non core real estate manager comparison fresno county

OCTOBER, 2015

Non Core Real Estate Manager Comparison

Fresno County Employees’ Retirement Association

Introduction— The asset allocation calls for a 5% allocation to

real estate.

Current investments represent 4% of assets, and will decrease as TA Realty IX winds down.

— Verus recommends additional commitments to Value-add as well as opportunistic, to diversify across the real estate risk spectrum and bring the allocation to target.

— Verus recommends committing $30 million to value-add fund and $20 million to opportunistic.

These amounts will mitigate J-curve impacts while preserving flexibility for future vintage year diversification.

Verus has identified 4 value add funds and 3 opportunistic funds for consideration.

September 2015Sound Retirement Trust 2

Fund Market Value AllocationInvesco Core 133,046,163 3.32%TA Realty IX 26,486,640 0.66%

159,532,803$ 4.0%

REAL ESTATE EXPOSURE AT 6/30

Core Value-Add OpportunisticLeverage Low Moderate Higher

Holdings fully leased trophy properties in desirable metropolitan hubs.

Properties in growing urban areas, require repositioning, some redevelopment, lease-up

Properties generally require substantial renovation, may involve new construction. Investments are generally more tactical in nature

Source of return

stable rental income

mix of rental income and capital appreciation

mostly capital appreciation

Return expectation

<10% 10%-18% >18%

Value Added Real Estate Comparison

October, 20153

American RealtyAmerican Value Fund

Invesco Real EstateReal Estate Fund IV, L.P.

Location Glendale, CA Dallas, TX

Founded 1971 1983

Firm AUM ($billions) $7.0 $65.1

Fund Offering Open-Ended Fund Fund IV

Fund Structure Open-Ended Fund Delaware L.P.

Investment Style Value Added Value-Added

Target Geographic Allocation United States United States

Target Fund Size ($mm's)$311 NAV (Current Size)$602 GAV (Current Size)

+$278mm in undrawn commitments

$500 mm($305 committed to date)

Initial Close/Final Close

Open-Ended Fund:Quarterly Contributions,

Quarterly Redemptions (after 12 month lock-up)

June 30, 2014 / Dec 31, 2015

(LPs agreed to extend final close 2 Qtrs)Target IRR 11-13% Gross 12-15% (Gross)

Investment Period Open-Ended Fund 2 years

Fund Term Open-Ended Fund 7 years (from final close)

Min. Capital Commitment $2 million $10 million stated (GP may accept smaller allocations on a case-by-case basis - $5mm likely)

Management Fees

1.25% on first $10mm1.20% on next $15mm1.10% on next $25mm

1.00% thereafter1.5%

Other Fees 0.60% acquisition fee Organizational and other expenses are capped at $1,000,000

Incentive Fees 20% 20%

Preferred Return 10% (rolling three year periods, based on valuation) 9%

Catch up Provision (GP / LP) No 50 / 50

Fresno County Employees Retirement Association


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American RealtyAmerican Value Fund

Invesco Real EstateReal Estate Fund IV, L.P.

Investment Objective

― Targeting 11-13% returns over a full cycle― The fund will look to be diversified within the U.S., focusing on office, retail, industrial and multifamily properties.

― Mui-family & office focused value added strategy (recaps, renovation, re-tenanting, & development)― Target properties in U.S. primary markets (50% gateway, 50% non-gateway)― Total Return: 20% from income & 80% from appreciation

Key Differentiators

― Open end structure― Strong union labor policies― Privately owned, independent firm

― Leverage is applied at the individual asset level― Fund expects 25% of the portfolio to be development properties and 10-25% recapitalizations― Average transaction size of $50 mm― Top-down focus developed from internal "U.S. House View"― Heavy weighting to Multifamily and Office properties

Target Property Type Allocations

Current Allocations:― 49% Office― 20% Retail

― 17% Multifamily― 14% Industrial

― 33 to 50% Multi-family― 25 to 40% Office

― 5 to 15% Industrial― 5 to 15% Retail

Development Hard Cap 25% 25% Target (35% Hard Cap)

Target Leverage Current 47%Maximum 65% Target 50-60% (Max 65%)

Transaction Sizes $15 to $100 mm $20 to $100mm

Potential Concerns― Long entry queue to get fully invested― Open end structure allows other investors in nad out, potentially affecting the managers plans for use of capital

― Leverage target is higher at 50%-60%― Fund is expected to only have approximately 15 holdings which will limit expected diversification

Fresno County Employees Retirement AssociationOctober, 2015


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Kennedy WilsonReal Estate Fund V

TA Associates Fund XI

Location Los Angeles, CA Boston, MA

Founded 1977 1982


Fund Offering Fund V Fund XI

Fund Structure Delaware L.P. Deleware L.P.

Investment Style Value Added Value-Added

Target Geographic Allocation United States - Western Focus United States

Target Fund Size ($mm's) $500 $1,250 mm($440 mm committed to date)

Initial Close/Final Close 4Q 2014 / 4Q 2015

2Q 2015 /4Q 2015 or 1Q 2016

Target IRR >15% Gross 14%-15% (Gross)

Investment Period 3 Years 2 Years

Fund Term 8 years (subject to extention) 7 years

Min. Capital Commitment $10 million $5 million (Firm stated they will accept commitments as low as $1 to $2 million)

Management Fees 1.0% on commitments during investment period1.5% on invested capital thereafter

Year 1: 0.50%, Year 2: 0.80%Year 3: 1.10%, Year 4: 1.20%Year 5: 1.25%, Year 6: 1.20%

Year 7: 1.00%, Thereafter: 0.60%

Other Fees Organizational and other expenses are capped at $1,500,000 Organizational and other expenses are capped at 0.25% of aggregate commitments


Preferred Return 10% 8%

Catch up Provision (GP / LP) 50 / 50 50 / 50



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Kennedy WilsonReal Estate Fund V

TA Associates Fund XI


― Target primarily office and multifamily in the Western U.S. in top markets with dense populations, high barriers to entry and limited land availability.― Look for distressed owners, forced sellers, undermanaged, under leased properties.

― Industrial & office focused value added strategy (renovation & re-tenanting)― Total Return: 66% from income & 33% from appreciation― Provide diversified exposure to four main property types

Key Differentiators

― KW Services (Auction, Property Mgmt and Research) operates in all major markets in the Western U.S. The fund will exploit opportuntieswhere KW has a competitive advantage through information or relationships. ― 75% of dealflow is sourced internally

― Leverage is applied at the Fund level― Income-oriented fund with a flatter "J-Curve"― Average transaction will be around $25 mm― Lower leverage approach (35%-45%) and more diversification ( 90-100 transactions planned)― Heavy weighting to Industrial and Office properties― Lower Management Fees


― 50% Office― 25% Multifamily

― 25% Other

― 20% Multi-family― 35% Office

― 40% Industrial― 5% Retail

Development Hard Cap None Stated (None Expected) 20%

Target Leverage Max 65% 35% - 45%

Transaction Sizes $20-$50 mm avg. (up to $100mm) $25mm avg

Potential Concerns

― Kennedy Wilson is a publicly traded company (NYSE:KW). They will invest balance sheet capital alongside fund investments. The Fund does get first priority access to all dealflow (including separate accounts)

― Since leverage is applied at the Fund level; the entire fund may be exposed to the risk of any one property. This is mitigated somewhat by the lower level of leverage utilized and transfer provisions allowed.― Recent departure of four Partners (out of 23) to pursue other opportunites. Two were in Acquisitions, two were in Asset Management. None of the individuals were on the Investment Committee or Management Committee. No key person events were triggered.


Opportunistic Real Estate Comparison

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Oak TreeReal Estate Opportunities VII

Westport Capital PartnersReal Estate Fund IV

Location Los Angeles, CA Wilton, CT / Los Angeles, CA

Founded 1995 2005


Fund Offering Fund VII Fund IV

Fund Structure Deleware L.P. Deleware L.P.

Investment Style Opportunistic Opportunistic

Target Geographic Allocation Global US / Europe (10-15%)

Target Fund Size ($mm's) $3,500 $500

Initial Close/Final Close 2Q 2015 / 4Q 2015 4Q 2013 / 4Q 2014

Target IRR >15% Gross 15-18% Gross

Investment Period 3 Years 3 years

Fund Term 10 years (subject to extention) 7 years

Min. Capital Commitment $2 million $5 million

Management Fees1.5% for allocation $2 to $149mm

1.4% for allocation $150 to $249mm1.25% for allocation over $250mm

1.5%

Other Fees Organizational and other expenses are capped at $2,000,000 n/a


Preferred Return 8% 8%

Catch up Provision (GP / LP) 60 / 40 50 / 50



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Oak TreeReal Estate Opportunities VII

Westport Capital PartnersReal Estate Fund IV


― Target over-leveraged assets and restructuring opportunities― Access to broad opportunity set across firm's six real estate platforms: Corporate, Commercial, Residential, FDIC/Bank Portfolios, Structured Finance and Non-US.

― Primarily invest in distressed and opportunistic real estate properties and debt that offer appreciation as well as significant income― Seek access to real estate through acquisitions of interests owned by banks and special servicers― Target assets that have inadequate capitalization, prior mismanagement and poor leasing

Key Differentiators

― Collaboration with other Oaktree strategies, expecially distressed debt.― Deep team of 31 real estate professionals and 650 firmwide employees. In addition, the firm has strong relationships with special servicer Sabal and residential specialist Carrington.― Very few investments made precrisis; minimal legacy property issues.

― Investment type will include equity, senior debt and subordinated debt― Very low leverage for opportunistic strategy― Value oriented strategy with focus on downside protection― Head of firm, Russ Bernard, headed up Oaktree's real estate group prior to 2005


Fund V Allocations:― 35% Commercial― 21% Residential

― 17% FDIC/Bank Portfolios― 13% Corporate

― 11% Structured Finance― 3% Non-US

― 15% Distressed Residential― 15% Industrial

― 15% Office― 15% Retail

― 10% Distressed Municipal Finance― 10% Hospitality― 10% Mixed Use

― 10% Residential Energy Sector

Development Hard Cap None Stated 10%

Target Leverage 30% - 45% 20-40% historically (Max 50%)

Transaction Sizes Varies by platform $5 to $50mm

Potential Concerns

― Firm had public IPO in March 2012. Principals hold 65% of equity and 97% of voting shares however.― Distressed debt funds can invest alongside the real estate group, although the real estate group has first access to any real estate deals.― Longer fund life of 10 years.

― Smaller overall firm size at $1.3bb. Team had prior experience leading a larger real estate platform.― Smaller fund size targeting $500mm



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Gerding EdlenGreen Cities III

Location Portland, OR

Founded 1996

Firm AUM ($billions) $1.0

Fund Offering Green Cities III

Fund Structure Delaware L.P.

Investment Style Value Added / Opportunistic

Target Geographic Allocation United States

Target Fund Size ($mm's)$350 mm

Hard cap $400 mmCurrently closed on $235 mm

Initial Close/Final Close 2Q 2015 / 1Q 2016

Target IRR 16% Gross

Investment Period 3 Years

Fund Term 7 Years

Min. Capital Commitment $5 million

Management Fees 1.5%

Other Fees Organizational and other expenses are capped at $750,000

Incentive Fees 20%

Preferred Return 8%

Catch up Provision (GP / LP) No



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Gerding EdlenGreen Cities III


― Target 50% retrofitting/repositioning of office properties and 50% development within the multifamily sector― The fund targets top growth, urban infill markets such as Seattle, Boston, Los Angeles and San Francisco

Key Differentiators

― The manager has expertise in sustainability and the creation of "green" buildings with LEED-certified standards― No catch up provision on the incentive fees


― 50% Office― 50% Multifamily

Development Hard Cap None Stated (50% Expected)

Target Leverage Max 60%

Transaction Sizes $10-$30mm (up to $60mm)

Potential Concerns

― Smaller firm and team than some other funds― 50% development target higher than other funds. The firm will try to mitigate entitlement risk by making purchases contingent on completion of the entitlement process― Had several condo development projects go bad during the financial crisis. These were larger condos with longer development timelines and higher leverage, a strategy they do not expect to continue


Manager Evaluation American Realty Advisors Strategic Value Realty Fund, LP

LAST UPDATED: AUGUST 2015

STRATEGY BASICS

Asset Class: Value-Add Real Estate

Firm Ownership: 100% Employee Owned

Firm Inception: 1971

Firm Assets: $7.0 Billion

Strategy Inception: 2010

Fund Size: $311 Million (NAV)

$602 Million (GAV)

Fund Structure: Open End Commingled Fund

Minimum Capital Commitment: $2 million

Annual Management Fee: 1.25% on first $10mm

1.20% on next $15mm

1.10% on next $25mm

1.00% thereafter

Incentive Fee: 20%

Preferred Return Hurdle: 10%

Catch-Up Provision No

Other Fees: 0.60% acquisition fee

GP Contribution: $8 million

Firm Background and History American Realty Advisors was formed in 1988 to provide real estate investment management services to institutional and tax-exempt investors. The Firm is headquartered out of Glendale, California and currently manages over $7 billion in domestic assets within open-end and closed-end core and value-added real estate funds as well as separate accounts. Of these, $5.6 billion is Core, while $1.1 billion is value added and $300 million is special situations. American Realty is 100% employee-

owned and has offices in Los Angeles, Atlanta, Chicago, New Canaan, Santa Fe, Orlando, and San Francisco. Mr. Stanley Iezman is the founding member of the Firm and owns 100% of American Realty Advisors’ common stock.

