider in 2016 include:

– The U.S. real estate cycle is mature today, and thus more susceptible to bumps along the road

• Portfolio construction consideration is critical; At this point in the cycle, appropriate risk mitigation measures should be a

staple in all investment portfolios

• New investments will likely be required to ride out a cyclical downturn

– Returns are moderating. Core recovery is fully valued or more in most markets

• Important to focus on underwriting assumptions, especially rent growth expectations, new supply impacts, and exit cap

rates; as well as non core activity in Core funds; Expect returns to be more in line with long run averages near term

– Non-Core investing is now past its cyclical sweet spot

• Tactical opportunities still exist, though return expectations are lower today than the past few years

• Pay attention to use of leverage; preferred equity and debt structures are important to incorporate now to help mitigate

medium term cyclical risks

– Fundamentals to remain healthy near term, while pricing is steep and uncertainty is likely to increase

• Non-residential growth in net operating income in 2016 still has room to improve and is expected to be the primary driver of

returns at this point in the cycle

• New supply is expected to rise across most property types, though suburban office and retail are well behind Apartments

and Industrial; Market selection will become increasingly important as new supply continues to come online

• Consider divestment/exiting of completed tactical or non-structural markets and assets to take advantage of current strong

market pricing and reduce portfolio risks

– The risk of rising interest rates remains present; with December 2016 marking the Fed’s second 25bps move. Strong sector

fundamentals will help offset rising rates, but the offset is not expected to be complete




Agenda





Section 5 Glossary




Summary of Portfolio Activity

Several commingled funds made capital calls during the first quarter totaling $4.3 million

− Carlyle Realty VII ($3.3 million)

− Long Wharf Real Estate Partners Fund V ($0.5 million)

− Alcion Real Estate Partners Fund III ($0.5 million)

SDCERS real estate portfolio made one new commitment during the third quarter

− $30 million Core commitment to Morgan Stanley Prime Property Fund

Subsequent to quarter end, SDCERS made two additional commitments:

− In the fourth quarter, the Portfolio made the following commitments:

o $20 million non-Core commitment to CBRE Strategic Partners U.S. Value 8

o $20 million non-Core commitment to Landmark Real Estate Fund VIII




SDCERS’ Portfolio Overview

As of September 30, 2016 SDCERS’ Portfolio

$ in millions

Number of Investments 25

Total Commitments $1,118.9

Unfunded Commitments1 $220.6



Net Asset Value $668.8

Gross Asset Value $990.8

DPI2 0.99x

TVPI2 1.41x

Since Inception IRR2 9.18%

The SDCERS Real Estate Portfolio is now allocated 100% to Private Real Estate following the liquidation

of the Public Market Portfolio in September 2016

− Real Estate Portfolio unfunded commitments span the risk spectrum from Core, Value-Add, and

Opportunistic

Of the Unfunded Commitments, 7.4% do not expect to be called due to funds being past their investment

periods

1Unfunded Commitments of $16.3 million are not expected to get called (includes $3.0 million from Europa III of

which manager does not anticipate calling more than $1 million of outstanding commitment).

2Active and Liquidated; See Glossary of Terms for definitions




SDCERS’ Portfolio Relative to Policy

As of September 30, 2016 Market Value

($ millions)

Unfunded Commitments

+ Funded (NAV)

($ millions)

Funded (NAV)

($ millions)

Current

Allocation

(%)

Target (Range)

(%)

SDCERS Total Assets $7,219.3

Private Real Estate 668.4 889.0 668.4 99.9% 100%

Public Real Estate 0.4 0.4 0.4 0.1%* N/A

Real Estate Portfolio:

Core 533.9 604.1 533.9 79.8% 70% (60-80%)

Non-Core 134.9 285.3 134.9 20.2% 30% (20-40%)

Value-Added 44.8 70.7 44.8 6.7% (0-40%)

Opportunistic 90.0 214.6 90.0 13.5% (0-20%)

Real Estate Market Value 668.8 9.3% 11% (9-13%)

Unfunded Commitments 220.6 3.1%

Market Value + Unfunded $889.4 12.3%

The Real Estate portfolio is below its target allocation of 11% as of Q3 2016

− The liquidation of Brookfield’s Global REIT at quarter-end is the primary driver of the decline in

the funded allocation

The Portfolio is currently out of line with respect to its Core exposure

− The DAM IMA now constitutes 56% of the Real Estate Portfolio, falling outside of the 35%

concentration guideline outlined in the Strategic Plan Objectives and Policies

− The DAM IMA is in the process of being liquidated

*For all practical purposes, the Public Market Portfolio has been liquidated. A balance of $377,084.55 remains in the account for the purpose of satisfying any outstanding expenses.




SDCERS’ Real Estate Performance

The SDCERS portfolio has delivered strong absolute performance over all time periods. On a relative

basis, the Portfolio outperforms the benchmark over the one- and five-year time periods

− The Private Market Portfolio has positively contributed to the total performance over the near-,

medium-, and since inception time periods

− The Public Market Portfolio positively contributed to the overall Portfolio’s performance over the

quarter, outperforming the benchmark by 80 bps

Note: See Glossary for Policy Benchmark definition

*For the purpose of time weighted returns, the transitions between the real estate portfolio and the opportunity portfolio are effective as of 1/1/2016. No changes have been made to the historical time weighted return

series.


