Real Estate Update - North Carolina€¦ · CCIM, MBA. Portfolio Manager. 4.5 Years with IMD. 16...

Real Estate UpdateNovember 16, 2017

Investment Management Division

AgendaI. Real Estate Team

II. Real Estate Market Conditions

III. Role and Objectives Core and Non-Core Comparison

IV. Real Estate Allocation

V. Real Estate Cash Flow

VI. Unfunded Commitment Pacing

VII. Manager Concentration

VIII. Cost Efficiency

IX. Performance Non-Core Core

X. Investment Strategy Initiatives

XI. Appendix NCRS Investment Approach Total Performance vs. REITs Leverage Example Investment Characteristics

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Real Estate Team

VacantDirector of Real Estate

Troy March, CCIM, MBAPortfolio Manager

4.5 Years with IMD16 Years Industry Experience

Tinh Phan, Licensed BrokerPortfolio Manager

4 Years with IMD18 Years Industry Experience

Tessa Tanis, CPA, MSAPortfolio Manager

2 Years with IMD16 Years Industry Experience

Sean IncremonaAnalyst

2 Years with IMD2 Years Industry Experience/

7 Years Economist

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Real Estate Market Conditions

New completions are a near-term headwind for rent growth, but starts haveslowed and long-term drivers of demand remain relevant.MultifamilyMaturing economic cycle and pockets of supply are having an impact on leasing, but income continues to be solid. OfficeChallenging landscape from rise of e-commerce and evolving consumer preferences.Value is concentrated in high-quality, well-located assets. RetailTop-performing sector underpinned by strong rent growth on robust demand for logisticsand limited new supply, especially in the in-fill markets.IndustrialSomewhat more balanced after dealing with pressure from elevated supply in recent years. Hotel

• Growth moderated from strong levels, vacancy remains low• Real Estate investment capital availability and pricing have held up despite reduced

transaction volume• Steady to slightly higher cap rates as income growth leads appreciation• Debt is accessible to quality sponsors, terms are prudent

Student/senior housing and storage are producing attractive income returns. Marketspecific issues related to new construction and the pace of rent growth.Other Niches

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Role and Objectives

CoreInflation hedge

High current income

Stabilized occupancy

Credit tenancy

Long-term return > fixed income

Minimal risk/downside protection

Non-CoreGrowth diversifier

Opportunity to add value

Renovation, development, leasing

Stabilized upon completion

Long-term appreciation and returns

Low correlation to fixed income

Investment StrategyHigh Quality Well Located

Strong Risk-Adjusted Returns

Core Thesis“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”

Non-Core Thesis“To achieve attractive risk-adjusted

net returns through appreciation and income from a diversified

portfolio, planning for strategic exit optionality”

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Real Estate Allocation

Allocation decrease is attributable to year-to-date net receipts of ~$800 million and the growth of the overall plan.

NCRS data as of 9/30/17Special Situations – Build-to-Core Strategy

4.4% 4.3% 4.2%3.6%

3.5%4.6% 5.1%

4.9%

7.9%

8.9%9.3%

8.5%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

4Q14 4Q15 4Q16 3Q17

% o

f Pla

n

Core Non-Core

3.6%2.5%

0.8%0.3%

4.9%4.2%

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 Pla

n

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%

SubstrategyStrategy

Core

Non-Core

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Real Estate Cash Flow

Investment StrategyHigh quality assets

Strong market locationsMeet or exceed benchmarks

Net realized distributions year-to-date (10/31/17) of ~$800 million.

NCRS data through 10/31/17 with Projected 2017

Commitments ($M): 380 1,205 1,885 1,402 915 0 343 1,265 1,005 1,211 1,798 1,575 1,965 0

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Unfunded Commitment Pacing



Of the $2.7 billion in unfunded commitments at 10/31/17, we project $1.8 billion will be called by 2020 and approximately $900 million will be held as reserves and is unlikely to be called.

