IMA Transition Update & Redeployment Strategy March 2017 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 confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the approval of Aon Hewitt.
SDCERS Portfolio Overview Portfolio Overview (As of September 30, 2016) Real Estate Portfolio Opportunity Portfolio Aggregate Number of Investments 25 3 28 Total Commitments $1,118.9 $90.0 $1,208.9 Unfunded Commitments $220.6 $21.9 $242.5 Market Value (NAV) $668.8 $69.9 $738.7 Real Estate Portfolio Opportunity Portfolio Strategy by NAV Strategy by NAV As of Q3 2016 As of Q3 2016 Opportunistic Core 79% Real Estate IMA 57% 23% Real Estate Debt 100% Equity 100% Value-Add Value- 21% Add 7% Opportunistic 13% Aon Hewitt | Retirement and Investment Proprietary & Confidential 2 Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.
IMA Liquidation Plan I.M.A. Assets Potential Exchange for Sell Individually Shares (9 assets totaling ~$166 million in (10 assets totaling ~$219 million in NAV) NAV) LOW Assets Likely of Interest to Open-End Funds HIGH Longer execution time (3-5 years) SDCERS’ remains invested in Core • • • Potentially “out of Core market” Rationale with no loss of allocation while liquidated dollars are re- • Limited transaction fees invested (if entry queues exist) Bidding offered to all AHIC buy • Pure market pricing achieved rated open end core funds • Potentially significant transaction Offers to be evaluated by multiple • • costs factors including price offered, portfolio construction fit, potential exchange restrictions e.g. lockups, etc. Aon Hewitt | Retirement and Investment Proprietary & Confidential 3 Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.
IMA “Exchange for Shares” Process Update • DAM has established an Oversight Committee, which excludes the PM team, to ensure • • DAM is holding second round Will seek approval to proceed with all parties are treated equally bidding and is expected to have TBD finalist, subject to successful • AHIC distributed bid invitations to final recommendation in March due diligence and legal potential bidders agreement SDCERS Bidding & Investment Buy-Rated Fund Selection Negotiation Committee Funds Approval • DAM’s PM team is reviewing bids. Any assets not receiving a successful bid will be moving to direct sales • 3 IMA assets are expected to be individually sold by April 2017 • Approx. $60 million to be redeployed with new allocation to Direct Sales PRISA and PRIME • Going forward quarterly monitoring of sales activity will drive additional core real estate commitments Aon Hewitt | Retirement and Investment Proprietary & Confidential 4 Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.
DAM IMA – Estimated Disposition Timeline $300,000,000 Currently in Market: Eagan Town Centre (3/16) Metropolitan Business (3/9) Fremont Business (bids) New Ridge/Benson (just in market) $250,000,000 Towers, Caballero I & II (swap bids) Sales to be explored over balance of 2017: 67 Pacella Landing on Mohegan Airport 100 $200,000,000 Country Club Plaza 700 S. Washington Rancho Hills $150,000,000 $100,000,000 2019: 4040 N Central Beyond 2020: Tigard Latitudes $50,000,000 2020: 2018: 100 Apollo Foothills Windsor Commons $0 Sales in 2017 Sales in 2018 Sales in 2019 Sales in 2020 Sales beyond 2020 Source: AHIC, DAM (Data as of 2/24/2017) Aon Hewitt | Retirement and Investment Proprietary & Confidential 5 Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.
SDCERS Core Profile – New Commitment Overview Current SDCERS Core Portfolio SDCERS Portfolio Including Core Fund Recommendations JPM SPF JPM SPF $114.3M $114.3M Average Asset Size Average Asset Size Diversified Fund $XXM UBS TPF UBS TPF $42.1M $42.1M Index Prudential PRISA MS Prime $45.0M $30.0M MS Prime $45.0M DAM IMA DAM IMA $377.5M $312.3M Relative Risk Relative Risk Italics represents SDCERS NAV or Commitment Amount 30% 30% 25% 25% 20% 20% 15% 15% 10% 10% 5% 5% 0% 0% Index DAM IMA JPM SPF UBS TPF MS Prime Diversified PRISA Index DAM IMA JPM SPF UBS TPF MS Prime Fund Leverage Non-Stabilized Source: AHIC, Managers Leverage Non-Stabilized Aon Hewitt | Retirement and Investment Proprietary & Confidential 6 Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.
Core Portfolio - Property Type and Geographic Diversification • The chart below assumes the following: o (3) DAM IMA industrial assets sold to a Diversified core property Fund $45 million committed to Prudential’s PRISA o o An additional $15 million committed to MS Prime • Under these assumptions, the diversification of the SDCERS Core Portfolio becomes increasingly benchmark aware with respect to diversification 45.0% 40.0% 35.0% 30.0% 25.0% Current Future 20.0% NFI-ODCE 15.0% 10.0% 5.0% 0.0% Office Apartment Retail Industrial Hotel Other West East Midwest South Source: AHIC, SDCERS 9/30/2016 (gross assets) Aon Hewitt | Retirement and Investment Proprietary & Confidential 7 Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.
Long-Term Strategy – Core Equity Execution • As the DAM liquidation progresses, SDCERS’ equity core portfolio is expected to become fully allocated, on an approximate value weight bases, to the Big 4 open end Core funds • Creates a “index” approach to achieving real estate returns in line with the NFI -ODCE Index Long-Term Execution Current SDCERS Core Portfolio JPM SPF $114.3M JPM SPF Average Asset Size Average Asset Size UBS TPF $42.1M Index UBS TPF Prudential MS Prime PRISA $30.0M DAM IMA $377.5M MS Prime Relative Risk Relative Risk Source: AHIC Aon Hewitt | Retirement and Investment Proprietary & Confidential 8 Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.
Rolling 3 Year Tracking Error The table shows the rolling three year tracking errors of a series of Funds starting with the largest Fund alone – As additional large cap funds are combined the tracking error reduces quickly and significantly – Benefit of additional holdings reduces quickly after the Big 4 A portfolio of the four smallest funds, “Small 4”, has much higher tracking error to the index Tracking Error (Rolling 3-Year) 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 - Big 1 Big 2 Big 3 Big 4 Small 4 Source: AHIC, Managers Aon Hewitt | Retirement and Investment Proprietary & Confidential 9 Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.
Overall Portfolio Structure – Core Satellite Approach Real Estate Toolkit for Portfolio Structure Reflects policy goals for real estate portfolio…focus on generating income and providing diversification benefits to the total portfolio, while providing competitive returns relative to the benchmark Complement Portfolio with return-seeking and risk-mitigation tools and investments; over- and underweight at tactical points in the real estate cycle REITs/REOCs PE Value Added Added return More balanced potential. Liquid risk/return profile but lower between income diversification and appreciation benefits PE Opportunistic Debt Opportunities Tactical Public & Private. opportunities Expand risk- Core Private RE driven by creating adjusted return appreciation; (index beta) opportunities highest risk Leverage Natural Resources Judicious use Timber, Farmland, allows for Infrastructure, exploiting Energy, etc.; opportunities for Terms/Structures helpful diversifier enhanced returns Alignment of interest; Funds, Sep. Accts, FoFs, co- investments… Aon Hewitt | Retirement and Investment Proprietary & Confidential 10 Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.
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