1.5 1.5

13.5

11.6 12.2

4.8

8.3

1.6 1.6

13.6

11.8 12.3

4.9

8.3

1.9 1.9

10.2

11.7 12.1

5.8

8.3

0

2

4

6

8

10

12

14

16

Quarter Fiscal YTD 1 Year 3 Years 5 Years 10 Years Since Inception(4Q90)

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Total SDCERS Real Estate (As of September 30, 2016)

SDCERS All Real Estate Total Real Estate Benchmark




SDCERS’ Real Estate Performance - Private versus Public

The Private Market portfolio lagged the benchmark over the quarter by 60 basis points

− The Core portfolio was the primary driver of Private Market Portfolio performance over the quarter,

driven by the DAM IMA which returned 1.6% in the third quarter. Core returns have moderated in

recent quarters and are moving back in line with the sector’s long rung average

The Public Market Portfolio outperformed the benchmark over the quarter by 80 basis points, but

underperforms over the one-, three-, and five-year time periods

− By sector, an overweight to the Retail sector was the largest contributor to performance during the

quarter, driven by stock selection while stock selection in the U.S. was the largest regional

contributor to relative performance

Note: Relative column measures SDCERS’ performance relative to Benchmark;

See Glossary for Benchmark definitions


series.

1.4 1.4

13.5 12.5 12.4

4.3

8.5

2.0 2.0

9.6 12.0 11.9

5.6 8.1

-0.6 -0.6

3.9

0.5 0.5

-1.3

0.4

-15

-10

-5

0

5

10

15

20

25


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%)

Private Performance (As of September 30, 2016)

SDCERS NFI-ODCE + 50 bps Relative

2.3 2.3

13.8

4.9

11.3

4.3

11.3

1.5 1.5

15.9

8.6

13.2

3.6

10.4

0.8 0.8

-2.1 -3.7

-1.9

0.7 0.9

-15

-10

-5

0

5

10

15

20

25


Tota

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%)

Public Performance (As of September 30, 2016)

SDCERS Custom Public Index Relative




SDCERS’ Real Estate Performance - Core Portfolio

23.4% of the Real Estate Portfolio’s total NAV is invested in Core commingled, open-end investment

vehicles

The Core portfolio, predominantly driven by the separate account, has been the most significant

performance driver of SDCERS’ total real estate portfolio to date

The commitments to JP Morgan’s Strategic Property Fund in 2010 and 2012 allowed the portfolio to

take advantage of strengthening pricing among stabilized, well-located assets

- The Portfolio made a $30 million follow-on commitment to the Strategic Property Fund in

January 2016

- Core returns continue to moderate and will contribute less to outsized returns going forward

The DAM IMA lags the NFI-ODCE Index over the quarter, but outperforms over the one-, three-, five-,

and ten-year time periods

The DAM IMA outperforms the portfolio’s Core commingled funds, JP Morgan SPF and UBS TPF,

over the one-, three-, and five-year time periods

UBS Trumbull Property Fund has typically underperformed over the shorter-term periods due to its

lower leverage and low risk strategy. While the Fund typically lags during market surges due to its

conservative leverage, the Fund is expected to be one of the top performers over a full market cycle


series.

As of 9/30/2016

Partnership NameQuarter Fiscal YTD 1 Year 3 Years 5 Years 10 Years Since Inception Inception Date

DAM IMA 1.6% 1.6% 15.4% 12.6% 12.0% 5.7% 9.8% 12/31/1996

JP Morgan Strategic Property Fund 1.8 1.8 8.8 11.3 11.8 - 12.4 12/31/2010

UBS Trumbull Property Fund 1.4 1.4 7.7 9.7 9.4 - 9.6 6/30/2011

Morgan Stanley Prime Property Fund - - - - - - - 10/1/2016

Total Core 1.7% 1.7% 13.6% 12.1% 11.5% 5.7% 8.2% 9/30/1990




SDCERS’ Real Estate Performance - Value-Added

Performance for Long Wharf Real Estate Partners V and CBRE Strategic Partners U.S. Value 7 is not

yet meaningful as the Funds are still early in their life cycles and within the J-Curve period

In the third quarter, Invesco Real Estate Fund I sold all of its remaining shares in the Milestone

Apartment REIT resulting in the full liquidation of all Fund assets

Cornerstone Hotel Income and Equity Fund has contributed positively to the portfolio over the near-

term as the portfolio was liquidated and the Fund ceased operations

Cornerstone Hotel Income and Equity Fund II is focused on exiting the portfolio’s last investment,

Hilton Double Tree Hotel. The quarter’s negative return is the result of a reduction in the asset’s market

value driven by on going declines in Houston’s lodging sector driven by the distressed energy sector

Greystar VII sold the last remaining asset in the portfolio in January 2016


return series.

As of 9/30/2016


INVESCO Real Estate Fund I -4.3% -4.3% 2.4% 8.3% 9.4% 1.2% 1.0% 12/31/2004

Cornerstone Hotel Income and Equity Fund -3.1 -3.1 11.1 -1.5 3.8 -4.0 0.0 12/31/2005

Fidelity Real Estate Growth Fund III -2.4 -2.4 4.8 23.2 20.1 - -11.5 6/30/2007

INVESCO Real Estate Fund II -1.8 -1.8 -1.4 6.1 11.8 - -7.0 6/30/2007

Cornerstone Hotel Income and Equity Fund II -15.5 -15.5 -39.1 -2.6 4.0 - -7.7 6/30/2008

Greystar Equity Partners VII -6.7 -6.7 -1.5 11.4 13.6 - 8.5 6/30/2011

CBRE Strategic Partners U.S. Value 6, L.P. 1.7 1.7 12.0 15.3 - - 12.8 9/30/2012

CBRE Strategic Partners U.S. Value 7, L.P. 1.8 1.8 20.1 - - - -10.5 9/30/2014

Brookfield Global Real Estate Securities Alpha 2.3 2.3 13.8 - - - 0.7 12/31/2014

Long Wharf Real Estate Partners V -16.8 -16.8 -39.3 - - - -27.1 5/31/2015

Total Value-Added 0.7% 0.7% 12.1% 10.3% 13.3% 4.7% 11.0% 9/30/1996




SDCERS’ Real Estate Performance - Opportunistic

Opportunistic returns outperformed Value-Added returns over the quarter

Alcion Real Estate Partners III is still early in its lifecycle and thus performance is not yet meaningful

