State Board of Administration Real Estate Asset Class Review Steve Spook, Senior Investment Officer-Real Estate Lynne Gray, Senior Portfolio Manager-Principal Investments Michael Fogliano, Senior Portfolio Manager-Externally Managed Investments Investment Advisory Council Meeting March 6, 2017
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Real Estate Asset Class Review - FOIALTS.com · 2017-03-04 · Real Estate Asset Class Review . Steve Spook, Senior Investment Officer-Real Estate . Lynne Gray, Senior Portfolio Manager-Principal
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Michael Fogliano, Senior Portfolio Manager-Externally Managed Investments
Investment Advisory Council Meeting March 6, 2017
Organizational Chart Ashbel Williams
ED & CIO
STEVE SPOOK
Sr. Investment Officer-RE
LYNNE GRAY Sr. Portfolio Manager Principal Investments
TOM PROCTOR Portfolio Manager
CHRIS MARINO Portfolio Manager
DAVE BURLAK Portfolio Manager
TED BOLLMANN Portfolio Manager
KIM BUCKLEY Sr. RE Research
Analyst III
LAURA FROST Sr. RE Operations
Analyst III
MICHAEL FOGLIANO Sr. Portfolio Manager
Ext. Managed Investments
JEFF SMITH Portfolio Manager
SARA GEIGER Portfolio Manager
AMANDA PORTER Sr. Investment
Analyst III
TIFFANY WILLIAMS Administrative Asst.
Dennis MacKee Acting Deputy Executive
Director
3
PAUL GROOM Deputy
General Counsel
Governance • Executive Director & CIO (ED & CIO)
• Delegated authority by Trustees to manage the investment of Florida Retirement System assets.
• Approves RE Annual Investment Work Plan. • Approves all new investment managers, direct owned
acquisitions/dispositions/financings, new commingled fund investments, investment manager agreements, and joint ventures.
• Deputy Executive Director (DED) • Provides guidance and input for above Real Estate activities. • Concurrence required prior to submission to ED & CIO.
• Senior Investment Officer-Real Estate (SIO-RE) • Delegated authority by ED & CIO to effectuate the preceding and perform
ownership responsibilities.
4
Real Estate Consultant
• Real Estate Consultant • Prepares quarterly and annual performance reports • Investment provider monitoring and annual review • Fund due diligence • Research • Ad hoc projects
5
Real Estate Benchmark
* (NFI) National Council of Real Estate Investment Fiduciaries Fund Index, (ODCE) Open-end Diversified Core Equity ** (REIT Index) Financial Times Stock Exchange, European Public Real Estate Association, National Association of Real Estate Investment Trusts
Principal Investments Leverage • The portfolio’s leverage as of 3Q16 is at an all time high of 20.4%, versus the NFI-ODCE benchmark leverage of 22.1%. • Leverage has steadily increased since the end of 2012 and increased by 290 bps over the last 12 months. • As of today, leverage is 24%.
14 Leverage as of 9/30/16. Source: The Townsend Group
Investment Portfolio Guidelines - Portfolio Leverage limited to 25% Loan To Value (LTV)
- Individual Asset Level limited to 50% LTV
- JV Individual Asset limited to 70% LTV
- Nonrecourse to the SBA
ODCE Leverage 22.1%
74% 26%
Fixed Rate Floating Rate
PI Leverage 20.3% $2.2 B
Real Estate Returns Data Through September 30, 2016
12.2% 13.4%
14.8%
7.2%
9.9% 11.3% 11.6%
5.0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
One Year Return Three Year Return Five Year Return Ten Year Return
SBA Real Estate RE Portfolio Benchmark16
Peer Performance
• SBAF’s five-year net performance versus its peers (67 institutional real estate investors) ranks in the 91st percentile.
• It is important to note, peer portfolio's will vary by investment strategy, investment type, risk appetite and portfolio inception dates.
17 Source: The Townsend Group *Performance as of September 30, 2016.
*as of 3Q2016 Five-Year Net Return
Peer Performance
SBAF’s five-year net performance versus its peers, 23 institutional real estate investors with Real Estate Investments exceeding $2 billion, is the top ranking plan.