Strategy Background The Strategic Value Realty Fund (The Value Fund) was created in 2010 to be the firm’s flagship value-added fund. In the past, they have offered specialized closed-end funds and separate accounts in the space. The Value Fund targets enhanced yield and capital appreciation opportunities in the United States using active management strategies such as repositioning of under-managed assets, lease-up, recapitalization, renovation and/or redevelopment. Investments are primarily driven by the particular value opportunity and timing in the market; however, the fund intends to maintain diversification by property type and geography. Property types will include retail, office, multi-family, industrial, hotel and other more specialized property types in major markets. Preferred markets generally exhibit higher growth from several of the following: large population with college degrees; significant presence from globally competitive industries including strong demand drivers from technology, advertising, media, energy and healthcare; and concentrations of universities, research centers, venture capital companies and other intellectual centers.

Key Investment Professionals American Realty Advisors has 97 employees across seven different offices. Of these, eight are affiliated with portfolio management, eleven with acquisitions, and 28 work in asset management roles.

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The American Realty Strategic Value Fund is overseen by an eight-member Investment Committee. Six Investment Committee seats are permanent and two are rotating positions. Every acquisition must be approved by this committee and each member has a veto right with regard to every transaction. The following professionals are instrumental in the Fund’s process:

SCOTT DARLING, PRESIDENT/EXECUTIVE MANAGING DIRECTOR, SENIOR PORTFOLIO MANAGER

Scott Darling serves as the President of American Realty Advisors and Executive Managing Director for the firm’s Portfolio Management Team where he oversees and is responsible for the investment strategy implementation of American’s largest commingled fund. Mr. Darling also serves as a member of the firm’s Investment and Management Committees. Prior to joining American, Mr. Darling served as Director of Asset Management and Sales for the California office at Resolution Trust Corporation, where he was the senior asset officer responsible for the management and sale of over $60 billion in assets from failed savings and loan. KIRK V. HELGESON, CIO/EXECUTIVE MANAGING DIRECTOR, INVESTMENTS

Mr. Helgeson serves as Chief Investment Officer for American Realty Advisors’ Investment Team, where he is responsible for overseeing all acquisition/disposition activity for the firm’s investment portfolios. Mr. Helgeson also manages the development, implementation and oversight for American’s value-added strategy through its open-end commingled fund, the American Strategic Value Realty Fund, LP, as well as through separate accounts and closed end commingled funds. Mr. Helgeson is the Chairman of the firm’s Investment Committee and a member of the Management Committee. Prior to joining American, Mr. Helgeson worked for AFP Properties USA, Inc. as the Investment Manager responsible for all aspects of the acquisition and disposition processes and asset management for a multi-class real estate portfolio in excess of $450 million. Prior to that, Mr. Helgeson was a Senior Appraiser for Eichel Inc., where he completed complex appraisal and consulting assignments encompassing a wide range of property types.

PAUL VACHERON, CPA, MANAGING DIRECTOR, ASSET MANAGEMENT

Mr. Vacheron is responsible for managing all of the Firm’s asset management operations. He is also a member of the Investment Committee. Prior to joining American Realty in 2003, Mr. Vacheron served as Senior Vice President – Asset and Portfolio Management and portfolio manager for PM Realty Advisors. He has also served as a portfolio manager for KBS Realty Advisors. Mr. Vacheron graduated from the University of California, Berkeley with a B.S. in Accounting and Finance and received his M.B.A. from the University of California, Los Angeles.

CHRIS MACKE, MANAGING DIRECTOR, RESEARCH AND STRATEGY

Chris Macke is responsible for leading the firm's research efforts and works closely with American's Investment and Portfolio Management Teams in developing investment analysis to support acquisitions and strategy implementation for the firm's commingled funds. Most recently, he was at CB Richard Ellis Global Research & Consulting as part of the firm's macroeconomic, property market, and capital market outlook and strategy effort. Mr. Macke's previous consulting experience includes advising large institutional investors and mid-size private equity and operating companies, as well as working with regulatory agencies including the U.S. Federal Reserve and U.S. Treasury Department. He is currently a contributor to the Federal Reserve's Beige Book and a member of the PREA Research Advisory Council.

Mr. Macke has over 22 years of real estate experience and holds a BA in Political Science from the University of Southern California and an M.B.A. from the Kelley School of Business at Indiana University.

STAN IEZMAN, CHAIRMAN, CHIEF EXECUTIVE OFFICER

Stanley Iezman serves as American Realty Advisors’ Chairman and Chief Executive Officer, responsible for the strategic planning and direction of all firm activities and a member of the firm’s Investment and Management Committees. Mr. Iezman has directed the acquisition, structuring, and management of approximately $10 billion of real estate located throughout the U.S., is a noted speaker on real estate investment, and has authored numerous articles on related issues for real estate, pension, and legal industry publications. Mr. Iezman is an

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Adjunct Professor at the University of Southern California’s Sol Price School of Public Policy, where he teaches real estate asset management in the Master of Real Estate Development Program. He also serves on the Planning Committee for the USC Real Estate Law and Business Forum, as well as on the USC Hillel Board of Directors. Mr. Iezman is actively involved in The Urban Land Institute, where he sits on the Board of Governors for the ULI Foundation and participates in the Industrial and Office Park Development Council. He also serves on the International Council of Shopping Centers, and is a member of the National Association of Real Estate Investment Managers; the Pension Real Estate Association; the International Foundation of Employee Benefit Plans; the Los Angeles County Bar Association; the Real Estate Roundtable; and the American Bar Association. Mr. Iezman was also the Chair of the NYU Real Estate Institute’s Annual Conference on Pension Fund Investment in Real Estate for ten years. Investment Committee

Name Title Yrs. w/

Firm Yrs. Exp.

Stanley Iezman Chairman & CEO 27 41

Scott Darling Exec. MD, Portfolio

Mgmt. 19 35

Kirk Helgeson Chief Investment

Officer 17 26

Paul Vacheron MD, Asset

Management 13 32

Chris Macke MD, Research &

Strategy 1 23

Daniel Robinson MD, Finance/Invest.

Consulting 22 31

Michael Schack* Sr. Director, Asset

Management 5 29

Michael Gelber* Sr. Director, Asset Management

11 25

*Rotating Members

Process American Realty’s investment process is research-driven, which is integrated throughout all stages including portfolio construction/management, investment, asset

management and dispositions. It begins with a Macro House View produced and shared with the entire firm by the Research Team, supporting the investment strategy and outlining American’s outlook on the macroeconomic environment, capital markets and property fundamentals. This Macro House View is produced on a quarterly basis.

A team approach is used during all phases of the investment management process. The firm’s Investment Committee and Value Fund Portfolio Management Team meet frequently to review the portfolio and its holdings, to monitor adherence to style, philosophy and process and to confirm that the fundamentals remain in compliance with its guidelines and objectives. All investment strategies at the firm (core, core plus and value-added) are managed by teams organized geographically across the firm.

One of the key drivers of American Realty’s research effort involves developing a detailed “target market analysis” to help determine portfolio allocations based on which geographic regions are positioned to generate the highest total return going forward. This model-driven analysis, divides locations into primary, selective, and non-target markets. The main factors that go into this analysis combine institutional quality properties with long-term fundamentals, including occupancy levels, rent trends, valuations, etc.

The acquisition process involves first identifying opportunities which most closely align with the Firm’s “target market analysis.” These target properties generally fall within a $15 million to $100 million dollar range and are located in or near major metropolitan areas. In addition to their research-driven targets, the Fund acquires assets in need of repositioning or lease-up due to under management, recapitalization, renovation and/or redevelopment. Early cycle investments will be more distressed oriented investments buying at a discount to replacement cost, mid cycle investments tend to be more lease up, renovation and new construction, while late stage investments are typically tenant retention, repositioning and adaptive re-use.

Primary markets reflect the most attractive historical performance and generally comprise the majority of the

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total portfolio. Selective markets offer fewer opportunities and require a greater emphasis on market timing and asset selection. Non-target markets may still offer attractive but unpredictable opportunities that require significantly more analysis and due diligence. These holdings must offer superior returns commensurate with increased risk. Finally, the submarkets within each target market area are ranked according to their return potential.

It is up to the acquisition team to source each potential opportunity. Acquisition teams are situated geographically around the country to facilitate key knowledge of each particular market. The team relies on its network of developed contacts to source investment opportunities primarily through off-market transactions. Off-market transactions are preferred due to comparatively lower acquisition costs. After conducting due diligence, each potential investment opportunity is submitted to the Investment Committee for approval.

The asset management process is largely focused on improving the individual performance of each holding. The process originates with the development of a business plan dealing with oversight of outsourced, on-site property managers, all leasing activity, capital budgeting programs, and operations, including renovation, maintenance, and capital improvements. American Realty Advisors’ Asset Management teams, led by Mr. Vacheron, are also positioned geographically to ensure a familiarity with each market’s distinctive characteristics and key subcontractors.

The disposition process is overseen by a combination of the Firm’s Portfolio Management, Investment, and Asset Management teams. Each division contributes in determining the holding’s appropriateness for the portfolio. For example, the Asset Management team evaluates the stability and health of each asset or its position relative to the local market while the Portfolio Management team gauges each asset’s suitability given the Fund’s regional or sector target allocations. The Fund also utilizes present value analysis models to forecast when the highest expected present value might be achieved within the predetermined holding period. Disposition of assets are generally direct sales to private buyers or recapitalizations by existing partners.

All final acquisition, disposition, loan origination, and capital investment decisions are approved by the Investment committee, led by Kirk Helgeson, Committee Chairman. Most decisions are determined by a simple majority vote, except new acquisitions or loans which must be approved unanimously by the entire body.

VALUATION POLICY

Every quarter, each investment in the Value Fund is externally appraised by an independent, third-party, Member of the Appraisal Institute (MAI) appraiser, initially within 15 months of asset acquisition, and is then marked to market quarterly and is written up, written down, or held constant, as appropriate, reflecting the determined value of the asset. Since 2010, the Altus Group, a firm with no relationship to or affiliation with American, has been engaged as the Independent Valuation Manager for the Value Fund. In this role, Altus:

• Advises American’s management on the selection and engagement of all third-party MAI appraisers, who are unrelated to American or to Altus

• Reviews all completed appraisals • Verifies that all appraisals conform to USPAP • Prepares appraisal reports for properties in

quarters for which Altus has not advised American’s management on the selection and engagement of another MAI appraiser

• Provides quarterly debt valuations for all property-level debt

• Provides a summary of the appraisal/valuation results and assumptions

In each quarter, approximately three-quarters of the Value Fund’s assets are appraised by Altus, with the remaining one-quarter being appraised by an appraiser unaffiliated with Altus or American. For each property in the fund, a complete USPAP-compliant appraisal performed by an appraisal firm unrelated to Altus is required at least annually. Prior to its first appraisal, an investment may be valued at cost plus capital expenditures less liabilities, if any. Investments will be valued more frequently if there has been a significant change in circumstances related to the asset since the last valuation or prior to the completion of the value-added program.

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Risk Management American Realty has several guidelines in place to manage the overall risk associated with their value fund. These guidelines are focused on minimizing leverage while improving both the diversification and the decision-making processes that govern the Fund.

The Value Fund has maintained a fairly conservative approach to leverage relative to other value funds. Over the past year, the Fund has maintained an average leverage ratio of 47%. The fund’s leverage is limited to a maximum level of 65%.

The Fund also relies on diversifications in holdings to manage the risks associated with the strategy from both a property type and geographic regional standpoint. No single investment represents more than 15% of the Fund. New construction is limited to 25% of NAV. Additionally, The Value Fund will invest in assets at various stages of their life cycle and will have vintage year diversification as an open end fund.

Potential Concerns Potential concerns that exist for the American Value Realty Fund include the ownership concentration, the Fund’s limited size, and recent turnover within research roles.

Currently, 100% of the company’s common stock is owned by one individual, Mr. Iezman. He is the founder of the Firm and has remained the sole owner since its inception. While the ownership structure is not ideal, the Firm maintains several features to alleviate this risk. They have a five-member management committee which oversees the day-to-day operations of the organization. This committee has also developed a succession plan to offset any senior-level departures. Ultimately, Mr. Iezman’s future plans for the company are his own; however, the investment team has remained intact for some time.

A second concern of the Fund is its relatively small size. As a result of this, the Fund may be forced to target small- to

middle-market properties ($15 to $150 million) while potentially missing out on larger opportunities. To counter this issue, the Firm cites its willingness to acquire more expensive properties through joint-ventures, especially when considering central business district office assets.

In the past three years, the fund has experienced three different Directors of Research. Walter Page left the Firm in late 2011 and was replaced in 2012 by Lee Menifee. Mr. Menifee left the Firm midway through 2014 and was replaced by the current Director of Research Chris Macke. We have met with Mr. Macke and believe he is a capable replacement with a good background for the role. Both prior individuals left for other opportunities with larger firms in similar research roles.