LaSalle Asia Opportunity Fund IV delivered strong performance over the near term and since

inception time periods

− Expect a continued moderation of Fund returns going forward

Colony Investors VIII continues to wind down operations and liquidate the portfolio. Long-term

performance has been impacted by the Fund’s challenging vintage year. As of Q3 2016, six

investments remain in the portfolio. The Fund’s life terminates November 27, 2016

As of September 30, 2016, NREP Real Estate Debt Fund no longer holds any investments. Three

of the four remaining assets were sold in an affiliate sale and one was sold in advance of the

affiliate sale *For the purpose of time weighted returns, the transitions between the real estate portfolio and the opportunity portfolio are effective as of 1/1/2016. No changes have been made to the historical time weighted return

series.

The quarterly capital account statements of Carlyle Realty Partners VII often include accruals for transactions that occur in the subsequent quarter. The net since inception time weighted return for this fund has been

calculated by adjusting the dates of such cash flows to the last day of the prior quarter.

As of 9/30/2016


California Smart Growth Fund IV 0.2% 0.2% 6.3% 13.4% 13.4% - -3.2% 9/30/2006

NREP Real Estate Debt Fund, L.P. -9.0 -9.0 -36.2 -1.2 11.7 -10.4 -10.4 9/30/2006

Cornerstone Apartment Venture III -3.8 -3.8 -7.5 -49.0 -31.1 - -19.9 3/31/2007

Colony Investors VIII, L.P. 4.9 4.9 -5.4 -4.7 4.7 - -36.7 6/30/2007

Europa Fund III, L.P. -1.3 -1.3 23.5 15.1 10.7 - 16.2 12/31/2008

Carlyle Realty Partners VII, L.P.1 2.5 2.5 22.0 - - - -10.6 3/31/2014

Europa Fund IV, L.P. -1.0 -1.0 21.4 - - - 1.6 6/30/2014

LaSalle Asia Opportunity Fund IV 2.7 2.7 26.8 - - - 91.5 9/30/2014

Alcion Real Estate Partners III -5.2 -5.2 -1.5 - - - -1.5 5/31/2015

Europa Fund V, L.P. 0.0 0.0 - - - - 0.0 6/30/2016

LaSalle Asia Opportunity Fund V 0.0 0.0 - - - - 0.0 7/1/2016

Total Opportunistic 1.5% 1.5% 19.0% 10.4% 11.4% - -9.5% 9/30/2006




Portfolio Performance Detail – By Style

The Core portfolio, driven by the separate account, has been the most significant driver of the Real

Estate Portfolio’s total performance

Greystar has been a strong contributor to performance over the long term

Near term, Carlyle VII and LaSalle Asia IV have contributed meaningfully to total portfolio performance

Both Colony Investors VIII and NREP Real Estate Debt Fund have experienced challenged returns

due to their peak 2007 and 2006 vintage years

Note: Totals include Active funds only; See Glossary of Terms for definitions

In Europa Capital Fund V the difference between committed and unfunded capital is due to currency fluctuations between the commitment date of March 10, 2016 and quarter-end (March 31, 2016).

Fund NameVintage

Year

Total

Commitment ($)

Unfunded

Commitment ($)

Total Paid-In

($)

Total Distributions

($)

Net Asset

Value ($)DPI RVPI TVPI Net IRR

DAM IMA 1997 374,344,800 40,170,010 364,803,485 260,992,599 377,526,922 0.72x 1.03x 1.75x 9.3%

JPMorgan Strategic Property Fund 2010 90,000,000 0 90,000,000 11,684,619 114,326,940 0.13x 1.27x 1.40x 11.8%

UBS Trumbull Property Fund 2010 30,000,000 0 30,000,000 5,130,924 42,081,829 0.17x 1.40x 1.57x 9.6%

Morgan Stanley Prime Property Fund 2017 30,000,000 30,000,000 0 0 0 N/A N/A N/A N/A

Subtotal: Core 524,344,800 70,170,010 484,803,485 277,808,142 533,935,691 0.57x 1.10x 1.67x 9.4%

INVESCO Real Estate Fund I 2005 40,000,000 3,006,442 36,993,558 40,000,725 98,090 1.08x 0.00x 1.08x 1.6%

Cornerstone Hotel Income and Equity Fund 2006 10,000,000 176,122 9,851,719 8,780,780 13,075 0.89x 0.00x 0.89x -2.2%

Fidelity Real Estate Growth Fund III 2007 20,000,000 0 17,998,026 21,673,023 2,394,105 1.20x 0.13x 1.34x 7.6%

INVESCO Real Estate Fund II 2008 40,000,000 3,198,665 36,801,335 44,565,623 4,118,705 1.21x 0.11x 1.32x 7.4%

Cornerstone Hotel Income and Equity Fund II 2008 20,000,000 1,818,586 18,181,414 23,945,567 1,117,801 1.32x 0.06x 1.38x 9.0%

Greystar Equity Partners VII 2011 25,000,000 1,483,170 23,878,542 41,233,914 240,075 1.73x 0.01x 1.74x 19.5%

CBRE Strategic Partners U.S. Value 6, L.P. 2012 20,000,000 0 20,160,394 17,335,222 11,529,713 0.86x 0.57x 1.43x 14.5%

CBRE Strategic Partners U.S. Value 7, L.P. 2014 20,000,000 2,069,491 17,930,509 829,023 20,325,901 0.05x 1.13x 1.18x 12.4%