It is important to note, peer portfolio's will vary by investment strategy, investment type, risk appetite and portfolio inception dates. 18 Source: The Townsend Group
FY 2016-2017 Activities • Continued to invest in traditional core property types. Four investments, including JV partner
buy-outs, totaling $200 million NAV. • Continued to diversify through non-correlated property types. Four investments, including a
self-storage portfolio, two student housing projects, and a medical office building totaling $291 million NAV.
• Five dispositions totaling $822 million NAV. • Portfolio leverage increased due to refinancing, new acquisitions utilizing leverage, and sale
of two unleveraged assets. • New commitments to value-add/opportunistic funds, one global and one domestic totaling
$125 million. • Full redemption from one open-end fund. • Hired two new core separate account managers.
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Lynne Gray Senior Portfolio Manager
Real Estate Principal Investments Portfolio
Principal Investments Portfolio
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Objective Provide returns that, with an acceptable level of risk, meet or exceed the National Council of Real Estate Investments Fiduciaries Fund Index – Open End Diversified Core Equity (NFI-ODCE).
Investments Primarily high quality, well-located, stable real estate properties: Apartment, Office, Industrial, Retail and Specialty Sector. The specialty sector includes Agriculture, Student Housing, Senior Housing, and Self Storage. Non-core strategies, such as development, are permitted.
Data through 09/30/16
Principal Investments Portfolio
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10.8% 12.2%
13.9%
9.1%
11.4% 11.3%
9.2%
11.3% 11.2%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
1 Year 3 Year 5 YearPI Total Net NFI ODCE Total Net NPI Total Net
Investment Portfolio Guidelines Guidelines for Managing and Monitoring
• Little control over execution of strategy • The manager is not responsible for the timing of
the exit
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Closed-End Pooled Funds Pros Cons
• Greatest number of investment strategies • Diversification by strategy and manager • Alignment of interests
• Least control • Least liquidity • Higher fees • Little control of execution of strategy
Closed-End Funds • Over 600 closed-end funds are actively raising capital today
47 Source: Townsend
Developed Americas,
412 Developed Europe,
100
Global, 27
Emerging Americas, 22
Emerging Asia, 22
Developed Asia, 21
Unidentified, 18
Frontier, 2 Emerging Europe,
2
Closed-End Private RE Funds
REITs A REIT, or Real Estate Investment Trust, is a company that invests in real estate or mortgages. A REIT stock is traded on the exchanges, which allows anyone to gain access to large commercial real estate equity or debt strategies.
REITs Pros Cons
• High liquidity • High diversification • Global exposure • Low fees • Not perfectly correlated with private real estate
• More volatile • Subject to local currency fluctuations
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Externally Managed Portfolio by Investment Type
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NAV $5.2 B
REITs 26%
Closed-End Funds
24%
Open-End Funds 50%
NAV ($5.2B + Callable Capital ($0.9B)
Closed-End Funds 36%
REITs 22%
Open-End Funds 42%
As of 9/30/16 Source: Townsend
Externally Managed Portfolio Returns Data through September 30, 2016
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2.3%
12.3% 12.7% 13.7%
1.8%
11.1% 11.0%
12.2%
1.8%
9.9% 11.3% 11.6%
1.8%
9.1%
11.4% 11.3%
0%2%4%6%8%
10%12%14%16%
3Q16 One Year Three Year Five Year
Externally ManagedPortfolio Total Net Return
Externally Managed PortfolioCustom Weighted Index
SBAF PrimaryBenchmark
ODCE TotalNet Return
Source: Townsend
Externally Managed Pooled Fund Returns Data through September 30, 2016
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11.6%
14.4% 13.9%
10.1%
12.5% 12.4%
9.1%
11.4% 11.3%
0%
2%
4%
6%
8%
10%
12%
14%
16%
One Year Three Year Five Year
SBA Pooled Funds Portfolio Net NFI-ODCE Gross NFI-ODCE NetSource: Townsend
Externally Managed Pooled Fund Returns Data through September 30, 2016
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Core vs. Non-Core Performance
Source: Townsend
Non-Core Returns
9.2%
11.7% 11.8%
9.1%
11.4% 11.3%
0%2%4%6%8%
10%12%14%16%18%20%
One Year Three Year Five Year
Core Externally Managed Net NFI-ODCE Net
Core Returns
14.4%
17.6% 16.5%
11.7%
14.1% 14.4%
10.7%
13.1% 13.0%
0%2%4%6%8%
10%12%14%16%18%20%
One Year Three Year Five YearNon-Core Externally Managed Net NFI-ODCE Value Weight +150 BPS Gross
NFI-ODCE Value Weight +150 BPS Net
Pooled Funds
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Office 32%
Retail 17%
Industrial 13%
Hotel 6%
Other 7%
Pooled Funds by Property Type
Residential 25%
East 24%
South 20%
West 36%
Midwest 7%
Pooled Funds by Geography
Domestic 87%
International 13%
Source: Townsend As of 9/30/16
International Pooled Funds Data through September 30, 2016
* Hotel assets in various unspecified locations. ** "Other" is comprised of small (<$1m) exposures to Argentina, Canada, Latvia, Romania, Slovakia and Ukraine.
