2017 REAL ESTATE PORTFOLIO REVIEW - Rhode Island
2017 REAL ESTATE PORTFOLIO REVIEWEmployees’ Retirement System of Rhode Island(ERSRI)October 2017
Table of ContentsSectionTabPortfolio Overview1Real Estate Pacing Plan2ERSRI 2017 Real Estate Portfolio Review2
Section 1 Portfolio Overview
ERSRI Real Estate Portfolio: PerformanceReal Estate Portfolio Performance Detail – Net of FeesPartnershipCurrent Value( eption(%)ERSRI Core Portfolio421.21.57.310.511.25.6AEW Core Property Trust102.01.67.210.210.412.5Heitman America Real Estate Trust77.71.26.9n/an/a10.1JP Morgan Strategic Property Fund105.11.46.99.711.06.2Morgan Stanley Prime Property Fund61.72.29.112.112.97.7Prudential PRISA74.71.46.810.610.95.8ERSRI Non-Core Portfolio171.94.114.814.314.41.7Crow Holdings Retail Fund21.85.013.4n/an/a22.2Exeter Industrial Value Fund III33.75.318.5n/an/a15.7GEM Realty Fund V42.32.615.617.4n/a9.013.05.611.2n/an/a15.7IC Berkeley Partners IIIIC Berkeley Partners IV(1)5.4-4.2-10.2n/an/a-10.2JP Morgan Alternative Property Fund0.21.26.46.15.8-0.2Lone Star Real Estate Fund IV17.47.227.3n/an/a15.1Magna Hotel Fund III1.111.30.0-3.18.711.2TriCon Capital Fund VII1.12.20.4-1.2-5.8-15.7Waterton Fund XII35.92.412.9n/an/a20.0ERSRI Total Real Estate Portfolio593.12.29.211.411.64.8Net NFI-ODCE1.56.910.310.86.3Performance Under / Over Benchmark0.72.31.10.8-1.5The current quarter, 1-year, and since inception returns are negative due to the majority of the activity being initial fundexpenses and management fees. The current quarter, 1-year , and since inception returns on a gross basis are 1.5%, 1.0%,and 1.0%, respectively.(1)As of June 30, 2017.ERSRI 2017 Real Estate Portfolio Review4 ERSRI net total returnsexceeded the benchmarkfor the current quarter, 1-,3-, and 5-year time periods. The Core portfolio net totalreturn was in-line with thebenchmark for the currentquarter and exceeded thebenchmark for the 1-, 3-,and 5-year time periods. The Non-Core portfolio nettotal return exceeded thebenchmark for the currentquarter, 1-, 3-, and 5-yeartime periods. ERSRI net total returns, aswell as net total returns forthe Core and Non-Coreportfolios haveunderperformed thebenchmark sinceinception.
ERSRI Real Estate Portfolio: Performance The Portfolio had a total Loan-to-Value (LTV) ratio at quarter end of 38.7%. As expected, the Non-Core investments with higher leverage and therefore higher risk,outperformed the Core investments.Real Estate Portfolio 2-Year Net PerformanceNet Total 2-Year Returns25.0%Exeter IndustrialValue Fund III20.0%15.0%10.0%20.0%Lone Star RealEstate Fund IVJP Morgan StrategicProperty FundPrudential PRISA0.0%0.0%WatertonFund XIIIC BerkeleyPartners III10.0%5.0%Crow HoldingsRetail FundGEM RealtyFund VMorgan Stanley PrimeProperty Fund(1), (2), (3)30.0%40.0%50.0%60.0%70.0%80.0%90.0%LTVAEW Core Property TrustMorgan Stanley Prime Property FundExeter Industrial Value Fund IIILone Star Real Estate Fund IVHeitman America Real Estate TrustPrudential PRISAGEM Realty Fund VWaterton Fund XIIJP Morgan Strategic Property FundCrow Holdings Retail FundIC Berkeley Partners III(1) The size of the bubble relates to the NAV amount of the investment as of June 30, 2017. Investments in JP Morgan Alternative Property Fund,Magna Hotel Fund III and TriCon Capital Fund VII are excluded due to each NAV being approximately 1 million or less and each respective fundbeing in the wind-down stage. IC Berkeley Partners IV was also excluded due to it being the first year of the fund.(2) Lone Star Real Estate Fund IV and Crow Holdings Retail Fund only have seven quarterly periods being annualized.(3) The LTV ratios used in the chart are a weighted average. Crow Holdings Retail Fund and Lone Star Real Estate Fund IV have higher LTV ratios duringthe trailing 2-year period due to the Fund line of credit being used to make investments in advance of calling capital from investors.As of June 30, 2017.ERSRI 2017 Real Estate Portfolio Review5
ERSRI Real Estate Portfolio: Capital ActivityVintage Year Exposure250200Waterton XII Millions150GEM Realty V100JPM StrategicHART50Magna Hotel IIIAEW Core PTAEW Core PTIC Berkeley IIICrow Retail IGEM Realty VIAEW Core PTExeter Value IIILone Star IVIC Berkeley IV2013201420152016020082009Core Fund CommitmentsNon-Core Fund CommitmentsAs of June 30, 2017.ERSRI 2017 Real Estate Portfolio Review62017