Brookfield Global Real Estate Securities Alpha 2015 88,350,036 0 89,176,245 90,392,737 377,085 1.01x 0.00x 1.02x 1.1%

Long Wharf Real Estate Partners V 2015 20,000,000 14,148,860 5,851,140 57,961 4,627,776 0.01x 0.79x 0.80x -27.0%

Subtotal: Value-Added 303,350,036 25,901,336 276,822,881 288,814,574 44,842,325 1.04x 0.16x 1.21x 6.1%

California Smart Growth Fund IV 2006 15,000,000 16,579 15,845,510 11,301,149 6,169,772 0.71x 0.39x 1.10x 1.7%

NREP Real Estate Debt Fund, L.P. 2006 15,000,000 534,270 14,465,789 7,203,937 50,703 0.50x 0.00x 0.50x -11.9%

Cornerstone Apartment Venture III 2007 20,000,000 7,186,888 13,024,223 15,625,557 17,816 1.20x 0.00x 1.20x 4.3%

Colony Investors VIII, L.P. 2007 33,000,000 1,125,481 31,874,519 8,924,152 5,614,700 0.28x 0.18x 0.46x -12.0%

Europa Fund III, L.P. 2009 28,085,600 1,463,019 24,991,837 23,743,619 8,995,439 0.95x 0.36x 1.31x 9.4%

Carlyle Realty Partners VII, L.P. 2014 50,000,000 28,361,231 21,755,190 171,021 27,369,188 0.01x 1.26x 1.27x 25.4%

Europa Fund IV, L.P. 2014 20,000,000 7,273,304 13,054,056 3,761,780 10,022,918 0.29x 0.77x 1.06x 5.3%

LaSalle Asia Opportunity Fund IV 2014 50,000,000 23,013,350 38,980,320 21,731,959 28,241,123 0.56x 0.72x 1.28x 49.0%

Alcion Real Estate Partners III 2015 20,000,000 15,670,270 4,329,730 4,164 3,678,983 0.00x 0.85x 0.85x -19.1%

Europa Fund V, L.P. 2016 20,075,983 19,860,671 0 0 0 N/A N/A N/A N/A

LaSalle Asia Opportunity Fund V 2016 20,000,000 20,000,000 0 0 -113,719 N/A N/A N/A NM

Subtotal: Opportunistic 291,161,583 124,505,063 178,321,175 92,467,338 90,046,923 0.52x 0.50x 1.02x 0.7%

Grand Total(s): 1,118,856,419 220,576,410 939,947,541 659,090,054 668,824,938 0.70x 0.71x 1.41x 7.9%




Portfolio Performance Detail – By Vintage Year

Note: Totals include Active and Liquidated funds;

See Glossary of Terms for definitions

Vintage years 2006 and 2007 were challenged due to the Global Financial Crisis. Accordingly, funds

formed during the aforementioned years are not expected to meet their target returns

More recent funds (Vintages 2010 – 2012) have allowed SDCERS the opportunity to participate in the

market recovery

Vintage YearTotal

Commitment ($)

Unfunded

Commitment ($)Total Paid-In ($)

Total

Distributions ($)Net Asset Value ($) DPI RVPI TVPI Net IRR

1990 19,813,721 0 19,813,721 30,351,174 0 1.53x 0.00x 1.53x 6.0%

1994 62,325,306 0 62,325,306 88,257,262 0 1.42x 0.00x 1.42x 11.7%

1996 133,884,492 0 133,884,492 297,370,112 0 2.22x 0.00x 2.22x 13.4%

1997 394,342,498 40,170,010 384,801,183 291,023,637 377,526,922 0.76x 0.98x 1.74x 9.5%

2003 3,895,000 0 3,895,000 5,397,050 0 1.39x 0.00x 1.39x 37.1%

2004 142,100,000 0 133,456,009 155,780,631 0 1.17x 0.00x 1.17x 4.3%

2005 40,000,000 3,006,442 36,993,558 40,000,725 98,090 1.08x 0.00x 1.08x 1.6%

2006 40,000,000 726,970 40,163,019 27,285,866 6,233,550 0.68x 0.16x 0.83x -3.2%

2007 73,000,000 8,312,369 62,896,768 46,222,732 8,026,621 0.73x 0.13x 0.86x -3.0%

2008 111,569,158 5,017,251 175,332,237 212,205,003 5,236,506 1.21x 0.03x 1.24x 5.4%

2009 28,085,600 1,463,019 24,991,837 23,743,619 8,995,439 0.95x 0.36x 1.31x 9.4%

2010 120,000,000 0 120,000,000 16,815,543 156,408,769 0.14x 1.30x 1.44x 11.0%

2011 25,000,000 1,483,170 23,878,542 41,233,914 240,075 1.73x 0.01x 1.74x 19.5%

2012 20,000,000 0 20,160,394 17,335,222 11,529,713 0.86x 0.57x 1.43x 14.5%

2013 73,266,219 0 73,578,994 81,296,773 0 1.10x 0.00x 1.10x 14.8%

2014 221,395,000 60,717,376 173,151,621 112,021,526 85,959,130 0.65x 0.50x 1.14x 21.1%

2015 128,350,036 29,819,130 99,357,115 90,454,861 8,683,844 0.91x 0.09x 1.00x -0.1%

2016 40,075,983 39,860,671 0 0 -113,719 N/A N/A N/A N/A

2017 30,000,000 30,000,000 0 0 0 N/A N/A N/A N/A

Grand Total(s): 1,707,103,015 220,576,410 1,588,679,796 1,576,795,648 668,824,938 0.99x 0.42x 1.41x 9.2%




Time Weighted Returns (Gross of fees)

Note: All fund inception dates are rolled forward/backward to the first quarter of the funds’ performance


series.