Performance

American Realty YTD 1 Year 3 Years 5 Years

Income 2.4% 3.3% 4.9% 4.9%

Appreciation 8.8% 14.2% 8.4% 16.6%

Total 11.3% 17.8% 13.7% 17.0%

NFI – ODCE Index 7.3% 14.4% 13.1% 14.4%

Excess Returns +4.0% +3.4% +0.6% +2.6%

(Gross of fees, as of June 30, 2015)

Recommendation Verus recommends the American Realty Strategic Value Realty Fund as an attractive opportunity for investors seeking to gain exposure to the value added real estate space though an open ended vehicle. The firm’s private ownership structure is unique in the open end fund space and the firm’s overall conservative approach to leverage relative to some competitors, make this an attractive opportunity.

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This report is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security or pursue a particular investment strategy. The information in this report reflects prevailing market conditions and our judgment as of this date, which are subject to change. This information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability.

The material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events may differ significantly from those presented. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

Manager Evaluation

Invesco Real Estate Fund IV, L.P.

LAST UPDATED: JULY 2015

STRATEGY BASICS

Asset Class: Value-Add Real Estate


Firm Assets: $65 Billion

Target Fund Size: $500 Million

Target Return: 12-15% Gross IRR

Currently Committed: $305 Million

Initial Close: June 2014

Final Close: December 2015

Fund Structure: Delaware L.P.

Min. Capital Commitment: $10 Million*

Investment Period: 2 Years

Term: 7 Years + 2 (1) year ext.

Annual Management Fee: 1.5% of Equity**

Incentive Fee: 20%


Catch-Up Provision: 50/50

GP Contribution: $10 Million

*GP may accept smaller allocations on a case-by-case basis with lesser servicing requirements.

**Organizational and other expenses are capped at $1 million.

Firm Background and History

Invesco Real Estate (”Invesco”) was established in 1983 to

provide real estate investment management services to

tax exempt institutional clients. Originating as part of the

Lomas & Nettleton organization, the firm was purchased

by Invesco PLC in April 1990 and became Invesco Real

Estate.

Invesco Real Estate is an investment center for Invesco

Advisers, Inc., which is a wholly‐owned subsidiary of

Invesco Ltd., a publicly listed firm on NYSE (IVZ).

Employees and employee trusts represent the single

largest shareholder group with approximately 8% of the

shares in Invesco Ltd.

Of the approximate $779 billion in assets managed by

Invesco Ltd. worldwide, the real estate group manages

approximately $56 billion in direct real estate and publicly

traded real estate securities. Private real estate strategies

include US core and value‐added funds and separate

accounts as well as closed end funds in Europe and Asia.

Invesco has over 21 years of experience providing value

add investment strategies to institutional clients.

Throughout this period, the Firm has invested in 152 value

added properties totaling roughly $8.5 billion. These assets

have combined to generate a gross IRR of 13.7%, including

current operating assets. These strategies all rely on

acquiring deficient, but fundamentally core assets,

improving them to stabilization and discharging them to

the marketplace independent of market cycle.

Strategy Background

Fund IV is the fourth commingled, value‐added fund

offering from Invesco. The Fund is seeking $500 million in

equity commitments and has a seven year term, which

includes an initial two year investment period and subject

to two, 1‐year extensions, subject to LP approval. The

Fund will have a maximum commitment of $750 million.

The first close occurred in the second quarter 2014 with a

final close expected at the end of the fourth quarter of

2015 after a six month extension was approved by LPs.

Fund IV maintains a targeted IRR of 12‐15%, gross of fees.

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Fund IV is expected to maintain a leverage amount of 50‐

60%. Previous value‐added funds targeted leverage ratios

of 65% so Invesco is taking a slightly more conservative

approach with this offering. Fund agreements limit

development‐type properties to 35% of the portfolio and

may utilize joint‐ventures to facilitate investment

opportunities. Investments will be made in Industrial (~5

to 15%), Multi‐Family (~33 to 50%), Office (~25 to 40%)

and Retail (~ 5 to 15%), mainly located in U.S. primary

markets. Invesco describes these primary markets as those

that are represented within the top half of the

corresponding NCREIF subindex and which have

outperformed the subindex at least 50% of the time over

rolling 3‐year periods. The fund expects over half of the

properties to be located in the top five of these markets,

including Boston, Los Angeles, New York, San Francisco

and Washington D.C.

Invesco and its Affiliates are including a capital

commitment of $10 million while certain executive officers

must also provide equity to the Fund at a minimum

amount of $1 million. These incentive arrangements help

to align the interests of the General and Limited partners

and provide for some assurance as to the effectiveness of

the strategic objective.

Key Investment Professionals

Mr. Jay Hurley serves as Portfolio Manager for Invesco’s

value added series of funds. He has a dedicated Portfolio

Analyst in Kevin Conroy, and access to professionals within

Invesco Real Estate’s units: Research (7 members),

Acquisitions (10 members), Underwriting (17 members),

Due Diligence (6 members), Asset Management (29

members), Accounting (21 members) and

Financing/Dispositions (3 members). Fund oversight is

provided by the Investment Committee, which consists of

11 senior investment team members. A list of those

professionals sitting on the Investment Committee is

shown on page 3 below.

A Key Person provision exists, such that if during the

investment period any three of six of the following

individuals cease to be employed by Invesco, capital calls

will be suspended unless a majority of the LP Advisory

Committee approves replacement of the individuals:

▪ Scott Dennis, CEO

▪ David Farmer, COO

▪ Paul Michaels, Director of North American Real

Estate

▪ Bill Grubbs, Head of North American Funds

▪ Max Swango, Director of Client Portfolio

Management

▪ Jay Hurley, Senior Portfolio Manager

JAY HURLEY, SENIOR PORTFOLIO MANAGER

Mr. Hurley serves as the portfolio manager for Invesco

Real Estate’s series of U.S. closed‐end Value Added Funds.

He joined Invesco in 1995 where he worked in the Firm’s

Acquisition group. He has also served as Invesco’s Director

of Dispositions and Director of Underwriting, and is a

longstanding member of the Firm's Investment Committee

and U.S. Direct Management Committee.

Prior to Invesco, Mr. Hurley held production positions with

both Amstar Group (private equity) and Citicorp Real

Estate (syndicated debt). Mr. Hurley is a member of the

Urban Land Institute (ULI) and the National Multi‐Housing

Council (NMHC). He received his Bachelor of Science

degree in Civil Engineering from The University of Texas at

Austin and his Master of Business Administration degree

from Southern Methodist University

T. GREGORY KRAUS, INVESCO SENIOR DIRECTOR,

DIRECTOR OF ACQUISITIONS

Mr. Kraus directs Invesco’s nine‐member Acquisition

Group and also sits on the Firm’s Investment Committee,

North American Executive Committee and Direct

Management Committee. Since joining Invesco, Mr. Kraus

has served in both a portfolio management and acquisition

role with the firm. Prior to joining Invesco, Mr. Kraus was

previously affiliated with the Harberg‐Masinter Company,

Crescent Real Estate Equities, the L&B Group and its

predecessor company Lehndorff USA, Ltd., Hall Financial

Group and Southland Financial Corporation. Mr. Kraus

holds a Bachelor of Business Administration degree from

Southern Methodist University.

3

MIKE SOBOLIK, CFA, CRE, REGIONAL DIRECTOR OF

RESEARCH, NORTH AMERICA

Mike Sobolik serves as Invesco Real Estate’s Regional

Director of Research for North America. As a member of

the firm’s Investment Strategy Group, Mr. Sobolik provides

research‐based strategic guidance on matters related to

property sector allocation, market selection, and macro

risk and opportunity. His role as Research Director involves

oversight of the group’s forecasting and analysis

processes, including the integration of forecasts and

outlooks into the Firm’s investment underwriting. He also

is a member of the company’s Investment Committee.

Prior to arriving at Invesco in 1999, Mr. Sobolik served

with AMRESCO and the USAA Real Estate Company.

Mr. Sobolik graduated from Texas A&M University with a

Bachelors of Business Administration degree. He holds the

Chartered Financial Analyst (CFA) designation and is a

Counselor of Real Estate (CRE).

MICHAEL C. KIRBY, CPM, DIRECTOR OF NORTH

AMERICAN REAL ESTATE OPERATIONS AND U.S. ASSET

MANAGEMENT

Mr. Kirby joined Invesco in 1993 after a varied career in

commercial real estate management. He currently serves

as Director of North American Real Estate Operations and

U.S. Asset Management for Invesco. In this capacity he

comanages the North American direct real estate

investment platform and heads asset management of

Invesco’s $13 billion portfolio of office, industrial, retail,

and multi‐family investments in the U.S. He currently

chairs the North American Executive Committee and

serves on both the Investment Committee and Investment

Strategy Group. Mr. Kirby has 25 years of real estate

experience.

Mr. Kirby is a graduate of The University of Texas at Austin

with a Bachelor of Science degree in Civil Engineering. He

is a Certified Property Manager (CPM) and has served on

the Executive Council of the Dallas Chapter of the Institute

of Real Estate Management (IREM).

CAIN KIRK, CPM, DIRECTOR, SENIOR ASSET MANAGER

Mr. Kirk joined Invesco in 1997 and currently serves as the

Lead Asset Manager Invesco’s series of closed end value

added funds. He is part of the management team for the

Asset Management Department. Prior to joining Invesco,

Mr. Kirk was Vice President of Management and

Construction for the retail division of Lincoln Property

Company for ten years.

Mr. Kirk received a Bachelor of Business Administration

degree from the University of Texas at Austin. He is a

member of the International Council of Shopping Centers

and the Institute of Real Estate Management having

earned his designation as a Certified Property Manager

(CPM).

WILLIAM C. GRUBBS, JR. – PORTFOLIO MANAGER, HEAD

OF NORTH AMERICAN FUNDS

Mr. Grubbs joined IRE in 2005 and has 19 years of real

estate experience. He is the lead portfolio manager for

Invesco Core Real Estate – USA, IRE’s U.S. open‐end core

commingled fund. In addition, Mr. Grubbs oversees Funds

Management for the U.S. direct real estate group.

Prior to joining Invesco, Mr. Grubbs was with the

investment firm of Bailard, Biehl & Kaiser (BB&K), in Foster

City, California, where he directed BB&K's real estate

investment program for six years including serving as the

President and Chief Operating Officer of the BB&K Real

Estate Investment Trust, an open‐end commingled private

real estate equity fund. Prior to joining BB&K, Mr. Grubbs

held various positions in real estate development,

portfolio management and finance with Prudential located

in San Francisco.

Mr. Grubbs received a Master of Business Administration

with distinction from the University of Michigan and a

Bachelor of Science degree from Colorado State

University. He is a member of Pension Real Estate

Association (PREA) and a full member of the Urban Land

Institute.

4

Process

The investment process for Fund IV is described in three

phases: Strategic Planning, Operational Execution, and

Performance Evaluation.

STRATEGIC PLANNING

In the first stage of the process, Invesco’s investment

professionals develop a collective opinion of the U.S. Real

Estate Markets. This so‐called “U.S. House View” is derived

from the combined input of the members of the Research,

Acquisitions, Underwriting, Asset Management and

Portfolio Management Groups; and is incorporated into

the strategy’s investment plan in accordance with Fund

guidelines and objectives. Strategic outlooks flow up from

the cross‐sectional, regional teams, to the Investment

Strategy Group and, finally, the Investment Committee

Regional Teams consist of a cross‐section of investment

professionals from the various units across the Firm

organized by dedicated NCREIF regions. They review

Invesco’s qualified market universe and recommend

changes as needed. They also recommend a subset of

targeted markets for investment to the Investment

Strategy Group on a semi‐annual basis.

The Investment Strategy Group reviews these

considerations and develops a more detailed “U.S. House

View” which includes regional market ratings and a more

defined investment strategy for each property type. This

analysis, applied at the Fund‐level, determines geographic

and property type allocations.

Finally, the Investment Committee evaluates and approves

the “U.S. House View,” thus formalizing the Funds

investment strategy. The Investment Committee is also

responsible for approving all final investment transactions

for the Fund. A breakdown of both Investment Committee

and Investment Strategy Groups is shown below:

Name

Investment

Committee

Investment

Strategy

Group

Yrs W/

Invesco

Total

Yrs.

Exp.

Paul

Michaels

Chair Yes 30 31

Michael

Kirby

Yes Yes 19 28

Greg Kraus Yes Yes 13 32

Jeff

Cavanaugh

Yes Yes 10 29

Bill Grubbs Yes Co-Chair 8 23

Mike

Cobolik

Yes Co-Chair 14 28

Jay Hurley Yes Yes 17 25

Peter

Feinberg

Yes Yes 2 28

Ron

Ragsdale

Yes - 22 29

Jason Geer Yes - 14 21

Whitney

Farley

Yes - 8 14

John

Blaylock

- Yes 14 22

Tim

Bellman

- Yes 1 27

ACQUISITIONS

The team makes recommendations based on the

framework established in the “U.S. House View.” From

there, they utilize bottom‐up property selection to seek

out investment opportunities within targeted overweight

markets. Invesco’s acquisitions professionals rely on their

relationship network of real estate service providers to

source potential investments and create a detailed

investment proposal for each opportunity.

Investment Committee

Investment Strategy Group

East

Regional

Team

Midwest

Regional

Team

West

Regional

Team

South

Regional

Team

5

ASSET MANAGEMENT

Asset management teams are assigned regional coverage

for each primary market. They work with acquisitions

professionals to develop a property level business plan,

called a Value Optimization Plan, to identify the critical

improvement path well before the acquisition of any asset.

Once assets are actually acquired, the teams work with

third‐party providers to execute the previously established

Value Optimization Plan. This includes value‐enhancement

through re‐capitalization, retenanting and/or renovation,

or property development.