$87.3 M $.08 M
$35 M
$34.5 M
$162.6 M $21.2 M
$184.7 M
$1.6 M
International Pooled Funds by Property Type
Apartment Health Care Hotel*Industrial Office Other**Retail Student Housing
$0.3 M
$75.2 M
$289 M $12.1 M
$109.3 M
$22.3 M
$4.9 M $0.8 M $13.1 M
International Pooled Funds by Geography
Developed Americas Developed AsiaDeveloped Europe Emerging AmericasEmerging Asia Emerging EuropeEmerging Middle East and Africa FrontierOther
Source: Townsend 54
Externally Managed REIT Returns Data through September 30, 2016
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1.8%
14.6%
8.8%
13.2%
1.3%
14.9%
7.7%
12.3%
0%2%4%6%8%
10%12%14%16%
3Q16 One Year Three Year Five Year
SBA REIT Portfolio Net SBA Custom REIT BenchmarkSource: Townsend
• Real Estate Consultant • Placement agents (Industry brokers)
• Industry contacts • Existing partner relationships • Industry conferences and roundtables
Pooled Fund Life Cycle
60
ACQUISITIONS - Screen Opportunities
• Starts with a conversation via referral source • Review offering materials • Discussions with real estate consultant • Conference call with manager • Face-to-face meeting • If still interested, initiate underwriting
Pooled Fund Life Cycle
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ACQUISITIONS –Thorough Underwriting Approach
• Engage real estate consultant • Send the newly created SBAF Supplemental Due Diligence Questionnaire to
potential fund manager • Assess fund strategy to current market conditions • Review organizational stability and platform • Review prior fund performance & fund terms • Assess deal pipeline & seed assets (attempt to visit several seed assets) • Review RE consultant reports
• Review background checks on key employees • Perform reference checks • Create on-site interview questions for face-to-face meeting with manager;
(Questions accumulated from all due diligence to that point) • Assess and measure risks for acceptability and attempt to mitigate
Pooled Fund Life Cycle
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ACQUISITIONS – Negotiate
• Management and Incentive fees • Co-investment rights • Accounting & reporting needs (Accounting DDQ) • Transfer rights • Fund restrictions • Obtain an Advisory Board seat • Underwriting works with internal and external counsel to vet legal and business
issues • Request manager confirmation of compliance with SBAF’s policies & Florida
statutes
Pooled Fund Life Cycle
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INVESTMENT MONITORING
• Review quarterly financials and manager reports • Compare acquisitions to fund strategy & restrictions/guidelines • Compare fund performance to fund objectives • Review fund amendments, extension requests, etc. • Attend annual investor/advisory board meetings • Review quarterly reports from Townsend • Produce internal quarterly reports for enhanced asset & portfolio management
Pooled Fund Life Cycle
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INVESTMENT MONITORING (continued)
• Quarterly calls with managers • Frequent calls with Townsend on manager issues, market views and potential new
managers • Quarterly calls with existing managers and potential managers on their market
views • Calls with market research specialists for unbiased market views • Monitored by External Investment Management Oversight group • Monitored by Internal Audit