Time Weighted Returns (Net of fees)

Note: All fund inception dates are rolled forward/backward to the first quarter of the funds’ performance

The quarterly capital account statements of Carlyle Realty Partners VII often include accruals for transactions that occur in the subsequent quarter. The net since inception time weighted return for this fund has been

calculated by adjusting the dates of such cash flows to the last day of the prior quarter.


return series.


*




Portfolio Diversification

SDCERS’ portfolio is diversified by both geographic region and property type

– Slight overweight to apartments is positive given the sector’s strong rebound from the downturn

and longer term more stable return profile

– Underweight to office is appropriate given the sector’s long term risk return spectrum, though

tactical near term opportunities are improving

– Overweight to the South is driven predominantly by the DAM IMA in addition to JP Morgan SPF

– The portfolio gains non-U.S. exposure through LaSalle Asia Opportunity Fund IV, Europa Fund III

and IV, and Colony VIII




Portfolio Diversification (cont’d)

Vintage Year Diversification


Style Diversification


SDCERS has diversification across vintage year and real estate style categories

– The significant Core allocation is primarily due to SDCERS large IMA exposure which was

started in 1997

1997 57%

2010 23%

2015 1%

2014 13%

2012 2%

2009 1%

2007 1%

2008 1%

2006 1%

2005 0%

2011 0%

2013 0%

2016 0%

Core 80%

REITs 0%

Value-Added 7%

Opportunistic 13%




Manager Diversification as of September 30, 2016

The DAM IMA is 56% of the Real Estate Portfolio and falls outside of the 35% concentration guideline

for IMA managers as outlined in the FY 2017 Strategic Plan Objectives and Policies. The SDCERS

Board has approved the liquidation of the IMA and SDCERS staff along with AHIC are working to

prudently wind down the separate account

SDCERS three largest manager concentrations are the DAM IMA, JP Morgan Strategic Property

Fund, and Brookfield Global Real Estate Securities Alpha representing 56%, 17%, and 6% of the

portfolio, respectively

56%

17%

6%

4%

4%

3% 2% 1%

1% 1%

1% 1% 1% 1% 0% 0% 0% 0%

0%

0% 0% 0%

0% 0% DAM IMA

JPMorgan Strategic Property Fund

UBS Trumbull Property Fund

LaSalle Asia Opportunity Fund IV

Carlyle Realty Partners VII, L.P.

CBRE Strategic Partners U.S. Value 7, L.P.

CBRE Strategic Partners U.S. Value 6, L.P.

Europa Fund IV, L.P.

Europa Fund III, L.P.

California Smart Growth Fund IV

Colony Investors VIII, L.P.

Long Wharf Real Estate Partners V

INVESCO Real Estate Fund II

Alcion Real Estate Partners III

Fidelity Real Estate Growth Fund III

Cornerstone Hotel Income and Equity Fund II

Brookfield Global Real Estate Securities Alpha

Greystar Equity Partners VII

INVESCO Real Estate Fund I

NREP Real Estate Debt Fund, L.P.

Cornerstone Apartment Venture III

Cornerstone Hotel Income and Equity Fund

Europa Fund V, L.P.

LaSalle Asia Opportunity Fund V




Portfolio Funding Summary

Several capital calls were made over the quarter totaling approximately $4.3 million

Unfunded Non-Core Commitments of $16.3 million are not expected to get called (includes $3.0 million from Europa III of which manager does not anticipate calling more than $1 million of outstanding commitment)


Partnership Name Funded Commitment ($) Unfunded Commitment ($) Total Commitment ($)

Alcion Real Estate Partners III 4,329,730 15,670,270 20,000,000

Brookfield Global Real Estate Securities Alpha 88,350,036 0 88,350,036

California Smart Growth Fund IV 14,983,421 16,579 15,000,000

Carlyle Realty Partners VII, L.P. 21,638,769 28,361,231 50,000,000

CBRE Strategic Partners U.S. Value 6, L.P. 20,000,000 0 20,000,000

CBRE Strategic Partners U.S. Value 7, L.P. 17,930,509 2,069,491 20,000,000

Colony Investors VIII, L.P. 31,874,519 1,125,481 33,000,000

Cornerstone Apartment Venture III 12,813,112 7,186,888 20,000,000

Cornerstone Hotel Income and Equity Fund 9,823,878 176,122 10,000,000

Cornerstone Hotel Income and Equity Fund II 18,181,414 1,818,586 20,000,000

DAM IMA 334,174,790 40,170,010 374,344,800

Europa Fund III, L.P. 26,622,581 1,463,019 28,085,600

Europa Fund IV, L.P. 12,726,696 7,273,304 20,000,000

Europa Fund V, L.P. 215,312 19,860,671 20,075,983

Fidelity Real Estate Growth Fund III 20,000,000 0 20,000,000

Greystar Equity Partners VII 23,516,830 1,483,170 25,000,000

INVESCO Real Estate Fund I 36,993,558 3,006,442 40,000,000

INVESCO Real Estate Fund II 36,801,335 3,198,665 40,000,000

JPMorgan Strategic Property Fund 90,000,000 0 90,000,000

LaSalle Asia Opportunity Fund IV 26,986,650 23,013,350 50,000,000

LaSalle Asia Opportunity Fund V 0 20,000,000 20,000,000

Long Wharf Real Estate Partners V 5,851,140 14,148,860 20,000,000

Morgan Stanley Prime Property Fund 0.00 30,000,000 30,000,000

NREP Real Estate Debt Fund, L.P. 14,465,730 534,270 15,000,000

UBS Trumbull Property Fund 30,000,000 0 30,000,000

Grand Total(s): 898,280,010 220,576,410 1,118,856,419




Portfolio Fee Analysis

Note: Table displays management fees incurred, but not necessarily paid, during the period