ERSRI Real Estate Portfolio: Capital Activity Total Q2 Portfolio Value: 593.1 M Current Committed but Unfunded: 76.6 M Total Value and Unfunded: 669.7 M Total Value and Unfunded Commitments as a Percentage of Q2 Total Plan Assets: 8.3%Current Value with Unfunded CommitmentsAEW Core Property TrustHeitman America Real Estate TrustJP Morgan Strategic Property FundMorgan Stanley Prime Property FundPrudential PRISACrow Holdings Retail FundExeter Industrial Value Fund IIIGEM Realty Fund VGEM Realty Fund VIIC Berkeley Partners IIIIC Berkeley Partners IVJP Morgan Alternative Property FundLone Star Real Estate Fund IVMagna Hotel Fund III (1)TriCon Capital Fund VII (1)Waterton Fund .05.424.00.217.46.31.11.135.9200.913.55.8406080100 MillionsCore NAV(1)Non-Core NAVNon-Core UnfundedThe unfunded commitments of 0.6 million (Magna Hotel Fund III) and 0.4 million (TriCon Capital Fund VII) are not shown.As of June 30, 2017.ERSRI 2017 Real Estate Portfolio Review7120
ERSRI Real Estate Portfolio: DiversificationAs compared to the NFI-ODCE: Underweight to office by 940 basis points and apartment by 200 basis points; Overweight to industrial by 430 basis points, hotel by 100 basis points, and retail by 10 basis points; and Overweight to “other” property types by 600 basis points, primarily through the core investments in theAEW Core Property Fund, Heitman America Real Estate Trust, Morgan Stanley Prime Property Fund andthe Prudential PRISA Fund.Property Type 3.2%ApartmentHotelOfficeOtherAs of June 30, 2017.ERSRI 2017 Real Estate Portfolio Review8IndustrialRetailApartmentHotelOther
ERSRI Real Estate Portfolio: DiversificationAs compared to the NFI-ODCE: Underweight to the East by 770 basis points and the West by 580 basis points; and Overweight to the South by 930 basis points and the Midwest by 100 basis points. The “other” category is comprised of the Portfolio’s international allocation from Lone Star RE IV of1.4% to Europe, 0.3% to Asia and 1.5% to “other U.S.” regions from Lone Star RE IV and Waterton XII.Geographic .5%32.7%10.3%9.3%27.8%18.5%US EastUS MidwestUS SouthUS WestEuropeAsiaUS EastOther U.S.As of June 30, 2017.ERSRI 2017 Real Estate Portfolio Review9US MidwestUS SouthUS West
Pacing Plan: Core Fund AnalysisConsolidated Core Portfolio RiskWeb(1) MSCI Inc. 2017. All rights reserved. The RiskWeb is based on values and percentile ranks. The closer to the outside of the web, the greater the risk. Asset Concentration based on the capital value in the top five assets is lower and more favorable than the benchmark’s25.5% value. Location Concentration based on the capital value in the top five regions is lower and more favorable than the benchmark’s62.9% value. Top regions include: New York-Northern New Jersey-Long Island, NY-NJ-PA (13.2%) Los Angeles-Long Beach-Santa Ana, CA/Riverside-San Bernardino-Ontario, CA (11.2%) San Francisco-Oakland-Fremont, CA/San Jose-Sunnyvale-Santa Clara, CA (8.5%) The Core portfolio in comparison to the benchmark is overweight super-regional malls, power centers and self-storage assets.The Core portfolio is underweight in community/neighborhood centers, other retail and CBD Office. The Core portfolio has a slightly higher debt ratio (LTV) of 23.4% in comparison to the benchmark’s ratio of 21.5%.(1)The benchmark is the PREA/IPD U.S. Property Fund Index Core Diversified Open End FundsAs of June 30, 2017.ERSRI 2017 Real Estate Portfolio Review10
ERSRI Real Estate Portfolio: Other (LTV)80.0%JP %CoreHeitman13.1%Non-CorePortfolio LeverageTotal PortfolioLeverage Limit The Portfolio has 13 managers. The five largest managers manage71.1% of the portfolio’s net assets.The Portfolio had an average overallLTV ratio of 38.7%. The Core Portfolio had an LTV of23.7%. The Non-Core Portfolio had an LTV of58.6%.As of June 30, 2017.ERSRI 2017 Real Estate Portfolio Review11
Section 2 Real Estate Pacing Plan
Pacing Plan: Introduction PCA has updated the following charts to assist the Employees’ RetirementSystem of Rhode Island (ERSRI or the System) with developing aninvestment pacing plan for its real estate program. PCA used growth and return assumptions provided by the System’s existingreal estate managers, assumptions from the System for growth of the fund,as well as PCA’s own growth and return assumptions in development of thispacing plan. Actual market conditions and returns may vary. Key assumptions areincluded on the following pages.ERSRI 2017 Real Estate Portfolio Review13