-

200

400

600

800

1,000

1,200

1,400

1,600

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Historical Projection

$ in

Mill

ions

Contribution Pacing by Vintage Year (excludes REITs)

2004 (96% | 96%) 2005 (95% | 95%) 2006 (82% | 82%)2007 (91% | 91%) 2008 (87% | 87%) 2009 (N/A | N/A)2010 (86% | 88%) 2011 (87% | 90%) 2012 (89% | 96%)2013 (81% | 88%) 2014 (80% | 94%) 2015 (58% | 93%)2016 (24% | 93%)

*Vintage (% Called | % To be Called)

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Manager Concentration (excludes REITs)



Contribution to Return

3 Year 5 Year

Private Core 9.0 10.0

High Conviction 7.6 7.9

Others 1.4 2.1

Non Core 13.6 14.0

High Conviction 9.8 9.5

Others 3.8 4.5

74% of private market value with high conviction managers –reduce complexity and fees, increase transparency and maximize returns.

* “High Conviction” Managers are identified by the Real Estate Team as General Partners with the highest probability of meeting/exceeding expected fund-level returns

NCRS data through 9/30/17

0

1

2

3

4

5

6

7

8

2005 2006 2007 2008 2010 2011 2012 2013 2015 2016 2017

Mar

ket V

alue

($ B

illio

ns)

High Conviction Managers

Other Private RE Managers

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Cost Efficiency

Leverage relationships and scale to minimize costs and enhance alignment.

-6.0%

-3.0%

0.0%

3.0%

6.0%

9.0%

12.0%

15.0%

2009 2010 2011 2012 2013 2014 2015 2016$0

$20

$40

$60

$80

$100

$120

$140

Tim

e W

eigh

ted

Net

Ret

urn

Ince

ntiv

e Fe

e ($

M)

Incentive Fee 5 Year Net Return

NCRS data through 12/31/16 2015: Convergence of delayed realization of GFC funds, early realization of post GFC funds, and an Industrial manager selling their entire platform

$40

$45

$50

$55

$60

$65

$70

$75

$80

$85

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2009 2010 2011 2012 2013 2014 2015 2016

Man

agem

ent F

ee ($

M)

Perc

ent o

f Mar

ket V

alue

Management Fee Fee % of MV

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Performance: Non-Core Real Estate



Non-Core Contribution to Return3 Year Contribution

Opportunistic 7.9 Value Add 5.7Total Non-Core 13.6

Major Drivers VintageO NorthCreek 2011 1.9 V NorthRock II 2012 1.5 O BREP VII 2011 1.0 V DRA VII 2011 0.8 O Lone Star II 2010 0.7

5 Year Contribution Opportunistic 8.8 Value Add 5.2 Total Non-Core 14.0 Major Drivers Vintage

O NorthCreek 2011 1.5 O BREP VII 2011 1.1O BREP VI 2007 1.0V NorthRock II 2012 0.9 O Lone Star II 2010 0.8

Non-core portfolio continues to outpace the benchmark by a significant margin due to strong performance in separate accounts and other high conviction managers.

* Non-Core Real Estate Benchmark is comprised of the following Burgiss Group Private iQ indices: 80% U.S. Non-Core Real Estate (Opportunistic and Value-Added) and 20% Non-U.S. Non-Core Real Estate (Opportunistic and Value-Added). NCRS data through 9/30/17

10.7%

13.6%14.0% 14.0%

2.7%

6.6%

8.2%7.5%

6.7%

9.2%

10.3%

-0.2%

7.1%

8.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

1 Yr 3 Yr 5 Yr 7 Yr 10 Yr 15 Yr 20 Yr

Tim

e W

eigh

ted

Net

Ret

urn

Non-Core Benchmark*

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Performance: Core Real Estate



Core Contribution to Return3 Year Contribution

Private Core 7.5 REITs 1.3Total Core 8.8

Major Drivers VintageNorthRock I 2008 1.8 JPM SPF 1998 1.3 BREP EDENS 2013 1.1

5 Year Contribution Private Core 8.0 REITs 1.7 Total Core 9.7 Major Drivers Vintage

NorthRock I 2008 2.8 JPM SPF 1998 1.8

Core real estate portfolio has started to outperform the benchmark as core plus investment strategy moves through the J curve.