Partnership Name

Current Quarter

Management Fees as of

9/30/2016 ($)

Fiscal YTD Management Fees

($)

DAM IMA (880,128) (880,128)

JPMorgan Strategic Property Fund (260,445) (260,445)

UBS Trumbull Property Fund (89,005) (89,005)

Subtotal: Core (1,229,577) (1,229,577)

Brookfield Global Real Estate Securities Alpha (130,394) (130,394)

CBRE Strategic Partners U.S. Value 6, L.P. (34,201) (34,201)

CBRE Strategic Partners U.S. Value 7, L.P. (44,826) (44,826)

Cornerstone Hotel Income and Equity Fund 0 0

Cornerstone Hotel Income and Equity Fund II 0 0

Fidelity Real Estate Growth Fund III (14,822) (14,822)

Greystar Equity Partners VII 0 0

INVESCO Real Estate Fund I 0 0

INVESCO Real Estate Fund II (8,388) (8,388)

Long Wharf Real Estate Partners V (75,616) (75,616)

Subtotal: Value-Added (308,247) (308,247)

Alcion Real Estate Partners III (75,000) (75,000)

California Smart Growth Fund IV (10,534) (10,534)

Carlyle Realty Partners VII, L.P. (175,480) (175,480)

Colony Investors VIII, L.P. (20,460) (20,460)

Cornerstone Apartment Venture III 0 0

Europa Fund III, L.P. (81,289) (81,289)

Europa Fund IV, L.P. (102,843) (102,843)

Europa Fund V, L.P. 0 0

LaSalle Asia Opportunity Fund IV (121,175) (121,175)

LaSalle Asia Opportunity Fund V (26,671) (26,671)

NREP Real Estate Debt Fund, L.P. (2,780) (2,780)

Subtotal: Opportunistic (616,232) (616,232)

Grand Total(s): (2,154,056) (2,154,056)




RE Portfolio - Carried Interest Analysis


Partnership NameCurrent Quarter Carried Interest as of

9/30/2016 ($)

Fiscal YTD Carried Interest

($)

DAM IMA 0 0

JPMorgan Strategic Property Fund 0 0

Morgan Stanley Prime Property Fund 0 0

UBS Trumbull Property Fund (25,759) (25,759)

Subtotal: Core (25,759) (25,759)

Brookfield Global Real Estate Securities Alpha 0 0

CBRE Strategic Partners U.S. Value 6, L.P. 78,527 78,527

CBRE Strategic Partners U.S. Value 7, L.P. 80,011 80,011

Cornerstone Hotel Income and Equity Fund 0 0

Cornerstone Hotel Income and Equity Fund II 10,336 10,336

Fidelity Real Estate Growth Fund III 0 0

Greystar Equity Partners VII 4,326 4,326

INVESCO Real Estate Fund I 0 0

INVESCO Real Estate Fund II 0 0

Long Wharf Real Estate Partners V 0 0

Subtotal: Value-Added 173,200 173,200

Alcion Real Estate Partners III 0 0

California Smart Growth Fund IV 0 0

Carlyle Realty Partners VII, L.P. (271,151) (271,151)

Colony Investors VIII, L.P. 0 0

Cornerstone Apartment Venture III 0 0

Europa Fund III, L.P. 0 0

Europa Fund IV, L.P. 0 0

Europa Fund V, L.P. 0 0

LaSalle Asia Opportunity Fund IV 0 0

LaSalle Asia Opportunity Fund V 0 0

NREP Real Estate Debt Fund, L.P. 0 0


Grand Total(s): (123,710) (123,710)




DAM IMA Property Level Performance and Net Asset Value

*Transitioned from Invesco IMA in Q4 2013

La Costa Apartments sold 2/12/2015


Investment Name Quarter Fiscal YTD 1 Year 3 Years 5 YearsSince

Inception

Net Asset Value

($)

100 Apollo Drive 1.3% 1.3% -5.6% -2.8% -0.9% 4.6% 12,778,108

4040 North Central Expressway 2.6 2.6 16.2 12.6 19.5 11.4 13,505,823

Country Club Plaza Shop Ctr 9.8 9.8 14.2 19.2 12.2 6.0 18,755,190

Eagan Town Centre 1.6 1.6 8.3 7.9 7.1 5.4 22,999,267

Foothills Corporate Centre 1.3 1.3 17.4 14.3 16.4 10.3 21,462,987

Fremont Business Center 1.7 1.7 19.7 16.8 15.6 3.2 26,529,676

Latitudes at the Moors 1.9 1.9 16.6 13.0 13.5 14.4 35,437,125

Metropolitan Business Center 0.7 0.7 12.5 5.9 3.5 5.8 5,635,357

New Ridge/Benson 1.5 1.5 4.8 3.9 7.7 2.1 11,444,718

Tigard Corporate Center -0.4 -0.4 20.0 - - 15.7 30,411,810

Towers Industrial Park 1.1 1.1 38.5 19.9 20.6 13.4 46,260,808

700 South Washington Street 1.8 1.8 14.7 - - 10.8 19,643,926

Airport 100 1.5 1.5 11.7 16.2 14.9 12.9 24,426,374

Barton Creek - - - - - - 150,102

Windsor Commons 6.9 6.9 13.3 22.9 16.0 13.8 11,335,977

67 Pacella Park Drive* 2.0 2.0 8.4 - - 10.2 9,129,482

Caballero Industrial I* 1.5 1.5 29.0 - - 20.8 8,986,134

Caballero Industrial II* 1.5 1.5 30.4 - - 20.6 9,966,886

La Costa Apartments* - - - - - - 53,064

Landing on Mohegan Lake* 2.0 2.0 17.2 - - 13.9 29,638,524

Rancho Hills Apartments* 1.4 1.4 13.3 - - 23.8 18,975,583

Total DAM IMA 1.6% 1.6% 15.4% 12.6% 12.0% 9.8% 377,526,922




Agenda





Section 5 Glossary




Summary of Portfolio Activity

Within the Opportunity Portfolio, the only Fund to make a capital call over the quarter was Torchlight

Debt Opportunity Fund V ($1.0 million)

In November 2016, Brookfield Real Estate Finance Fund V received Board approval, but is falling out

due to parties not being able to agree on legal terms.