Fund IV will target the following types of real estate:

▪ 75‐80% “Broken Core” – Fundamentally core

properties, but capital starved, income impaired

and/or operationally mismanaged assets; strategy

will be to stabilize the income and reposition as

institutional quality asset for core buyer

▪ 20‐25% Mispriced Opportunities – Tactical

opportunities on non‐stabilized assets where

impaired liquidity offers attractive total returns.

Strategic over weights will be in:

▪ Non‐commodity assets

▪ Multi‐family

▪ Urban office

▪ Exits to core buyers

▪ Short hold periods of 2‐3 years

Tactical underweights will be in:

▪ Commodity assets

▪ Secondary markets

▪ Necessity and high street retail

▪ Low finish industrial

▪ Exits to non‐core buyers

▪ Intermediate hold periods of 4‐6 years

Historically, Invesco has generated their highest returns

from multi‐family assets and urban office. They tend to

overweight these sectors as they have high conviction in

their execution.

This allocation is estimated to generate a gross IRR of 12‐

15%, which may be equally attributed to both income and

appreciation.

DISPOSITIONS

The disposition strategy for the Fund is integrated within

both the acquisitions and asset management processes.

Before each acquisition, a target disposition date is

estimated using the expected value creation/property

performance from the asset management side and the

projected market cycle at the time of the sale. The entire

team is then focused on efficient execution to meet the

targeted disposition date, which may also be affected by

market conditions.

Risk Management

There are a number of risks associated with investing in

opportunistic real estate. These include, but are not

limited to:

▪ Adverse changes to the global economic

conditions such as changes in GDP and

unemployment rates.

▪ Credit markets – most real estate strategies rely

on some level of debt. Credit pricing and

availability will affect supply and demand

characteristics.

▪ Investor demand – the attractiveness of the asset

class relative to other alternatives will drive

capital and affect supply and demand

characteristics.

▪ Foreign investments – currency and political/

social risks such as fluctuation in currency and

adverse political or social developments.

Additional risks at the individual manager/fund level

include:

▪ Dependence on key investment professionals over

the life of the underlying funds.

▪ Illiquid partnerships – investments made into

funds will have very limited transferability until

their final liquidation.

6

▪ Leverage – the fund will utilize highly leveraged

structures on investments. This adds additional

volatility, default risk and interest rate risk

through the use of floating rate structures.

▪ Development risks – regulatory approvals, timely

completion of construction, environmental

liability and availability of permanent financing.

Fund X has several provisions in place to mitigate the risks

associated with investing in real estate assets. These

include diversification by property type and geography,

across the US and Europe; diversification across four main

investment themes (land development, corporate

transactions, distressed debt, valued‐add income assets);

and 75% maximum leverage.

Potential Concerns

On a strategy level, the Fund has many of the similar risks

normally encountered with other private real estate

vehicles. These include changing market conditions,

personnel risks, credit risk and liquidity risk. At a Fund

level, this vehicle targets a 50% ‐ 60% leverage ratio. While

this is a targeted amount, the Fund’s leverage may in fact

rise to a much higher level should asset values decline.

Fund II, for example, saw leverage rise as high as 90% in

2009. At the time, this did not present much of a problem

due to the fact that the Fund had only called about half of

all commitments. However this may present more of an

issue for Fund IV going forward should asset values fall

precipitously.

Historically, Invesco’s value‐add acquisitions have

averaged around $50 million in transaction size. With a

targeted Fund size of $500 million, Fund IV could

theoretically have as few as 10 property holdings, and

would therefore, be considerably less diversified than

comparable funds. However, Invesco has historically

demonstrated a prudent and reasonable strategy of

diversification and will likely leverage debt capacity to

increase the breadth of investments. They are currently

targeting approximately 15 transactions for the fund.

Key Considerations

Invesco does have a few value‐added separate accounts.

Those funds are currently unwinding so this potential

conflict of interest is not expected to be a major issue. The

firm’s core real estate funds allows up to 15% in value

added properties and may also compete for value added

opportunities. Fund agreements also prevent the value

add fund from selling to Invesco’s core fund to prevent

further conflicts of interest.

Fund IV agreements designate a 9% annual cumulative

compounded preferred return to investors. The General

Partner will receive 20% over the preferred return with a

50% General Partner/50% Limited Partner catch‐up

provision.

Performance

Invesco’s first value added commingled fund was incepted

in the 1st quarter of 2005, while Fund II was incepted in

the 3rd quarter of 2007 – a time when asset prices were at

their peak. These funds currently maintain gross IRRs of

2.3% and 8.2%, respectively. Fund III has a shorter time

frame with an inception of 2012 and no realizations at this

point, but is projecting a gross IRR of over 22%. A more

detailed breakdown of performance for Funds I, II and III is

included below.

Invesco’s longer term value‐add track record, which

includes separate accounts, is very attractive with a total

gross IRR of 14.5% on all liquidated assets since 1992.

Invesco

Vintage

Year

Equity

Raised

($MM)

IRR

Gross

(proj)

Equity

Multiple

Gross

Value Added, S.A. 1992-

2015 $4,838 14.5% 1.5x

Value Fund I 2005 $320 2.3% 1.1x

Value Fund II 2007 $457 8.2% 1.4x

Value Fund III 2012 $344 22.3% 1.7x

Total $6,254 13.5% 1.4x

(as of 3/31/15)

7

Recommendation

Verus recommends the Invesco Real Estate Fund IV as an

effective way in which to gain access to the value‐added

real estate space. The Firm’s long track record, combined

with its experienced investment teams provides for a high

level of expertise in the execution and management of real

estate transactions. At the same time, the current

condition of real estate markets also suggests an attractive

entry point for a value‐added strategy. Based on size,

leverage and diversification targets, Fund IV offers a more

aggressive approach to value‐added real estate compared

to other managers, but one that, ultimately, seeks to

deliver attractive risk‐adjusted returns over its seven year

term.

8

Vintage

Year

Equity Raised ($MM)

Invested ($MM)

Gross Capitalization

($MM) LTV # of

Investments

IRR Gross (proj)

IRR Net (proj)

Equity Multiple

Gross

Equity Multiple

Net %

Realized

Sep Accts

1992-2015

$4,838 $4,838 $7,425 32% 127 14.5% - 1.5x - 43%

Fund I

2005 $320 $330 $891 0% 15 2.3% 1.0% 1.1x 1.1x 93%

Fund II

2007 $457 $1,074 $1,074 46% 16 8.2% 6.8% 1.4x 1.3x 72%

Fund III

2012 $344 $291 $845 46% 13 22.3% 18.0% 1.7x 1.6x 29%

Fund VI

2014 $295 $182 $525 41% 5 16.3% -` 1.6x - 0%



Manager Evaluation

Kennedy Wilson Real Estate Fund V, L.P.


STRATEGY BASICS

Asset Class: Value Added Real Estate




(hard cap $750 Million)

Target Return: >15% Gross


Initial Close: 4Q 2014

Final Close: 4Q 2015


Min. Capital Commitment: $10 Million


Term: 8 Years (plus two 1-year ext.)

Annual Management Fee: 1.0% on committed capital (during Investment Period)

1.5% on committed capital (thereafter)

Incentive Fee: 20%



GP Contribution: $25 Million


Kennedy Wilson Inc. (KW) is a real estate investment and

operating company that provides a diversified array of real

estate investments and services in the U.S., Europe and

Japan. Founded in 1977, KW is a vertically integrated

global real estate firm headquartered in Beverly Hills, CA,

with 25 offices throughout the U.S., Europe and Japan. KW

has assets under management of approximately $18

billion and manages over 68 million square feet of office,

retail, industrial and residential properties. KW is defined

by two core business segments: KW Investments and KW

Services. KW Investments invests capital and KW’s equity

partners’ capital in multifamily, residential and office

properties as well as loans secured by real estate. KW

Services provides a full array of real estate-related services

to investors and lenders, from auction to property

management, with a strong focus on financial institution-

based clients. KW is a publically-traded company on the

New York Stock Exchange (NYSE: KW). Employees own

22% of shares.

Strategy Background

Kennedy Wilson Real Estate Fund V will target a +15%

gross IRR’s to limited partners by targeting investments in

western U.S. markets experiencing superior S.T.E.M.

(science, technology, engineering, mathematics) job

growth comprised of highly educated workers, markets

where KW possesses a distinct competitive advantage.

The Fund will seek investments typically in markets with

high barriers to entry due to dense populations,

entitlement difficulty and limited supply. Industries that

rely on highly trained science and technology workers

have consistently hosted strong growth over the past 30

years.

The Fund’s investment strategy is to create value at the

acquisition stage by sourcing investments, regardless of

asset type, from financially distressed owners and lenders

and to find under-managed or under-leased assets

wherein KW can create value through its asset

management expertise. Since 2010, KW has bought $12

billion in assets with over 75% sourced through its services

businesses. The strategy is focused on value-added office

and multifamily, as well as debt, and other real estate and

real estate related investments.

2


Kennedy Wilson has approximately 450 employees with 25

offices globally. Over 200 of those employees are located

in the Western part of the United States, where this fund

will focus its attention. The firm has 50 professionals that

are dedicated to the management of their funds business.

The senior management team consists of 11 professionals

that comprise their Investment Committee (IC). The IC

was formed in 2000 and had 7 members at that time.

Since 2000, six of the original members remain on the

committee, with one retirement (Bob Hart, Head of

Multifamily retired in 2013) and several additional

members added periodically. Nine members of the IC are

based in the firm’s Beverly Hills headquarters, while Mary

Ricks (Head of Europe) is based in London and Kurt Zech

(Head of Multifamily) is based in San Francisco.

INVESTMENT COMMITTEE

Name Title

Yrs.

Firm

Yrs.

Exp.

Bill McMorrow Chairman & CEO 27 29

Nicholas Colonna President: Commercial

& Fund Mgmt 2 29

Justin Enbody Chief Financial Officer 5 13

Kent Mouton General Counsel 20 37

Mary Ricks EVC and CEO Europe 25 28

Matt Windisch Executive Vice

President 9 13

Stuart Cramer President: Residential 17 31

Kurt Zech President:

Multifamily 12 13

Phillip Winter CFO: Multifamily 10 11

John Prabhu President: Direct

Investments 17 24

Barry Schlesinger Senior Advisor 17 44

Average 15 26

William McMorrow Chairman and Chief Executive Officer

Mr. McMorrow is Chairman and Chief Executive Officer of

Kennedy Wilson, which he purchased in 1988 as a real

estate auction company. He is the architect of the Firm’s

expansion into an international firm offering a

comprehensive array of real estate investments and

services. In addition to his real estate experience, he has

more than 17 years of banking experience. Prior to the

acquisition of Kennedy Wilson, he was the executive vice

president and chairman of the Credit Policy Committee at

Imperial Bancorp and held senior positions with a variety

of financial services firms, including Fidelity Bank in

Pennsylvania, where he was a senior vice president for

eight years. Mr. McMorrow received his B.S. degree in

Business and M.B.A. from the University of Southern

California. He serves on the Executive Board of the USC

Lusk Center for Real Estate and is involved in numerous

Southern California charities, including Chrysalis, the Rape

Treatment Center, the Village School and Loyola High

School, where he is a member of the Loyola High School

Board of Regents.

Nicholas Colonna President: Commercial Investments and

Fund Management

Mr. Colonna joined Kennedy Wilson in 2014 as a Senior

Advisor, and subsequently was named President of the

Commercial Investment and Fund Management groups.

Mr. Colonna has nearly 30 years as a real estate private

equity executive. Most recently, Mr. Colonna co-founded

PCCP, LLC a real estate investment management firm. Prior

to PCCP, he was Senior Vice President in Real Estate

Merchant Banking for Wells Fargo. Mr. Colonna graduated

from University of Southern California with a B.S. in

Business Administration and Real Estate Finance.

John Prabhu President: Direct Investments

Mr. Prabhu is President of Direct Investments for the

Commercial Investment and Fund Management Groups.

He joined the Firm in 1998, and is responsible for the

acquisitions, asset management and dispositions of all

commercial and fund investment assets in the United

States as well as lead portfolio manager for the Fund

Management Group. Prior to joining Kennedy Wilson, he

worked for Heitman Properties, he supervised

management, leasing, construction, and client service

activities. Mr. Prabhu has extensive experience in the

acquisition and disposition of real estate and the

repositioning of troubled assets. Mr. Prabhu received a

3

B.A. in Quantitative Economics and Decision Sciences from

the University of California at San Diego.

Matt Windisch Executive Vice President

Mr. Windisch is Executive Vice President, and is

responsible for Kennedy Wilson’s corporate and deal

capital raising (equity and debt), cash planning and

forecasting, analysis and underwriting of acquisitions and

dispositions, and investor relations. He co-chairs the

Investment Committee and is responsible for direct

oversight of the company’s activities in Japan as well as

the company's U.S. note origination and purchasing

business. Prior to joining the Firm in 2006, Mr. Windisch

was an associate at JPMorgan Chase, where he held

various positions in investment banking, strategy and risk

management. He received a B.B.A. in Finance and

Accounting from Emory University and an M.B.A. from the

University of California at Los Angeles.

