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Real Estate Update
Core Portfolio Presentation for IAC
November 18, 2015
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Agenda
I. Real Estate Investment Portfolio Overview
II. Core & Non-Core Real Estate Performance
III. Core Real Estate Transitional Goals
IV. Market Conditions
V. Discussion Topics
2
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Real Estate Allocation Overview (as of 9/30/15) 3
Strategic policy transition to 5% Core / 3% Non-Core of plan (60/40 within REIP), is well underway
4.2%
2.8%
1.0%
0.4%
4.5% 3.8%
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 P
lan
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%
Valuation as of 9/30/15
Substrategy Strategy
Core
Non-Core 4.7%
4.2% 4.8%
3.0% 4.5%
4.3%
7.7%
8.7% 9.1%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
2Q14 3Q15 4Q15
Historical Forecast%
of
Pla
n
CoreNon-Core
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Non-Core RE Performance (Net Returns) 4
Separate accounts and high-conviction managers are driving impressive returns
Non-Core Contribution to Return
1 Yr Contribution
Opportunistic 10.3
Value Add 7.3
Total Non-Core 17.7
Major Drivers Vintage
O NorthCreek 2011 2.6
O Blackstone VII 2011 1.7
O Lone Star II 2010 1.5
V NorthRock II 2012 1.2
O Blackstone VI 2007 1.0
3 Yr Contribution
Opportunistic 10.1
Value Add 5.6
Total Non-Core 15.7
Major Drivers Vintage
O Blackstone VI 2007 1.5
O NorthCreek 2011 1.5
O Blackstone VII 2011 1.4
V KTR II 2008 1.2
O Lone Star II 2010 1.1
NCRS data through 9/30/15 O = Opportunistic, V = Value Add
17.7%
15.7% 14.9%
-0.1%
4.6%
8.8%
11.7% 12.2%
-1.3%
4.7%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
1 Yr 3 Yr 5 Yr 7 Yr 10 Yr
TWR
Non-Core Benchmark
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Core Real Estate Performance (Net Returns) 5
Core performance is expected to improve within 24 months as investments mature
Core Contribution to Return
1 Yr Contribution
Private Core RE 7.6
REITs 1.5
Total Core 9.1
Major Drivers Vintage
PC NorthRock Core 2008 2.4
PC JP Morgan SPF 1989 2.1
PC Blackstone Edens 2013 1.4
3 Yr Contribution
Private Core RE 8.4
REITs 2.0
Total Core 10.3
Major Drivers Vintage
PC NorthRock Core 2008 3.5
PC JP Morgan SPF 1989 2.3
NCRS data through 9/30/15
PC = Private Core Real Estate
9.1%
10.3% 10.8%
4.6% 5.3%
11.4%
11.0%
12.3%
3.9%
5.8%
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
TWR
Core Benchmark
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REITs & Private Core Performance (net returns) 6
Anticipated J-curve effect from significant recent commitments to Core Plus investments
is causing short term underperformance
Source: NCRS data through 9/30/15
0
500
1,000
1,500
2,000
2,500
3,000
3,500
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
1 Year 3 Years 5 Years 7 Years 10 Years
Co
mm
itm
ents
($
M)
Net
Ret
urn
s
Private Equity Core Real Estate
Custom NCREIF ODCE Net
Cumulative Commitments ($M)
REITs Private Core
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
1 Year 3 Years 5 Years 7 Years
Public Equity Real Estate
FTSE/EPRA/NAREIT Global Securities
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Core Thesis 7
“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”
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REITs
ODCE
SMA
Debt
Core Transition Plan 8
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Private Core 9
5.5%
4.5% 4.2%
3.7%
4.4% 4.5%
5.0% 5.1% 5.2% 5.5%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
2017 2015 1-Year 2-Year 3-Year 5-Year
Forecast Historical
Private Core Gross Income Returns
NCRS ODCE Benchmark
Source: 2Q15 Courtland Report
As a result of implementing the Core Transition Plan, we expect core returns to increase steadily over the next couple of years
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Total Core Leverage by Structure 10
Overall leverage is projected to move higher, however NCRS maintains control with Separate Accounts
24%
30%
43%
37%
33%
29%
37%
43%
40% 38%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
NCRS ODCE Funds Commingled Club Separate Total Core
Leverage
2015 2017
Real estate cash flow projection
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Market Conditions 11
• Vacancy rates are low as solid demand outpaces new supply
• Fundamentals are driving rent increases above inflation and providing healthy NOI
• Elevated valuations are evident for high quality assets
• Financial market turbulence and market/industry specific risks are ever-present, but long-term fundamental drivers provide support for values
• Household formation and demographic trends favor apartments Multifamily
• Supply constrained CBDs and strong employment growth Office
• Urbanization and limited development Retail
• E-commerce and supply chain optimization with focus on the “last mile” Industrial
• Rising travel spending , prime locations generate high occupancy and pricing Hotel
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IV. Topics for Discussion 12
• Increasing our investment in real estate will allow non-core real estate investments to offset underweight to Private Equity
Consider raising the overall cap on real estate
• Pros Challenges
• Pipeline access - Private Equity-type risk
• More efficient cost structure - Difficult to source
• Governance/control - More DST resources
Real Estate Operating Company (REOCs)
• Comfort level
• Leverage is accretive in current market environment
• Proper structure is key
Leverage
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Thank You!
Together we can build and maintain a fiscally strong and prosperous North Carolina.
www.NCTreasurer.com