Pacing Plan: AssumptionsTotal Plan AssumptionsTotal Plan Growth RateTarget Real Estate Allocation (1)Real Estate Plan AssumptionsCore Target Allocation (1)Non-Core Target Allocation (1)Column13.0%5.9%Column161.5%37.5%Publicly Traded Target Allocation (2)Real Estate Growth AssumptionsCore Net IncomeCore Net AppreciationTotal Net Core ReturnCore Cash DistributionsNon-Core Net IncomeNon-Core AppreciationTotal Net Non-Core icly Traded Net AppreciationPublicly Traded DividendPublicly Traded Net Return5.0%2.5%7.5%(1) Proposed allocation percentages(2) For modeling purposes, the 1% target allocation for Publicly Traded/REIT securities is included in the Non-Core targetallocation. PCA believes it is appropriate to create ranges for each of the sub asset classes. However, for modeling purposes, PCA used static targets for each sub-asset class.ERSRI 2017 Real Estate Portfolio Review14
Pacing Plan: Key InputsCoreThe model assumes that no new Core commitments will need to be made.Rather, in order to meet the proposed new target allocations, amounts will need to bewithdrawn from the Core funds. The model assumes a 74 million withdrawal from the PRISA fund in December of2017, bringing the fund balance to zero. Based on the current estimated growth rate of 3%, it is projected that by 2021 theCore Portfolio will be approximately 50 million above the targeted NAV. The actual growth rate of total plan assets along with the resulting targeted NAVand actual NAV of the Core portfolio, within the Inflation Protection Class, shouldbe monitored in order to ascertain if further withdrawals will be needed.Non-CoreThe model includes the following commitments to the Non-Core portfolio, all of which arecontributed over three year periods, earn distributions beginning in the third year, and havebeen adjusted downward by a 20% over-commitment factor: 40 million per year between 2018 and 2021.Publicly-TradedThe model does not include a commitment to publicly-traded securities.ERSRI 2017 Real Estate Portfolio Review15
Pacing Plan: Projected ValuationsProjected Valuations 700 600 599 500 537 537 Millions 477 489 514 400 300 200 100 6/30/201712/31/2017Existing Core Investments12/31/201812/31/201912/31/2020Existing Non-Core InvestmentsNew Non-Core Investments12/31/2021Target As of June 30, 2017, the System had 7.4% of its assets invested in real estate. The line in the chartillustrates the targeted real estate allocation (i.e., appx. 5.9% of total assets (proposed policy)). Assumes total plan assets grow at an annual rate of 3.0%. Projected funding over the next four years includes new commitments to the Non-Core sub assetclass and a withdrawal from the Core sub asset class.ERSRI 2017 Real Estate Portfolio Review16
Pacing Plan: Strategic AllocationsProposed Target AllocationsGlobal EquityEquity Hedge FundsPrivate GrowthIncome ClassInflation ProtectionIG Fixed IncomeAbsolute ReturnCashCrisis Risk 0%10.0%11.0%12.0%13.0%15.0%Current Policy20172018201920202021 %0.0%ERSRI 2017 Real Estate Portfolio Review17
Pacing Plan: Strategic AllocationsProposed Target AllocationsPrivate EquityNon-Core Real EstateOpportunistic Private DebtCore Real EstateInfrastructure Natural ResourcesTIPSBank nt %Private Growth 2018201920202021 (ProposedPolicy)Inflation ProtectionWithin the Inflation Protection Class, the long-term target for Core real estate is 45%.Within the Private Growth Class, the long-term target for Non-Core real estate will be 15%.ERSRI 2017 Real Estate Portfolio Review18
Pacing Plan: Strategic AllocationsProposed Core Real Estate Allocations 4505.0%4.5% 4004.2%4.2%4.2%4.2%4.2% 350 3004.0%3.6%3.6%3.6%3.6%3.5%3.0% 250 Millions4.5%2.5% 2002.0% 1501.5% 1001.0% 500.5% 00.0%12/31/201712/31/2018Core Target NAV 12/31/201912/31/2020Projected Core NAVCore Target %12/31/2021Projected Core %Within the Inflation Protection Class, the long-term target for Core real estate is 3.6% ofTotal Plan assets.ERSRI 2017 Real Estate Portfolio Review19
Pacing Plan: Strategic AllocationsProposed Target AllocationsCore Target Allocation (as % of RE)Non-Core Target Allocation (as % of 3.7%62.5%61.5%2018201920202021 nt Policy2017 Over the next four years, the pacing plan will shift the portfolio towards a long-term targetof approximately 61.5% core and 38.5% non-core real estate. This translates to Core real estate having a target of 3.6% of total plan assets and Non-Corereal estate having a target of 2.3% of total plan assets.ERSRI 2017 Real Estate Portfolio Review20