Opportunity Portfolio Funding Status

PORTFOLIO OVERVIEW


$ in millions

Number of

Investments

3

Total Commitments $90.0

Unfunded

Commitments $21.9



Market Value (Net

Asset Value or NAV) $69.9

PORTFOLIO COMPOSITION TO TARGETS


Target Range

Unfunded

Commitments +

Funded (NAV) Funded (NAV)

Target Opportunity Allocation 2%-3% 1.3% 1.0%

Leverage N/A 34.7%

The Opportunity Portfolio is below its target allocation of 2-3%, currently at 1.0% funded

- The allocation will move towards its target allocation as unfunded commitments to are drawn

down over the coming quarters

Due to the tactical nature of the investment strategy, the Opportunity portfolio allocation target range is

2-3% of Total Plan assets and will focus on larger commitments to fewer managers




Opportunity Portfolio Performance

The Opportunity Portfolio has delivered strong returns over all time periods

- Torchlight DOF IV is invested in 111 deals and is expected to perform in line with its target

returns

- Mesa West Real Estate Income Fund III is invested in 49 deals and is expected to perform in

line with its target returns

- Torchlight DOF V is invested in 57 deals and is expected to perform in line with its target returns

Strong one-year and since inception returns are still predominantly driven by LaSalle Asia Opportunity

Fund IV and Carlyle Realty Partners VII. These funds have been moved to the Real Estate Portfolio

effective 1/1/2016

*For the purpose of time weighted returns, the transitions between the real estate portfolio and the opportunity portfolio are effective as of 1/1/2016. No changes have been made to

the historical time weighted return series.

3.2 3.2

14.0 13.7

1.8 1.8

9.1

11.3

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Quarter Fiscal YTD 1 Year Since Inception(1Q14)

Tota

l N

et

Retu

rns (

%)

Total SDCERS Opportunistic (As of September 30, 2016)

SDCERS NFI-ODCE




Opportunity Portfolio Performance Detail

The Funds within the Opportunity Portfolio are still early in their lifecycle with all three being within

their investment periods as of Q3 2016. Despite this, the Funds have delivered solid returns to-date

See Glossary of Terms for definitions

Fund Name Vintage YearTotal

Commitment ($)

Unfunded

Commitment ($)

Total Paid-In

($)

Total

Distributions ($)

Net Asset

Value ($)DPI RVPI TVPI Net IRR

Mesa West Real Estate Income Fund III, L.P. 2013 20,000,000 5,923,318 14,088,150 2,354,089 14,490,047 0.17x 1.03x 1.20x 9.6%

Torchlight Debt Opportunity Fund IV 2013 50,000,000 0 54,894,973 11,960,061 51,113,958 0.22x 0.93x 1.15x 7.9%

Torchlight Debt Opportunity Fund V 2015 20,000,000 16,000,000 4,000,715 31 4,277,887 0.00x 1.07x 1.07x 9.0%

SDCERS Opportunistic 90,000,000 21,923,318 72,983,838 14,314,181 69,881,892 0.20x 0.96x 1.15x 8.3%




Opportunity Portfolio – Private Market Equivalent (PME) Analysis

In an exercise to examine whether the Non-Core investments are adding alpha over Core, an IRR

equivalent measure of performance has been created for traditional Core benchmarks

– Cash flows, dates and sizes from Non-Core funds are applied to the NFI-ODCE and NPI indices

to derive an IRR equivalent for those indices

TVPI, or Total Value to Paid-In ratio, is the ratio of total value from an investment, including

distributions, to total invested capital and provides a reasonable measure of a portfolio’s performance

The Opportunity Portfolio is not yet adding alpha over the broader Core equity index on an IRR or

TVPI basis. Returns are expected to become more meaningful over time as all three funds are still

within their investment periods.

– All three funds in the portfolio are entirely or largely unrealized as of Q3 2016

• Mesa West Real Estate Income Fund III is targeting a net IRR of 12%

• Torchlight DOF IV is targeting a net IRR of 15%

• Torchlight DOF V is targeting a net IRR of 13-15%

SDCERS Opportunity Portfolio Portfolio IRR PME IRR Over/Under PME Portfolio TVPI PME TVPI Over/Under

PME

vs. NFI ODCE 8.27% 11.81% -3.54% 1.15x 1.23x -0.08x




Opportunity Portfolio Diversification

As of Q3 2016, SDCERS’ Opportunity Portfolio is diversified by sector and geography

- The apartment overweight is in line with the market’s increased demand for apartment debt

financing as the sector rebounded strongly after the recent financial crisis

- With the transition of LaSalle Asia IV into the Real Estate Portfolio effective Q1 2016, the

Portfolio now only has exposure to the U.S.

The Portfolio’s sector and geographic diversification will continue to increase as unfunded capital is

drawn down and invested

0%

10%

20%

30%

40%

50%

Apartment Industrial Office Retail Hotel Other

Property Type Diversification (As of September 30, 2016)

SDCERS

NFI-ODCE

0%

10%

20%

30%

40%

50%

East Midwest South West Non-U.S.