Process

During the due diligence/underwriting stage of an

investment, a deal team is assigned including the following

professionals: An Investment Committee member is

assigned responsibility, who also typically manages the

relationship with the seller and lender. An acquisition and

disposition strategy is developed which includes the

expected time period an investment will be held, typically

between one and seven years (average is three to five). A

due diligence coordinator is then assigned and is

responsible for implementing KW’s due diligence checklist,

overseeing third-party reports, property inspections, lease

review, tenant interviews and investment committee

reports. A senior financial analyst is also assigned and is

responsible for the property underwriting, sensitivity

analysis and comparable analysis. The building system

engineer is then engaged and is responsible for the

physical inspection of the property and for the capital

improvement plan. An asset manager is assigned and is

responsible for setting the property budget and for

forecasting revenues and expenses. A closing coordinator

is responsible for the closing process and proration and is

KW’s point of contact for counterparts at the seller, lender

and the escrow company.

In evaluating investment opportunities, the stages of KW’s

process include:

Pre-Screening: KW will screen opportunities that are

submitted through its extensive network and narrow the

selection by targeting investments that fit Fund V’s

investment parameters.

Initial Financial Analysis: Potential transactions will be

identified and analyzed from a risk and return perspective.

Financial projections will be prepared, and initial market

due diligence will be performed with assistance from KW

Services professionals in KW’s regional offices and other

third parties.

Internal Consensus: Prior to any decision to pursue an

investment, the acquisition point person on the KW

Investments team will prepare a preliminary acquisition

package, which will be reviewed by the appropriate

members of the IC who focus on the particular asset type

or region. At this stage, a pricing level is determined and a

nonbinding offer may be submitted.

Contract Execution: Positive seller response to the non-

binding offer will initiate a contract negotiation phase that

typically will lead to an exclusive 30 day due diligence

period upon contract execution. At this stage, any deposit

made will generally be refundable through the due

diligence period.

Due Diligence: This phase will typically draw upon the

expertise and services of the full KW platform. Property

operations, systems, structural quality and other property

specific issues, as well as market characteristics such as

competitive rents, expense levels, occupancy rates,

absorption trends and tenant concessions will be analyzed.

Selected consultants will prepare engineering and

environmental reports for each property. Material

property leases will be reviewed, property taxes will be

analyzed and existing insurance policies will be examined.

KW will also seek to ensure compliance with local and

national regulations and building codes or make

appropriate adjustments to its acquisition strategy.

4

Final Review: The final acquisition package detailing the

investment opportunity is prepared. A review meeting

attended by KW professionals involved in the transaction

process will serve as an opportunity to finalize negotiation

points internally and address any pending issues relating

to the acquisition. Each designated professional, including

representatives from the acquisitions, leasing, property

management and asset management areas, as applicable,

will have the opportunity to contribute to and review the

final acquisition package.

Final Approval: The IC will review the final acquisition

package, and if the IC believes that all issues have been

adequately addressed, it will vote to pursue the

acquisition. An investment will only be made if a majority

of the I.C. approves such investment.

The investment decision process culminates with a vote by

KW’s Investment Committee. Throughout the process

however multiple discussions take place between the

assigned team and members of the IC. During these

meetings, investments that are in the due

diligence/underwriting stage are presented, which ensures

that most members of the IC have been tracking the

progress of an investment opportunity before it is brought

to a vote. A majority vote is needed for approval.

Risk Management



limited to:


conditions such as changes in GDP growth and

unemployment rates.




characteristics.

▪ Investor demand – the relative attractiveness of

the asset class relative to other investment

alternatives will drive capital flows and affect

supply and demand characteristics.





include:






▪ Leverage – opportunistic funds will utilize highly

leveraged structures on investments. This adds

additional volatility, default risk and interest rate

risk through the use of floating rate structures.



liability and availability of permanent financing,

Kennedy Wilson seeks to mitigate some of the risks

through diversification and by placing certain limits on the

fund through portfolio construction. Leverage will be

capped at 65% at the fund level and 75% at the individual

property level. At least half of the debt is expected to be

fixed rate debt.

Additionally, the fund intends to minimize binary

investment risks by avoiding assets in markets that are

not realizing growth or markets that are projected to

grow at below average rates. Also, the fund will look to

avoid purchasing assets with the sole intent of profiting

from growth in certain markets. The fund will seek out

assets that exhibit both market growth as well as

favorable individual property fundamentals.

Potential Concerns

Kennedy Wilson manages real estate investments for

other investors including other institutional investors in

separate accounts, as well as balance sheet investments,

however all value-added investment opportunities are to

be offered first to the fund, as the firm wants to build out

their fund platform as their flagship investment vehicle

going forward.

5

Other risk factors include their focus on S.T.E.M (Science,

Technology, Education and Medical) growth markets. A

technology sector crash would have a significant negative

impact on the fund.

Other Considerations

KW plans to employ a “risk-off” value-add strategy

targeting western United States cities experiencing

tremendous job growth. KW prior funds employed a “risk-

on” strategy seeking both value-add and opportunistic

investments which exploited financially distressed owners

and lenders affected by the global financial crisis. While

KW Investments has relied on KW Services for real estate

insights, a key competitive advantage, KW Investments has

likewise learned to incorporate additional macroeconomic

and demographic trends into the property analysis, such

as the current focus related to the tremendous growth in

science and technology industries, and by avoiding MSAs

and real estate sectors not participating in those economic

trends. This layering of information, top-down

macroeconomic and demographic trends combined with

bottom-up insights from the property level, enables the

investment team to holistically view each investment from

various key viewpoints.

Performance

Prior Fund Track Record (as of 3/31/15):

Kennedy

Wilson

Vintage

Year

Size

($MM)

IRR

Gross

Multiple

Fund I 2000 $63 2.8% 1.1x

Fund II 2005 $100 -1.2% 1.0x

Fund III 2008 $126 14.1% 1.9x

Fund IV 2011 $303 18.0% 1.8x

Funds 1 & 2 were small custom funds created for specific

clients with limited property type and geographic

investment scopes.

Overall U.S. Track Record (All U.S. investments ‘99-‘15):

Kennedy

Wilson

#

Investments Size ($MM) IRR Gross

Office Total 52 $1,941 30.7%

Multifamily

Total 100 $4,215 24.7%

Other Total 56 $1,624 41.7%

U.S. Total 208 $7,781 31.2%

Recommendation

Verus recommends Kennedy Wilson Real Estate Fund V as

an effective way in which to gain access to the value‐

added real estate space. The Firm’s long track record,

combined with its experienced investment teams provides

for a high level of expertise in the execution and

management of real estate transactions. The firm’s

unique deal sourcing that stems from their real estate

services business offers them an attractive opportunity set

to select from. At the same time, the current condition of

real estate markets also suggests an attractive entry point

for a value‐added strategy.

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Manager Evaluation Oaktree Capital Management Real Estate Opportunities Fund VII, L.P.

LAST UPDATED: MARCH 2015

STRATEGY BASICS

Real Estate Category: Opportunistic



Target Fund Size: $3.5 Billion

Target Return: >15% Gross IRR

Current Commitments: $1.2 Billion

Total Capital Called: 0%

Initial Close: 4/1/15

Final Close: 4/1/16


Min Capital Commitment: $10 Million*


Term: 10 years (subject to ext.)

Annual Management Fee: 1.5%

Incentive Fee: 20%


Catch‐Up Provision: 60/40 (GP/LP)

GP Contribution: Greater of $20mm or 2.5%

*Note: Oaktree may waive their minimum on a case‐by‐case basis


Oaktree Capital Management (“Oaktree”) was founded in 1995 by Howard Marks, Bruce Karsh, Steve Kaplan, Larry Keele (retired), Richard Masson (retired) and Sheldon Stone. These principals joined together beginning in the mid‐1980s to specialize in less efficient and alternative markets: high yield bonds, convertible securities, distressed debt, principal investments and distressed real estate activities. Oaktree is comprised of eight principals and over 600 staff members in Los Angeles (headquarters),

New York, Stamford (Connecticut), Amsterdam, Frankfurt, London, Luxembourg, Paris, Beijing, Hong Kong, Seoul, Singapore and Tokyo.

Oaktree held an IPO in March of 2012 and is now publicly traded (NYSE: OCM). Oaktree maintained 67% ownership among Principals while maintaining 97% of the voting interests. The principals’ ability to liquidate their equity holdings is limited for the first three and a half years post‐IPO. In November 2014, Oaktree created a new position of Chief Executive Officer and named Jay Wintrob to this new role. Mr. Wintrob spent 27 years at American International Group previously, most recently as CEO of their retirement services business.

The firm manages more than $90 billion across various strategies, the largest of which are distressed debt opportunities ($25B), global control investments ($17B) and high yield debt ($17B). The firm currently manages over $6.7B in real estate. The firm’s institutional client base is diverse with public funds and corporate plans representing over half the firm’s assets.

Strategy Background

Oaktree’s Real Estate Opportunities Fund VII (ROF VII) will

opportunistically invest in real estate, real estate related

debt, companies, securities and other assets on a global

basis but with an emphasis in the U.S. The strategy is

currently focused on distressed opportunities primarily in

real estate debt and restructurings which involve rescue

capital, distress for control and value investments.

Oaktree has six separate real estate platforms they can

access for the fund: Commercial Real Estate, Corporate

Real Estate, Structured Finance, FDIC/Bank Portfolios,

Residential Real Estate and Non‐U.S. Real Estate. Oaktree

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expects the target allocations to Fund VII to look similar to

Fund VI below:


Oaktree’s real estate team is comprised of 48 investment professionals located in six offices around the globe: twenty‐one in North America, three in Europe and eight in Asia. The team is led by John Brady, who joined the firm in 2007 after 13 years at Colony Capital. Key individuals from each of Oaktree’s six real estate platforms are listed below:

JOHN BRADY, HEAD OF GLOBAL REAL ESTATE

Mr. Brady joined Oaktree in 2007 as Managing Director and Head of Oaktree’s global real estate group. From 2003 to 2007, Mr. Brady was Principal and head of the North American acquisitions business (excluding gaming) at Colony Capital, LLC. In 2000, he co‐founded The Destination Group, LLC, a private equity investment firm in Los Angeles targeting opportunities in travel and leisure. From 1991 to 2000, Mr. Brady focused on distressed investments for Colony Capital and led Colony’s expansion into Asia in 1998. Mr. Brady also led the re‐building and oversight of Colony’s loan asset management business in the early 90’s. From 1986 to 1988 and again from 1990 to 1991, Mr. Brady worked in corporate finance and real estate within the investment banking division of Merrill Lynch in both New York and Los Angeles. He has extensive experience across a range of real estate investments and property types, including: distressed loan portfolio acquisitions and asset management; loan restructurings, workouts and loan/property dispositions; direct real estate and real estate related corporate acquisitions and financings; and re‐positioning and development transactions. Mr. Brady earned a B.A. degree in English from Dartmouth College and an M.B.A. with concentrations in corporate finance and real estate from the University of California at Los Angeles.

AMBROSE FISHER, MANAGING DIRECTOR

Since joining Oaktree in 1995, Mr. Fisher has become a senior member of the real estate team. He has been

Platform Team LeadersYears w/

Oaktree

Years

Exp.

Industry

Head of Real Estate John Brady 7 29

Commercial Ambrose Fisher 19 24

Phil Hofmann 15 22

Corporate Todd Liker 6 18

Structured Finance Keith Gollenberg 6 32

Justin Guichard 7 15

FDIC / Bank PortfoliosMark Jacobs 13 21

Residential Jason Keller 7 17

Non‐US (Asia) Hiroshi Nakamura 7 39

Toshiya Kuroda 13 30

Steve Choi 7 18

Non‐US (Europe) Ben Bianchi 1 20

Manish Desai 10 13

David Snelgrove 3 13

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involved in the investment and management of its real estate funds. His responsibilities include acquisitions, dispositions, financings/re‐financings, asset management, development and redevelopment of all property types, including office, hotels, retail, residential, land and other miscellaneous property types. Prior to joining Oaktree in 1995, Mr. Fisher was an Assistant Vice President in the Special Credits Real Estate Group at TCW. Before that, he managed a portfolio of non‐performing and performing loans and real estate for the J.E. Robert Companies. Prior to that, Mr. Fisher was a real estate loan workout specialist with Bank of America. Mr. Fisher holds a B.S. degree in Business Administration from the School of Business Administration at Georgetown University.

TODD LIKER, MANAGING DIRECTOR

Mr. Liker joined Oaktree in 2008 and is involved in the investment and management of its real estate funds. His responsibilities include acquisitions, dispositions, financings/re‐financings, asset management, development and redevelopment of all property types, with a primary focus on corporate transactions. In addition, Mr. Liker is a member of the Board of Directors of LNR Partners, LLC and he helps coordinate Oaktree’s real estate investment activities in Asia and in Europe. Prior to joining Oaktree, Mr. Liker was an Executive Director with JPMorgan Securities’ Real Estate, Lodging & Gaming Investment Banking group in New York, where he was responsible for client coverage and transaction execution for real estate and lodging companies across the spectrum of investment banking products and services. Mr. Liker also spent four years with JPMorgan’s Real Estate and Lodging Investment Banking group in London, where he led a team that provided investment banking services to real estate companies in the U.K., Scandinavia and the Netherlands, as well as to hotel companies across Europe. Prior to joining JPMorgan, Mr. Liker spent four years at ABN AMRO, first in the Structured Finance and Private Equity group in Chicago and later in the Corporate Advisory and Debt Structuring group in Singapore. Mr. Liker received a B.S. degree in Business Administration from the John M. Olin School of Business at Washington University and an M.B.A. from the Tuck School of Business at Dartmouth.