Pacing Plan: Commitment Schedule(1) MillionsHistorical and Projected Commitments and Allocations 2409.0% 2007.5% 1606.0% 1204.5% 803.0% 401.5%0.0% 012/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021CommitmentsActual Real Estate AllocationTarget RE AllocationProjected Post the secondary sale of eight Non-Core investments in 2013, there was a large number ofnew commitments in 2013. Actual commitments between 2013 and 2016 totaled approximately 120 million Core and 231million Non-Core. Additional Core commitments are not anticipated to be needed at this time. Projected Non-Core commitments beginning in 2018 and thereafter will be approximately 40 million per year.(1) Includes commitments made but not yet funded based on year commitment was made and funded commitments based on the yearof the capital callsERSRI 2017 Real Estate Portfolio Review21
Pacing Plan: Strategic AllocationsHistorical and Projected Core and Non-Core NAVs 450100% 417 384 400 344 350 363 354 346 372 38180% Millions 300 25060% 239 197 207 17140% 148 150 78 100 50 204 198 20020% 30 11 00%12/31/201312/31/2014Core NAV 12/31/201512/31/2016Non-Core NAV12/31/2017Core Allocation12/31/201812/31/201912/31/2020Non-Core Allocation12/31/2021ProjectedOver the next four years, the pacing plan will continue to shift the portfolio towards along-term target of 61.5% core and 38.5% non-core real estate.ERSRI 2017 Real Estate Portfolio Review22
Pacing Plan: Commitment & Withdrawal ScheduleProjected Commitments and Withdrawals 60 550 537 40 40 40 40 40 537 530 520 20 510 514 Millions 540 - 500 490 (20) 489 (40) 480 477 470 460 (60) 450 (80) (74)12/31/2017 awals12/31/2021Targeted NAVThe System would need to make the following commitments and withdrawal beginning in 2017 inorder to achieve the targeted 5.9% real estate allocation in four years: Core: a withdrawal in December of 2017 for approximately 74 million. Non-Core: approximately 40 million of new commitments annually in 2018-2021.ERSRI 2017 Real Estate Portfolio Review23
Pacing Plan: Projected Total Cash FlowsProjected Cash Flows 100 70 47 43 Millions 10 42 33 40 10 (20) (39) (50) (97) (110) (140) (69) (70) (80) (110)12/31/201712/31/2018Total ContributionsERSRI 2017 Real Estate Portfolio Review12/31/2019Total Distributions2412/31/2020NET Activity12/31/2021
Pacing Plan: Projected Core and Non‐Core Cash FlowsProjected Cash Flows 70 50 Millions 40 31 30 10 45 41 9 2 2 2 2 2 (10) (12) (12) (21) (30) (13) (13) (27) (50) (56) (57) (70) (89) (90) 12/31/201712/31/2018 (84)12/31/202012/31/201912/31/2021Over the next four years, the real estate program is not expected to require capitalTotal Non-Core ContributionsTotal Core DistributionsTotal Non-Core Distributionscontributions to fund commitments.Total Core ContributionsThe total distribution amounts include a withdrawal from the Core funds.ERSRI 2017 Real Estate Portfolio Review25
DISCLOSURES: This document is provided for informational purposes only. It does not constitute an offer of securities of any of the issuers that may be described herein. Information contained herein may have been provided by third parties, including investment firms providing information on returns and assets under management,and may not have been independently verified. The past performance information contained in this report is not necessarily indicative of future results and there is no assurance that the investment in question will achieve comparable results or that the Firm will be able to implement its investment strategy or achieve itsinvestment objectives. The actual realized value of currently unrealized investments (if any) will depend on a variety of factors, including future operating results, the value of the assets and market conditions at the time of disposition, any related transaction costs and the timing and manner of sale, all of which may differ from theassumptions and circumstances on which any current unrealized valuations are based.Neither PCA nor PCA’s officers, employees or agents, make any representation or warranty, express or implied, in relation to the accuracy or completeness of the information contained in this document or any oral information provided in connection herewith, or any data subsequently generated herefrom, and accept noresponsibility, obligation or liability (whether direct or indirect, in contract, tort or otherwise) in relation to any of such information. PCA and PCA’s officers, employees and agents expressly disclaim any and all liability that may be based on this document and any errors therein or omissions therefrom. Neither PCA nor any of PCA’sofficers, employees or agents, make any representation of warranty, express or implied, that any transaction has been or may be effected on the terms or in the manner stated in this document, or as to the achievement or reasonableness of future projections, management targets, estimates, prospects or returns, if any. Anyviews or terms