Geographic Diversification (As of September 30, 2016)

SDCERS

NFI-ODCE




Opportunity Portfolio Fee Analysis

Note: Management fees are deducted from the portfolio NAVs in their respective quarterly periods


Partnership Name

Current Quarter

Management Fees as of

9/30/2016 ($)

Fiscal YTD Management Fees

($)

Mesa West Real Estate Income Fund III, L.P. (56,775) (56,775)

Subtotal: Value-Added (56,775) (56,775)

Torchlight Debt Opportunity Fund IV (117,765) (117,765)

Torchlight Debt Opportunity Fund V (60,000) (60,000)


Grand Total(s): (234,540) (234,540)




Opportunity Portfolio Carried Interest Analysis


Partnership NameCurrent Quarter Carried Interest as of

9/30/2016 ($)

Fiscal YTD Carried Interest

($)

Mesa West Real Estate Income Fund III, L.P. 0 0

Subtotal: Value-Added 0 0

Torchlight Debt Opportunity Fund IV (90,572) (90,572)

Torchlight Debt Opportunity Fund V 0 0

Total Opportunistic: (90,572) (90,572)

Grand Total(s): (90,572) (90,572)




Agenda





Section 5 Glossary




Glossary of Terms

All Real Estate Return – A combined measure of both the Real Estate Portfolio and Opportunity Portfolio’s performance

Catch-up - The provision that dictates how cash flows from the fund will be allocated between the investors and the manager in

order for the manager to receive their performance fee. This allocation of cash flows occurs once the investors have collected their

capital and preferred return

Core - The most conservative institutional real estate investing style

Core-Plus - A style whereby investments have a slightly higher level of risk and expected return than Core, primarily through use of

leverage

Custom Public Index – Currently the FTSE EPRA/NAREIT Global Developed REIT Index. Prior to July 2008, the benchmark was

the Dow Jones U.S. Select REIT Index

Development - The construction of buildings from breaking the ground through building completion. This may also include

entitlement of the land and the pursuit of permits prior to construction

DPI – Distributions to Paid In; the ratio of distributions from investments to total invested capital

First Closing - The point at which a manager receives and executes the subscription documents and can begin drawing capital

from investors

Final Closing - The final date at which new investors can subscribe to a fund

Internal Rate of Return (IRR) - A method of measuring the performance of a portfolio from inception through a particular point in

time. This method weights returns according to the dollars invested at each point in time. Hence, this is known as dollar-weighted

return. This is a better measure when the manager controls when dollars must be invested and is the most commonly used method

of real estate performance evaluation; Gross IRR is gross of fee and Net IRR is net of fee

NFI-ODCE – NCREIF Fund Index Open-end Diversified Core Equity Index is an index of investment returns reporting on both a

historical and current basis the results of 24 open-end commingled funds pursuing a core investment strategy; underlying funds are

leveraged with gross and net returns available

NPI – NCREIF Property Index is a quarterly time series composite total rate of return measure of investment performance of a very

large pool of individual commercial real estate properties acquired in the private market for investment purposes only; it is reported

unlevered and gross of fee

FTSE-NAREIT Equity REIT – An unmanaged capitalization-weighted index of all equity real estate investment trusts




Glossary of Terms (cont’d)

FTSE EPRA/NAREIT Global REIT – An unmanaged market-weighted total return index, which consists of many companies from

Global markets whose floats are larger than $100 million and derive more than half of their revenue from property-related activities

Opportunistic - A style that is the riskiest form of real estate investing. The name derives from when such funds were formed after

the early 1990s real estate market crash to take advantage of opportunities in unwanted properties. Such investments include

ground-up development, highly-leveraged purchases, or transactions involving highly complicated legal or environmental situations

Private Market Equivalent (PME) Analysis - The private market equivalent (“PME”) analysis seeks to answer the question of

whether a portfolio’s non-Core investments are providing alpha over the lower-risk Core alternatives. Non-Core performance is best

measured through dollar weighted performance metrics (i.e. IRR) while Core indices have traditionally been provided in time

weighted return (“TWR”) methodologies. The PME analysis converts the Core indices from TWRs to IRRs by taking the cash flows

from the non-Core portfolio and making hypothetical investments into the Core indices. This exercise allows for a like-kind

comparison on performance.

Policy Benchmark – Blended benchmark reflecting private and public nature of portfolio where private real estate benchmark is

weighted 90% and public real estate benchmark is weighted 10%; private real estate benchmark is NFI-ODCE + 50bps, public real

estate benchmark is Wilshire REIT 1Q1997 through 2Q08 and EPRA/NAREIT Global Developed Index from 3Q08 to present

Pre-Specified Deals – Investments that are purchased for a fund before its final close. The assets are typically warehoused on a

line of credit

Promote (Carried Interest) -The performance fee a manager receives once the investors have received their return of capital and

the preferred return (return promised by the manager)

RVPI – Residual Value to Paid In; the ratio of the residual value of an investment to total invested capital

Time-Weighted Return - A method of measuring the performance of a portfolio over a particular period of time. Effectively, it is the

return of one dollar invested in the portfolio at the beginning of the measurement period. This is a better return measure when the

manager does not control when the dollars must be invested

TVPI – Total value to paid-in ratio; the ratio of total value from an investment, including distributions, to total invested capital

Value-Added - A style that represents moderate-risk real estate. A manager typically increases the future value of the investment

by undertaking activities such as leasing, improving an existing building, or taking some risk through operating intensive assets,

such as hotels or self-storage

Vintage Year - The year in which a fund has its final closing. Typically coincides with the year a fund begins making investments

third quarter real estate performance review

Documents