Real Estate Search Process and Recommendation May 19-20, 2016 Tom Masthay, Director of Real Estate & Real Return Eddie Schultz, Investment Analyst, Real Estate & Real Return Rachel Cleak, Alternative Investment Analyst Courtland Partners, Real Estate Consultant
Agenda I. Real Estate Search Process Timeline & Allocation Objectives II. Manager Search Process III. Portfolio Construction IV. Manager Selection & Recommendation* V. Requested Board Action *Names used in this presentation are a shortened version that is used for ease of communication purposes throughout this document. The formal recommendations to the Board on the last page of this presentation reflect the full legal name of the investment. 2
I. Real Estate Search Process Timeline & Allocation Objectives
Real Estate Search Process Timeline • TMRS staff presented and Board Approves the 2016 Real Estate Pacing Plan recommending a commitment of up to $600 million of net new real estate exposure. Dec 2015 • TMRS Staff formally launched the search process, in concert with Courtland . Dec 2015 • Conduct manager reviews through a multi-phase evaluation process for all candidates. • Multiple conference calls /meetings with Courtland to score and determine best candidates for TMRS, as well as incorporate their sourcing Q1 2016– and due diligence. Ongoing • March 2016 Board Meeting: TMRS Board approves investments in two real estate funds for a total of $375 million in new real estate commitments. Q1 2016 • May 2016 Board Meeting: TMRS and Courtland will present to the board the search process utilized for the Real Estate search as well as manager recommendations. One recommendation for $100 million will be presented. Q2 2016 4
Real Estate Search Process Objectives • Portfolio Diversification • Work towards an appropriately balanced portfolio with an efficient number of partnerships for TMRS oversight purposes. • Build a portfolio with suitable geographic and economic concentrations to achieve decreased volatility in returns while providing access to alpha producing opportunities where accretive and cognizant of risk. • Portfolio Partnerships • Identify best in class managers currently in fundraising capable of investing in uncertain market with strong alignment of interests. • Targeted Commitment Level • The targeted Real Estate Pacing Plan for 2016 is up to $600 million. However, pacing plan considerations may lower total recommendations for the year. 5
II. Manager Search Process
Manager Search Process Manager Screen & Universe Analysis Scoring Scoring Category Score / Outcome Manager Screen Yes - Take Meeting; No - Don't Take - Is vehicle consistent w/ TMRS' Sourcing Meeting objectives? (Y/N) Manager Analysis - Does vehicle have 1 - Advance; 2 - Stop adequate capacity and Research Preliminary Due Diligence timeline? - PPPST* Preliminary Review (1/2) Semi-Finalist Scoring Matrix Scoring Category Score Prioritization Finalist Manager Review (A,B,C) - Questionnaire Review A - Prioritize for Final Due - Detailed PPPST* Review Diligence - In-depth Manager Qualifications Comprehensive Due B - Perform More Research Diligence Review C - Stop Research / Manager - Compliance with TMRS IPS (Score) not Selected - Verification of Research, References, Further Market Research Staff Final Due Diligence Scoring Matrix Recommendation Scoring Category Possible Points People (Firm & Team) 0 - 40 points Process (Sourcing, Underwriting and Managing) 0 - 40 points Board Performance (Historical / Expected) 0 - 40 points Approval Strategy (Attractiveness of Opportunity / Portfolio Fit) 0 - 20 points Terms (Fees, Liquidity, etc.) 0 - 20 points Total 100† *PPPST – People, Process, Performance, Strategy, Terms 7 †Selected managers standardized to a score of 100 to allow comparability among selected managers.