contained herein are preliminary only, and are based on financial, economic, market and other conditions prevailing as of the date of this document and are therefore subject to change.The information contained in this report may include forward-looking statements. Forward-looking statements include a number of risks, uncertainties and other factors beyond the control of the Firm, which may result in material differences in actual results, performance or other expectations. The opinions, estimates and analysesreflect PCA’s current judgment, which may change in the future.Any tables, graphs or charts relating to past performance included in this report are intended only to illustrate investment performance for the historical periods shown. Such tables, graphs and charts are not intended to predict future performance and should not be used as the basis for an investment decision.All trademarks or product names mentioned herein are the property of their respective owners. Indices are unmanaged and one cannot invest directly in an index. The index data provided is on an “as is” basis. In no event shall the index providers or its affiliates have any liability of any kind in connection with the index data orthe portfolio described herein. Copying or redistributing the index data is strictly prohibited.The Russell indices are either registered trademarks or trade names of Frank Russell Company in the U.S. and/or other countries.The MSCI indices are trademarks and service marks of MSCI or its subsidiaries.Standard and Poor’s (S&P) is a division of The McGraw-Hill Companies, Inc. S&P indices, including the S&P 500, are a registered trademark of The McGraw-Hill Companies, Inc.CBOE, not S&P, calculates and disseminates the BXM Index. The CBOE has a business relationship with Standard & Poor's on the BXM. CBOE and Chicago Board Options Exchange are registered trademarks of the CBOE, and SPX, and CBOE S&P 500 BuyWrite Index BXM are servicemarks of the CBOE. The methodology of the CBOES&P 500 BuyWrite Index is owned by CBOE and may be covered by one or more patents or pending patent applications.The Barclays Capital indices (formerly known as the Lehman indices) are trademarks of Barclays Capital, Inc.The Citigroup indices are trademarks of Citicorp or its affiliates.The Merrill Lynch indices are trademarks of Merrill Lynch & Co. or its affiliates. Supplement for real estate and private equity partnerships: While PCA has reviewed the terms of the Fund referred to in this document and other accompanying financial information on predecessor partnerships, this document does not constitute a formal legal review of the partnership terms and other legal documents pertaining to the Fund. PCA recommends that its clientsretain separate legal and tax counsel to review the legal and tax aspects and risks of investing in the Fund. Information presented in this report was gathered from documents provided by third party sources, including but not limited to, the private placement memorandum and related updates, due diligence responses,marketing presentations, limited partnership agreement and other supplemental materials. Analysis of information was performed by PCA. An investment in the Fund is speculative and involves a degree of risk and no assurance can be provided that the investment objectives of the Fund will be achieved. Investment in the Fund is suitable only for sophisticated investors who are in a position to tolerate such risk and satisfy themselves that such investment isappropriate for them. The Fund may lack diversification, thereby increasing the risk of loss, and the Fund’s performance may be volatile. As a result, an investor could lose all or a substantial amount of its investment. The Fund’s governing documents will contain descriptions of certain of the risks associated with aninvestment in the Fund. In addition, the Fund’s fees and expenses may offset its profits. It is unlikely that there will be a secondary market for the shares. There are restrictions on redeeming and transferring shares of the Fund. In making an investment decision, you must rely on your own examination of the Fund and theterms of the offering.
GEM Realty Fund V GEM Realty Fund VI IC Berkeley Partners III IC Berkeley Partners IV JP Morgan Alternative Property Fund Lone Star Real Estate Fund IV Magna Hotel Fund III TriCon Capital Fund VII Waterton Fund XII 0 20 40 60 80 100 120 Millions Non-Core NAV Non-Core Unfunded (1) Total Q2 Portfolio Value: 593.1 M
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