* The Core Real Estate Benchmark is comprised of 80% NCREIF ODCE Net and 20% FTSE EPRA NAREIT Global Index.NCRS data through 9/30/17

8.6%8.8%

9.7%

10.2%

4.2%

6.6%7.2%

6.5%

10.0%10.3%

11.4%

4.4%

7.3%

8.1%

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 15 Yr 20 Yr

Tim

e W

eigh

ted

Net

Ret

urn

Core Benchmark*

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Investment Strategy Initiatives

Continue to increase allocation to high conviction managers and reduce manager count More attractive terms (e.g. fee discounts for loyalty and size) Greater control and transparency (e.g. Separate Accounts, custom solutions, founding

Limited Partner)

High Conviction Managers

Minimize costs and maximize returns by favoring fee structures that optimize alignment

Cost Efficiency

Target new commitments in property types that enhance portfolio construction Favorable long term risk/return profiles Diversification benefits

Sector Allocation

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Appendix

i. NCRS Investment Approach

ii. Total Real Estate Performance vs. REITs

iii. Leverage

iv. Example Investment Characteristics


Investment Approach• Downside protection• Eye toward current income for core or speed to income for opportunistic

strategies• Moderate leverage levels

Stay the course with our investment strategy…do not

reach for yield

• Stabilize Core portfolio• Diversify by strategy, property sector and location• Balance asset risk and market risk by insisting on the highest asset quality and

location• Target specific submarkets and streets

Use thoughtful & deliberate portfolio construction

• Better terms & fees• More transparency and control• Ability to move quickly to capitalize on opportunities & dislocations• Be the founding investor for new strategies with high conviction managers

Leverage the size of our plan & skill set of our team

• Separate accounts• Multiple strategies with single manager• Fee benefits

Invest meaningful amounts with fewer best-in-class

managers

• Be involved, be nimble and follow through• Deliver results• Be a leader among Limited Partners

Take a long-term view toward investments and manager

relationships 15


Performance: Total Real Estate vs. REITs



NCRS data through 9/30/17

FTSE EPRA/NAREIT Developed Index: The index serves to represent real estate equities across developed markets of North America, Europe and Asia.FTSE EPRA/NAREIT Global Index: The index is designed to track the performance of real estate equities in both developed and emerging markets.

9.5%

11.2%

12.0%12.3%

2.9%

6.2%

7.4%

1.5%

6.8%

7.6%8.4%

2.6%

10.4%

7.4%

4.4%

7.3%7.6% 7.9%

2.4%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

1 Year 3 Year 5 Year 7 Year 10 Year 15 Year 20 Year

Tim

e W

eigh

ted

Net

Ret

urn

NCRS Real Estate FTSE EPRA/NAREIT Developed FTSE EPRA/NAREIT Global

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Leverage



Maintaining prudent levels of leverage and retaining ability to adjust through our Separate Accounts.

40%

32%

39% 39%

50%

43%41%

0%

10%

20%

30%

40%

50%

60%

Private Core REITs Total Core Opportunistic Value Total Non-Core Total Real Estate

Source: Courtland Partners NCRS PMR Q1 2017

LTV as of Q1 2017

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Example Investment Characteristics

StrategyTotal Gross

ReturnDistribution

Income/Appreciation Leverage

Core 7 - 9% 80/20 < 40%

Core Plus 9 - 11% 70/30 < 50%

Value-Add (Non-Core) 11 - 16 % 30/70 up to 60%

Opportunistic (Non-Core) > 16% 10/90 up to 75%

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Real Estate Update - North Carolina€¦ · CCIM, MBA. Portfolio Manager. 4.5 Years with IMD. 16...

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