Manager Search Process Sourcing (Y/N) 162 distinct real estate manager meetings taken Preliminary Due Diligence (1/2) Met with 45 international real estate managers Prioritization (27.7% of 162) (A,B,C) 3 international managers Comprehensive Due selected as finalists (6.7% of 45) Diligence (Score) 1 manager recommendation Staff (2.2% of 45) Recommendation Board Approval 8
Final Selected Manager Scoring Matrix Final Due Diligence Scoring Matrix - Aggregated Results* Comparable Comparable Recommended Manager/Fund Manager Score† Mgr. 1 Score Mgr. 2 Score Kildare European Partners II, L.P. 100 90 75 (Kildare) *Scoring matrices utilize difference calibrations depending on the strategy being utilized. †Selected managers standardized to a score of 100 to allow comparability among selected managers. 9
III. Portfolio Construction
Manager Selection Portfolio Considerations Strategy Diversification TMRS is approaching strategy diversification with a conservative mindset in order to ensure ongoing compliance with the IPS in a variety of plausible outcomes. Over time, the core portion of the portfolio will come to equilibrium around 60%, the IPS mandates a minimum of 50% core. 11
Manager Selection Portfolio Considerations Manager Implementation Manager Diversification Seeking top performing (Post-Recommendation by Adjusted Commitments) managers to form beneficial partnerships for the TMRS real Stockbridge estate portfolio. Blackstone Property Partners 3% 1% 2% USAA Eagle Fund 1% 16% 2% The number of partnerships is H/2 Capital Partners 2% 2% being watched closely by Harrison Street 3% Invesco US Core Income Fund TMRS and Courtland so Abacus Multi-Family Fund II 5% monitoring and maintenance Walton Street 12% does not become an undue 3% Rubenstein Partners cost. Lubert-Adler Fund VII 4% Greenfield Acquisition Partners VII TPG Realty Fund II Sizing of manager 5% Moorfield Real Estate Fund III relationships remains critical, 10% Miller Global 5% based upon portfolio needs, Torchlight DOF V manager capabilities & Alcion Ventures III 7% 8% opportunity set. Tristan EPISO IV 9% DivcoWest V Kildare II (new) 12
Manager Selection Portfolio Considerations Geographic Diversification Geographic diversification lowers volatility in the portfolio by providing exposure to geographies and economies that are in different stages of their economic cycle. A mindful mix within the portfolio will provide diversity of cash flows and a wider opportunity set to incrementally increase attainable alpha. 13
IV. Manager Selection & Recommendation
Executive Summary of Manager Recommendation Summary of Recommendation Strategy Recommended Recommended Manager/Fund Target Return Classification Amount Kildare European Partners II, L.P. Opportunistic $100 million 14% plus net Total Net Recommendations: $100 million 15
Top Candidate Characteristics – Kildare $100 million Recommendation Scoring Matrix Reasons to Invest Category Kildare Mgr. A Mgr. B People 25 20 15 - Experience & expertise including in house special Process 20 20 20 Performance 20 20 15 servicer Strategy 20 15 15 Terms 15 15 10 - Large market opportunity - $2+ trillion non core Total Points 100 90 75 European commercial real estate on bank balance sheets - Broad based high quality Western European exposure Issues to Watch - Only Fund II and Key man – team has long history & fund I doing well - Use of Leverage – currently using reasonable level - Assets in foreign currency – currency risk is hedged Kildare Holdings organized its first fund in 2013 with capital commitments of approximately $1.9 billion under the direction of Mr. Ellis Short the former CEO and head of Asian operations for Lone Star. Kildare will execute the same strategy investing in real estate and real estate-related assets in Europe with a primary focus in Germany, the Netherlands, the UK and Italy. The principal strategy is to access commercial real estate debt and equity investments through distressed assets. Kildare looks at performing, sub-performing and non-performing loans secured directly or indirectly by commercial real estate assets which they can buy at a discount and work out of distress. 16
V. Requested Board Action
Recommendation TMRS Staff and Courtland Partners recommend that the Board of Trustees approve the selection of the following fund as referenced in the Board Communication Memo for investment in the specified fund below: Kildare European Partners II, L.P. $100 million 18
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