KEITH GOLLENBERG, MANAGING DIRECTOR

Mr. Gollenberg joined Oaktree in 2008 as a senior member of the real estate team and focuses on the investment and management of its real estate funds. Mr. Gollenberg has extensive experience in the commercial real estate debt and equity markets, having originated, purchased or

issued billions in whole loans, B Notes, Mezzanine, Preferred Equity, Equity, CMBS, CDO, REIT, and other debt and equity investments. Prior to joining Oaktree, Mr. Gollenberg led the creation of and spent three years at CBRE Realty Finance, Inc., where he most recently served as Chief Executive Officer and President. Before that, Mr. Gollenberg spent over 21 years at CIGNA Investment Management, where he most recently served as Senior Managing Director of Capital Markets, responsible for investing in and issuing all types of real estate debt products. He received a B.S. degree in Business Administration with a concentration in Accounting and Economics cum laude from the University of Hartford. He is a CFA charterholder and serves as President elect of the Commercial Real Estate Finance Council.

MARK JACOBS, SENIOR VICE PRESIDENT

Since joining Oaktree in 2001, Mr. Jacobs has been involved with all property types, including office, retail, industrial, multi‐family, hotel, residential homes/ condominiums, master planned communities, golf courses, land and other miscellaneous property types. His responsibilities have included acquisitions, dispositions, financings/re‐financings, asset management, development and redevelopment. In addition, Mr. Jacobs has been involved in the analysis and purchase of real estate debt including senior/junior mortgages and real estate securities. Prior to joining Oaktree, Mr. Jacobs spent seven years with Lord Baltimore Properties, a national real estate development company. During his time at Lord Baltimore Properties, Mr. Jacobs was involved in the acquisition, disposition, ground up construction and development of properties and responsible for all aspects of lease negotiations on a portfolio of west coast assets. Mr. Jacobs holds a B.S. degree in Business Administration and an M.B.A. from the Marshall School of Business at the University of Southern California.

JASON KELLER, SENIOR VICE PRESIDENT

Prior to joining Oaktree in 2007, Mr. Keller worked for seven years at DLJ Real Estate Capital Partners, in the Real Estate Private Equity division of Credit Suisse. During his time at DLJ he was responsible for sourcing, evaluating and executing opportunistic real estate investment opportunities. Prior to joining DLJ, Mr. Keller worked in real estate finance in the New York offices of Salomon Brothers and CIBC Oppenheimer, advising numerous public and private companies, REITs and financial institutions with respect to the acquisition, disposition and recapitalization of their real estate portfolios. He also

4

worked as a real estate manager and developer for D‐Street Investments, a boutique private equity firm. Mr. Keller holds a B.A. degree in Finance from Utah State University and an M.B.A. in Finance and Real Estate from the Wharton School at the University of Pennsylvania.

HIROSHI NAKAMURA, MANAGING DIRECTOR

Prior to joining Oaktree in 2007, Mr. Nakamura spent eight years at Strategic Value Partners Japan, LLC and its affiliate, Moore Strategic Value Partners, most recently as President and Partner. While at Strategic Value, Mr. Nakamura served as a member of the investment committee and was responsible for originating and executing Japanese NPL and distressed real estate investment opportunities. Prior to that, he spent two years as the head of the Securitization group at Morgan Stanley, Japan. Before that, Mr. Nakamura spent seven years as a Director in the Real Estate Investment Banking group at Merrill Lynch & Co., where he served as a relationship manager for Japanese corporations. Prior experience includes work at Bankers Trust New York and the Bank of Tokyo. Mr. Nakamura received a B.A. degree in International Relations from Tokyo University. He is fluent in English and Japanese.

BEN BIANCHI, MANAGING DIRECTOR

Prior to joining Oaktree in 2014, Mr. Bianchi worked for Deutsche Bank AG where he held senior positions in the firm's London, Hong Kong and New York‐based real estate divisions. In his most recent role, he served as Global Head of Deutsche Bank's Special Situations Group responsible for the investment activities of the $5 billion real estate credit and private equity platform specializing in distressed real estate debt. Before joining Deutsche Bank, Mr. Bianchi was employed by Moore Capital's MSVP Japan where he served as a Senior Vice President. He began his career as an Associate in Goldman Sachs' Archon Group in the U.S. and Asia. Mr. Bianchi received his B.Eng. degree from Vanderbilt University.

Process

John Brady, as lead portfolio manager for this fund, has

the discretion to select the best opportunities from across

the firm’s six real estate platform. The types of

opportunities selected will be in the following areas:

COMMERCIAL REAL ESTATE

The Commercial Real Estate Team focuses on individual

asset or portfolio transactions across all types of real

estate on an opportunistic basis. They usually work in

concert with borrowers and/or operating partners.

The focus in this area will be on rescue capital and

distress‐for‐control investments. There is an opportunity

in the market to take advantage of maturing debt that was

originated at the peak real estate years of 2006 and 2007.

As this debt matures, many times the debt exceeds the

current value of the properties and new equity is required

in order to refinance. In many cases, these properties

have not been properly maintained as the owners have

had little incentive to put new capital into an underwater

property. Acquiring and recapitalizing these properties at

low valuations will be a focus of the team.

CORPORATE REAL ESTATE

The Corporate Real Estate team focuses on entity‐level

investments in real estate or real estate‐related

companies. This can include corporate mergers and

acquisitions, recapitalizations, corporate joint‐ventures,

acquisition of securities (debt or equity), platform build‐

ups or off‐balance‐sheet investments with strategic

partners.

Oaktree will look to purchase public corporate REIT

securities at attractive prices. While a broad recovery in

REITs has made it difficult to find attractively priced

securities, they will likely target pockets of smaller cap

REITs that trade at a discount to their larger peers and at a

discount to the value of their underlying holdings. Many

of these smaller cap REITs still have a difficult time raising

capital as investors were burned by lofty IPO prices in 2010

and early 2011.

STRUCTURED FINANCE

The Structured Finance team focuses on structured debt

and CMBS. The team employs a bottom‐up approach to

analyzing individual asset and security structures and

making selective purchases of structured securities. In July

2009, Oaktree was selected by the U.S. Treasury to serve

as a fund manager in the Legacy Securities Public‐Private

5

Investment Program (PPIP). Since that time, Oaktree has

purchased $1.3 billion in its PPIP program. While Oaktree

believes senior CMBS prices are generally high relative to

their risk profile, they do see pockets of buying

opportunities during periods of high volatility, such as

June‐November 2011 when they opportunistically

purchased $900 million in CMBS for various Oaktree funds.

FDIC/BANK PORTFOLIOS

The FDIC/Bank Portfolios team focuses on acquiring

portfolios of small balance real estate loans from the FDIC

and distressed banks. Portfolios typically range in size

from $100 million to $2 billion in unpaid principal balance

across all property types. Since the small loan workout

business is very people‐ and management intensive,

Oaktree works closely with a special servicing and

management partner, Sabal Financial Group. Sabal has

over 70 asset managers and underwriters that manage the

workout process through resolution, which includes

restructured loans, foreclosures and short‐sale

transactions. The pipeline of activity has remained strong

in this area as hundreds of banks failed since 2008 and

many remain on the FDIC “problem list.” The banks are

being pressured to de‐lever and the cost to manage the

small loan portfolios is high. Oaktree looks to purchase

portfolios of assets at 40 cents on the dollar. They

typically only win a third of portfolios that they bid on.

RESIDENTIAL REAL ESTATE

The Residential team focuses on deeply discounted

investments in land, land development, single‐family

residential REO or loan pools, homebuilding and master‐

planned communities on a single asset, portfolio of assets

or corporate basis. They look to purchase non‐performing

residential mortgage loans from financial institutions at

attractive prices. Typically, they buy at values of 30‐40%

of peak home values and at approximately 60% of holding

value. Oaktree has partnered with Genesis Capital

Partners to grow a residential lending platform that

originates short term loans to well‐established real estate

investors in the distressed single family residential

marketplace. They seek to make six‐to nine‐month, first

lien loans to investors acquiring homes for purposes of

refurbishment and short‐term resale. Benefits are

conservative loan‐to‐value ratios (60‐75%), high annual

interest rates (10‐13%), and full recourse personal

guaranties from borrowers.

NON‐U.S. REAL ESTATE

Oaktree has a dedicated team of three professionals in

Europe (UK and Germany) and eight professionals in Asia

(Japan and Korea). The team in Europe will focus on

distressed acquisitions from state run banks and other

financial institutions. Asia continues to be a growth story

amid periods of volatility and distress. Oaktree will likely

focus on European distressed asset sales for only a small

portion of the overall ROF VII fund.

Risk Management

There are a number of risks associated with investing in opportunistic real estate. These include, but are not limited to:

▪ Adverse changes to the global economic conditions such as changes in GDP growth and unemployment rates.

▪ Credit markets – most real estate strategies rely on some level of debt. Credit pricing and availability will affect supply and demand characteristics.

▪ Investor demand – the relative attractiveness of the asset class relative to other investment alternatives will drive capital flows and affect supply and demand characteristics.

▪ Foreign investments – currency and political/ social risks such as fluctuation in currency and adverse political or social developments.

Additional risks at the individual manager/fund level include:

▪ Dependence on key investment professionals over the life of the underlying funds.

▪ Illiquid partnerships – investments made into funds will have very limited transferability until their final liquidation.

▪ Leverage –this adds additional volatility, default risk and interest rate risk through the use of floating rate or fixed rate structures.

6

▪ Development risks – regulatory approvals, timely completion of construction, environmental liability and availability of permanent financing.

The fund has broad guidelines in place to ensure sufficient diversification. There is a limit of 35% on foreign investments in the fund and a limit of 20% of the fund to be invested in any one single property or securities issued by one issuer.

Potential Concerns

Oaktree is dependent on several outside entities as partners for their real estate platform. Both Sabal and Genesis Capital are outside special servicers, asset managers, and property managers. Oaktree has worked with these parties for several years now and are not dependent on them for sourcing investments. Instead, the fund will rely on them for loan workouts on small loan portfolios and residential single family assets. We feel confident in these relationships today, however they are third‐party entities outside of the control of Oaktree.

Oaktree overlaps transactions between various groups within the company. Oaktree’s flagship distressed debt funds has include up to 40‐50% of their investments from the real estate sector in prior funds. Currently, they are not looking to deploy as much capital within the real estate space. Therefore, even though prior funds were smaller than Fund VII, which is targeting $3.5 billion, the total amount put to work in real estate will be at similar levels.

The firm had a public Initial Public Offering in March 2012. Principals of the firm continue to hold 65% of the outstanding equity and maintain control with 97% of the voting shares however. Verus prefers ownership to be closely held by the key decision‐makers and principals of the firm and yet widely distributed among the other key investment professionals of the organization. The creation of freely exchangeable shares of the company is seen as likely to be a negative development in the long‐term, which depends in part on the continued incentives of the professionals to adhere to the principles and philosophy that has allowed the firm such success to date. Some evidence suggests previously‐private firms may suffer performance deterioration following IPOs since GPs may be encouraged to focus on quarterly earnings and other short‐term metrics to the detriment of long‐term

performance and investors’ best interest. These concerns are partially mitigated by the current expectation that the firm’s principals intend to take no salary and instead rely on their shares of carried interest and substantially‐retained equity in the firm.

The addition of a newly created CEO position in November 2014, while creating a role that aligns the firm with a more typical management structure in the industry, it is a change for the firm that could potentially lead to a change in culture. Mr. Wintrob has a reputation for cost cutting and managing Wall Street expectations. We don’t expect any near term disruptions, but we will be monitoring the way he manages the firm going forward.

Given the growth in opportunities in the European markets, they added Ben Bianchi, who now leads the Real Estate Debt team and will contribute to this fund on the Non‐US side. They also moved Manish Desai from the Corporate Real Estate team to the Non‐US team in London to bolster resources there.

Key Considerations

Prior to the real estate crisis in 2008, Oaktree limited their

investment pipeline, as they did not have a fund between

2002 and 2008. Instead they focused on selling existing

real estate holdings in their portfolios. They reached a low

in real estate fund assets under management in

September 2007 of $980 million. This has allowed them to

focus their time and effort on seeking out attractive

opportunities, rather than managing problem assets. Post‐

Lehman, they have deployed $13.3 billion of capital and

realized $10.7 billion. Their focus on avoiding overvalued

assets may help if things get overheated again.

Performance

Oaktree currently has four active funds (ROV IV, Remington, ROF V and ROF VI). These recent funds have had an excellent start as they have been selectively investing the assets post‐crisis. All of these funds are fully invested and are in asset management / execution / wind down mode. Detailed performance of their prior funds is available on the following page.

7

Oaktree was rewarded for slowing their capital‐raising efforts during the height of the market as they did not raise a real estate fund between 2002 and 2008. This saved them from dealing with troublesome legacy assets.

Recommendation

Verus recommends the Oaktree ROF VII Fund as an

effective means to gain exposure to the private

opportunistic real estate space. Oaktree has a proven

track record with similarly‐oriented vehicles dating back

two decades. The Firm has maintained a stable

organization over the years and employs a very

experienced staff dedicated to this strategy.

This recommendation for ROF VII is particularly timely

given the current state of private real estate markets.

Commercial real estate fundamentals are improving while

investment opportunities are materializing at attractive

rates. Oaktree accesses many transactions through the

debt side, which we find to be compelling currently given

the overall need for refinance and rescue capital.

Historical Track Record

(as of 12/31/14)


The material may include estimates, outlooks, projections and other “forward‐looking statements.” Due to a variety of factors, actual events may differ significantly from those presented. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

SCF VI ROF A ROF B ROF II ROF III/IIIA ROF IV Remington ROF V ROF VI

Commencement of Operations Aug '94 Feb ' 96 Mar '97 Dec '98 Oct '02 June '08 Feb '10 Feb '11 Sept '12

Committed Capital ($MM) 505.5 303.7 285.5 463.5 707.3 450.4 256.3 1,283.0 2,677.2

Gross Investment Level IRR (%) 23.2 11.8 9.2 17.3 18.4 20.1 19.0 21.6 26.4

Gross Fund Level IRR (%) 21.1 10.5 8.2 15.2 15.6 17.7 16.1 19.9 24.9

Net Net Fund Level IRR (%) 17.4 8.4 7.1 11.1 11.7 12.2 13.8 14.5 15.8

Net Net Fund Level Multiple 2.1x 1.7x 1.6x 1.5x 1.7x 1.7x 1.6x 1.5x 1.2x

Distributed Capital (%) 208.1 163.3 160.4 148.4 165.5 91.7 86.6 51.5 0.2

Investment Funds

Manager Evaluation TA Associates Realty Fund XI


STRATEGY BASICS

Real Estate Category: Value-Add Real Estate


Firm Assets: $12 Billion

Target Fund Size: $1.5 Billion

($440 MM Committed)




Min Capital Commitment: $5 Million*

Investment Period: 3 years

Term: 7 years + 3 (1) year ext.

Annual Management Fee: Tiered, see page 6*

Incentive Fee: 20%

Preferred Return Handle: 8%


GP Contribution: Min $5mm

*GP has agreed to waive minimums for Verus clients to $1 million on a case by case basis. ** Organizational and other expenses are capped at 0.25% of aggregate commitments

Firm Background and History TA Associates Realty (“TA Realty”) was founded in 1982 in Boston, Massachusetts as a provider of real estate investment management and advisory services. The Firm traces its history back to the original TA Associates, a well-established Boston-based private equity enterprise. The Firm spun out from TA Associates in 1982 and became a privately-held company in 1987.

TA Realty now has over 30 years of providing real estate investment management to all major institutional investor types. The Firm is headquartered in Boston, Massachusetts and maintains another office in Newport Beach, California.

In October 2014, TA Realty announced a strategic partnership with Rockefeller Group International (RGI), a wholly owned subsidiary of Mitsubishi Estate Co., Ltd (MEC) who acquired a 70% stake in TA Realty. The principal stakeholder in TA Realty previously, Mike Ruane, will continue to own 20%, while 14 other partners will own the remaining 10% with equity grants and long term vesting contracts. Mike Ruane will be under an employment contract for eight years and cannot start selling any additional shares until year’s five to eight of the contract. The purpose of the sale was to enable a succession plan to liquidate key members and keep the day to day control with TA Realty. 20 professionals will continue to participate in 100% of the carried interest of prior funds; going forward MEC/RGI will only participate at 25%.

MEC/RGI was looking to expand from its Japanese real estate platform. They expect to invest $60-$100 million alongside other investors in Fund XI, which should not overwhelm the $1.5 billion fund.

In July, 2015 four Partners departed together, two from Asset Management and two from Acquisitions. No key person events were triggered and none of the individuals were on the Investment Committee or Management Committee. It appears to be a lift-out or a start-up. The firm has promoted two individuals and is in the process of hiring two senior professionals to replace them.

2

Fund XI will be the eleventh value-added, closed-end, commingled fund sponsored by TA Realty. The first of these funds was launched in 1987 with $164 million in capital. The first five funds all liquidated without any extension, so the Firm currently manages five remaining value-added funds. Combined, all ten funds represent almost $9 billion in committed capital throughout the Firm’s history.

Of TA Realty’s roughly $12 billion in assets under management, one-third are dedicated to separate account strategies. These separate accounts are committed to the core real estate space which prevents the competition of assets between the value-added commingled funds.

Strategy Background TA Realty is targeting $1.5 billion in capital commitments for Fund XI. Commitments may exceed this amount with the approval of the Limited Partners. TA Realty has a 14%-15% targeted return, gross of expenses, 12-13% net of expenses.

Given TA Realty’s long track record with similar value-added funds, previous vehicles offer relevant proxies for Fund XI’s strategy and process. Accordingly, Fund XI will target a diverse set of small to mid-size transactions across the four major property types. The Fund will complete 80-90 transactions over its life with an average deal size of about $25 million. The high end of the size spectrum would be around $100 million but deals are rarely expected to be that large (e.g., there was only one such transaction in Fund IX). The large number of planned transactions and their relatively small size would lessen the impact of a problem asset dragging down overall performance. Historically, 50%-60% of these transactions have occurred off-market where TA Realty believes pricing inefficiencies are more prevalent.

The strategy utilizes a combination of “top-down” and “bottom-up” research to target investments in primary markets, with a substantial emphasis on coastal regions. The Fund will not set property or geographic constraints on the portfolio but allocations of previous funds resulted in overweight allocations to office and industrial assets. A snapshot of historical diversification for Fund’s VIII-X is shown below:

TA Realty typically rejects the use of joint-venture deals in favor of more direct control of assets. The Firm estimates that most assets will be held for a period of three years.

The strategy also emphasizes income distributions as the most significant driver of total returns. Of the Firm’s previously liquidated value-added funds, over two-thirds of IRR can be directly attributed to the income component.

Key Investment Professionals Ultimately, the two most important decision-making bodies are the firm’s Investment Committee and the Management Committee. The Investment Committee must grant a formal approval of all investment recommendations while the Management Committee meets regularly to ensure the execution of the firm’s strategic initiatives and goals. The Management Committee is comprised of five TA professionals and two RGI designees.

The firm has a total of 80 employees, 20 of whom are Partners, participating in the carried interest and 14 of whom are equity owners of the firm. The 20 Partners average 14 years tenure with the firm and over 25 years of real estate experience. The Asset Management Group consists of 23 professionals: nine partners, seven senior professionals and five administrative professionals. The Acquisitions Group consists of 16 professionals: seven Partners, five senior professionals and four administrative professionals.

3

Shown below is a brief table highlighting the members within each committee:

The fund has a Key Person Provisions that includes eleven individuals, where six departures trigger a Key Person Event. There is an additional supplementary (and more restrictive) Key Person Provision which would be triggered by four departures out of seven individuals labeled as Key Investment Persons, which include all six Investment Committee Members listed above, along with Tom Landry, Managing Partner.

TA Realty maintains a flat organizational structure whereby team members are able to contribute to the Firm’s operations in multiple ways. Given this consideration, we have provided a brief sample of some of the more tenured partners with the Firm below:

MICHAEL A. RUANE

Mr. Ruane is a founding member of TA Realty as well as its Managing Partner. He is responsible for the overall strategy of the Firm, leads the Management Committee and is a member of the Investment Committee. He founded the Firm in 1982 after having served as Senior Management Consultant at Arthur Young & Company. Mr. Ruane graduated from Providence College with an A.B. degree in Economics and received an M.B.A. from the Wharton School at the University of Pennsylvania.

SCOTT W. AMLING

Mr. Amling serves in an Asset Management role and is a member of the Management Committee. He joined TA Realty in 2001 after having served as Vice President of Asset Management at PM Realty Advisors. Mr. Amling has also worked at AMRESCO, a Dallas-based asset management company. He graduated from California State University, Northridge with a B.S. in Business Administration and Marketing and received an M.B.A. from the Anderson Graduate School of Management at UCLA.

JAMES RAISIDES

Mr. Raisides serves in a Portfolio Management role and is a member of both the Management and Investment Committee. He joined TA Realty in 1996 after having served as an Associate at Whittier Partners, a management and leasing company. He has also worked as a review appraiser at the Bank of Boston. Mr. Raisides graduated from the University of Connecticut with a B.A. in Economics.

JAMES O. BUCKINGHAM

Mr. Buckingham serves in an Acquisitions role and is member of both the Management and Portfolio Management Committee. He joined TA Realty in 1997 after having served at Davis Partners where he was responsible for the acquisition and management of development projects. He has also worked at Coldwell Banker Commercial Real Estate Group as a broker specializing in the leasing and sales of suburban office properties. He graduated from the University of California at Berkeley with a B.A. in Economics.

Managing PartnersInv.

Comm.Mgmt. Comm.

Years w/Firm

Years Exp.

Mike Ruane, Founder, Strategy Yes 32 35

James Buckingham, Acquisions, Strategy Yes Yes 18 33

Tom Landry, Inv. Relations, Ops, Strategy Yes 7 17

PartnersInv.

Comm.Mgmt. Comm.

Years w/Firm

Years Exp.

Scott Amling, Asset Mgmt, Portfolio Mgmt 13 25

Alan Brand, Asset Mgmt Yes 14 31

David Buxbaum, Asset Management 7 19

Scott Dalrymple, Finance and Compliance Yes 11 21

Nicole Dutra Grinnell, Dispositions 12 19

Douglas Engelman, Acquisitions 11 27

Nathan Foss, Accounting and Operations Yes 5 29

Christopher Good, Asset Mgmt 14 27

Michael Haggerty, Acquisitions Yes 16 26

Heather Hohenthal, Asset Mgmt 15 25

James Knowles, Asset Mgmt 16 29

Blair Lyne, Acquisitions Yes 12 31

John Powell, Asset Mgmt 11 24

James Raisides, Portfolio Mgmt Yes 18 23

Brooks Wales, Asset Mgmt 15 17

Gregory Waxman, Acquisitions 10 12

James Whalen, Acquisitions Yes 22 30

Average 14 25

4

SCOTT L. DALRYMPLE, CHIEF FINANCIAL OFFICER & CHIEF COMPLIANCE OFFICER

Mr. Dalrymple is responsible for the financial operations of the Firm as well as Compliance. He joined TA Realty in 2003 after having served as a Senior Manager at Ernst & Young LLP. He graduated from Georgetown University with a B.S. in Business Administration.

JAMES F. WHALEN

Mr. Whalen serves in an Acquisitions role and is also a member of both the Management and Investment Committee. He joined TA Associates Realty in 1992 after having served as a Director at Aetna Realty Investors, Inc. Mr. Whalen has also worked at Coopers & Lybrand where he was responsible for clients in real estate and financial services. He graduated with a B.S. from the University of Connecticut and received an M.B.A. from the Wharton School at the University of Pennsylvania.

Process Fund operations and processes are overseen by several committees organized by their respective role. This includes Acquisitions, Investment, Portfolio Management, Valuations, Dispositions and Finance Committees. The Investment Committee must grant formal approval of all investment recommendations while the Portfolio Management Committee is focused on other Fund-level considerations including leverage amounts, lease rollover exposure, valuations and disposition activity. The Firm’s flat organizational structure allows for many portfolio responsibilities to be shared across roles. For example asset management teams will play an early role in the acquisitions process while the portfolio management teams will work closely with the Valuations and Dispositions teams.

ACQUISITIONS

TA Realty indicates that the majority of potential investments are sourced through their extensive network of relationships with property owners, lenders and service providers. They estimate that roughly 50% - 60% of all deals are off-market transactions.

Prospective investments will all have the potential for realizable value over the short-term targeted holding period with respect to future sale price and increasing cash flows. Investment opportunities may also consist of

changes to leasing arrangements; reflect discounted asset prices; and/or exhibit potential for redevelopment and cost savings initiatives. The Firm is active in 35 regional markets and monitors an additional 15 markets in an attempt to source under-marketed opportunities throughout the country and across all property types. To support this wide-ranging geographic coverage, acquisitions teams are organized by geographic region.

Targeted investments by property type include:

▪ Office properties are high-quality, but comparably small to mid-size and located in suburban areas. These properties are typically multi-tenant and located in high-growth, coastal regions with high barriers to entry, such as Virginia, Maryland, Florida, Boston and Southern California. The Fund takes advantage of distressed property sellers and undertakes minor capital improvements while reorganizing re-leasing efforts. Demographic characteristics such as population or job growth also play roles in determining whether or not certain markets exhibit sufficient potential for future demand.

▪ Multi-family investments are typically “garden-style” apartments with high projected rent growth and located in Sunbelt markets. Properties typically range from 200-400 units in size, with a diverse mix of floor plans and easy access to mass transit.

▪ Targeted retail investments are typically grocery-anchored properties in dense, high growth areas within supply-constrained sub-markets. Parking and easy site-access are necessary characteristics.

▪ Targeted industrial properties include warehouse and logistics facilities located in geographic areas that serve as distribution hubs, (both seaports like Southern California, New Jersey, Seattle and Houston and inland ports like Chicago, Atlanta and Dallas). These markets have high geographic or regulatory barriers to entry and sufficient demand. The strategy relies on easily attracting new tenants to these properties while simultaneously requiring very little capital improvements. This emphasis results in relatively modern properties with multi-tenant capabilities and an ability to improve operating efficiency with minimal capital.

5

ASSET MANAGEMENT

The asset management process at TA Realty relies on realizing as much value as possible during each investment’s holding period. This consists of:

▪ Executing the value-added strategy identified in the acquisitions process, e.g., mitigating lease-up risk, increasing rents, implementing capital improvements, etc.

▪ Creating operating and capital plans and monitoring financial performance

▪ Managing third-party service providers

▪ Supervising the operations of each property

▪ Enhancing each property’s position within each local marketplace

▪ Conducting an annual hold/sell analysis

PORTFOLIO MANAGEMENT

The Portfolio Management Committee is responsible for all fund-level decisions including geographic and property type allocations, leverage amounts, lease rollover exposure, valuations and distribution activity.

Geographic property allocations are not set at specific ranges. Instead, the Committee analyzes a variety of factors, including employment trends, economic growth and local valuations, in order to position the portfolio across the most appropriate geographic regions. Historical allocations from previous funds have typically held to the following ranges: 20%-35% in the East; 20%-30% in the South; 10%-20% in the Midwest; and 25%-40% in the West. We can expect Fund XI to be positioned similarly to these allocations.

TA Realty applies leverage at the portfolio level and caps this amount at 50% of Loan-to-Value (LTV). The decision to utilize leverage at the Fund level may allow for greater flexibility and cheaper financing, but may also increase the risks associated with problem assets as the entire fund will be responsible for the write-off. Fund XI will have a target LTV ratio of 35%-45% and will incorporate two debt components: floating rate and fixed rate financing. The floating rate debt has already been secured with a rate of 175 basis points over LIBOR. The subscription line will begin at the beginning of the Fund’s investment period. A working capital revolver will be used to help mitigate

interest rate volatility. The fixed rate debt will be a non-recourse, life-company, secured loan portfolio with staggered maturities. The target financing levels here are lower than that of other value-added strategies.

DISPOSITIONS

Disposition activity is integrated with the asset and portfolio management processes in the Fund. Based on current appraisals, capital market conditions and other real estate market fundamentals, the team attempts to develop the most favorable exit strategy for each asset. In the end, each property is managed toward the timely disposition of an attractive, core asset into a receptive marketplace.

Risk Management There are a number of risks associated with investing in opportunistic real estate. These include, but are not limited to:








▪ Leverage – many of the funds will utilize highly leveraged structures on investments. This adds

6

additional volatility, default risk and interest rate risk through the use of floating rate structures.

▪ Development risks – regulatory approvals, timely completion of construction, environmental liability and availability of permanent financing,

Fund XI will utilize several approaches to mitigate the risks associated with an investment in this vehicle.

First, the Fund is targeting 80 to 90 transactions over its investment term, with an average deal size of roughly $25 million. The number of transactions is higher than that of other comparable strategies. This feature, combined with the relatively smaller deal size, provides for a greater level of diversification and increased downside protection against problem assets.

Second, Fund XI will undertake a low amount of leverage in implementing its value-added investment strategy (approx. 35%-45%). TA Realty will only utilize leverage at the Fund level – not at the individual property level. This strategy’s intent is to facilitate more flexibility such as the ability to make purchases not contingent on specific property financing, which may generate a better value. In addition, they have a substitution provision granting them the ability to switch properties included in the collateral pool, which allows them to sell a property unencumbered as well. This approach may increase the risks of fund level default in a highly levered fund, however the target leverage ratio remains lower than that of other comparable value-added strategies. In its history, TA Realty has never had to return a property to a borrower and has never tripped any borrower covenants. Additionally, the Fund will utilize both fixed and floating rate debt to mitigate interest rate risk.

A final level of risk management concerns the ownership structure of individual assets: TA Realty will not undertake joint-ventures in Fund XI. This attribute allows for direct control of assets and negates the potential for misaligned partners.

Potential Concerns There are few firm-specific, potential red flags with respect to TA Realty. The Firm is well-established and very experienced in the value-added private real estate space, having successfully launched ten similarly-oriented funds since 1986.

The recent ownership change, along with recent personnel departures are areas we are monitoring closely. New economic incentives are in place for key individuals in the form of equity grants with long term vesting schedules, but not all individuals who were granted equity had accepted. Two of the four Partners who left this in 2015 were offered equity and declined to sign the long term contracts. We believe the firm has the depth and experience to withstand these departures and continue to execute their strategy; however we will be monitoring personnel closely. The long term contracts in place with key professionals should help ensure their retention going forward. The firm had been very stable in the personnel department prior to these departures.

At a strategy level, the Fund has many of the similar risks normally encountered with other private real estate vehicles. These include changing market conditions, personnel risks, credit risk, finance risk, execution risk and liquidity risk.

Key Considerations TA Realty Funds have historically maintained overweight positions to industrial-type properties. The Firm likes the consistent income associated with industrial assets (8%-9%) and the overweight allocation corresponds with the belief that income is the most substantial driver of total returns. Industrial assets are also relatively generic and can be re-leased with little in terms of capital improvements. This provides for investments that tend to generate a flatter J-curve for the portfolio than obtained from other property types.

Fund XI is considered an Exclusive Investment Vehicle as TA Realty will not commence a new commingled fund with the same investment objective until at least 80% of all capital commitments are invested or committed.

7

The projected asset management fee for Fund XI, specified by year, is shown below*:

Annual Asset Management Fee

Year 1 0.50%

Year 2 0.85%

Year 3 1.15%

Year 4 1.20%

Year 5 1.25%

Year 6 1.20%

Year 7 1.00%

Thereafter 0.60%

* Organizational and other expenses are capped at 0.25% of aggregate commitments

Distributions of cash from operations and disposition proceeds will be made to the Partners based on an inflation-adjusted basis. These proceeds will be subject to a pegged IRR hurdle rate at the fund level outlined in the Private Placement Memorandum. Should the Fund generate a real return above 8%, this would result in a distribution of 80% of proceeds to the Limited Partners and 20% of proceeds to the Sponsor General Partner. This distribution arrangement provides an incentivized fee structure for the General Partner.

Fund XI also has a catch-up provision in place should Limited Partners miss the Final Closing Date. This arrangement states that investors will (i) contribute to the Fund that portion of their capital commitment that would have previously been called had they committed to invest the entire amount of their capital commitment on the Initial Closing Date and (ii) pay to the Fund as “catch-up interest an amount equal to 6% per annum on the amount specified in clause (i).

Performance

TA Realty currently has four active funds (Fund VII, VIII, IX and X). One additional fund is currently in liquidation, though all investment activity has ceased. Recent funds have struggled through the difficulties seen in recent real

estate cycles. Fund VII, VIII and IX have current gross projected IRRs of 2.0%, 2.3%, 15.1% and 15%, respectively.

Funds VII and VIII, were incepted in 2004 and 2006 and invested close to the height of the real estate bubble leading to the underwhelming relative performance for those funds.

On the other end of the spectrum, Fund IX terminated its investment period in 2011 and invested capital was put to work at the trough of real estate valuations. Subsequent performance has been excellent and Fund IX has been one of TA Realty’s best-performing funds to date. Similarly, Fund X has been invested over the last three years and is off to a solid start. A more detailed breakdown of performance-related information for prior funds is included at the end of this report.

Recommendation Verus recommends TA Associates Realty Fund XI as an effective means to gain exposure to the private value-added real estate space. TA has a proven track record with similarly-oriented vehicles dating back three decades. The Firm employs a very deep and experienced staff dedicated to this strategy. Fund XI also applies a lower level of leverage, while at the same time, providing a greater level of diversification than that of other funds.

This recommendation for Fund XI is particularly timely given the current state of private real estate markets. Commercial real estate fundamentals are improving while investment opportunities are materializing at attractive rates. Accordingly, Fund XI provides a timely vehicle to capture these improving trends while retaining a proven investment strategy within the private real estate space.



8

APPENDIX: PERFORMANCE TRACK RECORD

Date Formed

Liquidation Date

Capital Committed

Equity Invested

# Investments

# Liquidated

Total Distributed

Realized Value ($mm)

Unrealized Value ($mm)

Gross IRR Net IRRGross Equity

Multiple

Net Equity

Multiple

I 1987 2001 $163.5 $163.5 12 12 $196.5 fully liq. fully liq. 3.3% 2.4% 1.3x 1.2x

II 1990 2003 $332.5 $332.5 41 41 $762.7 fully liq. fully liq. 13.6% 11.6% 2.4x 2.1x

III 1994 2006 $487.5 $487.5 66 66 $1,087.6 fully liq. fully liq. 12.7% 10.9% 2.3x 2.1x

IV 1996 2007 $450.0 $450.0 52 52 $1,049.6 fully liq. fully liq. 14.9% 12.8% 2.4x 2.2x

V 1999 2012 $562.6 $562.6 55 55 $1,062.2 fully liq. fully liq. 12.2% 10.3% 2.0x 1.8x

VI 2002 2014 $738.5 $738.5 65 65 $1,145.2 fully liq. 5.9 11.0% 8.6% 1.7x 1.5x

VII 2004 2016 $917.0 $917.0 75 37 $460.2 793.8 473.5 2.0% 0.2% 1.1x 1.0x

VIII 2006 2018 $1,742.0 $1,742.0 127 37 $241.3 924.7 1165.9 2.3% 0.8% 1.2x 1.1x

IX 2008 2021 $1,492.6 $1,492.6 96 12 $749.0 396.1 1509.7 15.1% 12.3% 2.1x 1.8x

X 2012 2022 $1,562.1 $1,015.4 69 2 $57.0 102.4 1098.4 14-15% 12-13% 2.0x 1.8x

Liquidated Funds

Active Funds

Manager Evaluation

Westport Capital Partners Real Estate Fund IV, L.P.

LAST UPDATED: JULY 2015

STRATEGY BASICS

Asset Class: Opportunistic




Target Return: 15-18% gross





Min. Capital Commitment: $5 Million


Term: 7 Years

Annual Management Fee: 1.5% of Committed Capital*

Incentive Fee: 20%



GP Contribution: 2%

*1.5% of invested capital, following the investment period.


Westport Capital Partners LLC is a real estate investment

firm specializing in investments in the opportunistic real

estate arena globally. The firm provides its services to

institutional and private clients. Westport Capital Partners

was founded in 2005 and is based in Wilton, Connecticut

with additional offices in Los Angeles and London. The firm

was founded by Russel S. Bernard, and employs 29

employees. The senior investment team collectively has

over 100 years of experience in real estate investment,

management, consulting and brokerage services. The firm

has broad distribution of ownership as it is owned by nine

senior partners, with Mr. Bernard owning the largest

percentage at 25%, while the other eight partners own the

remaining 75%.

Mr. Bernard, Managing Principal, has over 32 years of real

estate management and investment experience. Prior to

founding Westport, Mr. Bernard was a Principal and

Portfolio Manager at Oaktree Capital Management, LLC,

where he served as leader of Oaktree’s real estate

investment team for 10 years. Prior to Oaktree, Mr.

Bernard was a Managing Director of Trust Company of the

West (“TCW”), where he was the portfolio manager of the

TCW Special Credits Distressed Mortgage Fund.

Strategy Background

The fund will focus on distressed and opportunistic real

estate properties and debt that offers appreciation as well

as significant income. Targeted returns for the fund will be

15‐18% gross. Investment types will include equity, senior

debt and subordinated debt. Total transactions sizes will

range from $5 to $50 million. The targeted properties will

be located in the United States (85‐90%) and Europe (10‐

15%). The fund will employ a modest amount of leverage

with a stated maximum of 50%, although the actual levels

for prior funds have been 15‐40%. The fund will be

diversified both geographically and by property type with

the following targets:

The approach will focus on investment themes seen as

relevant by the investment management team in the

current market conditions. These include purchasing

assets from the banking sector and special servicers who

continue to dispose of sub‐performing real estate and real

estate debt. In addition, they are looking to purchase

assets from other distressed sellers as credit concerns

2

have constrained liquidity in the real estate sector. The

fund has a current preference to growing secondary

markets rather than gateway markets, as valuations are

viewed fully priced in gateway markets. The fund will

target some asset classes that are less institutional with

less competition, such as self‐storage, cold storage and

energy markets such as North Dakota, Texas and Ohio.

Value added strategies include proactively managing and

repositioning assets to create value; strategic capital

investments and tenant improvements, and aggressive

execution of leasing and operational plans to increase

revenues and minimize expenses.


Westport employs 32 individuals including a senior

investment team of nine professionals that average 27

years of industry experience, 19 years working with the

team (through Westport, Oaktree and TCW), and nine

years with the firm. Four professionals make up the firm’s

Investment Committee that must approve all transactions:

Name Title

Yrs.

Firm

Yrs.

Team

Yrs.

Exp.

Russel

Bernard*

Managing

Principal 9 30 34

Sean

Armstrong*

Principal,

Portfolio Mgmt 9 21 23

W. Gregory

Geiger*

Principal,


Mark

Porosoff*

Principal,

General Counsel 9 18 23

Peter

Aronson

Principal, Asset

Mgmt 9 17 22

Jordon

Socaransky

Principal,


Bruce Nuzie Principal, Admin 9 30 34

Steven

Russell

Principal, Chief

Admin Officer 9 9 31

Howard Fife Principal, Head

Trader 8 8 29

Average 9 19 27

*Denotes Investment Committee Member

A Key Person provision exists such that if any three or

more of Sean Armstrong, Gregory Geiger, Jordan

Socaransky and Marc Porosoff cease to be actively

involved on an ongoing basis, the Investment Period will

be suspended.

RUSSEL S. BERNARD, MANAGING PRINCIPAL

Russ Bernard is the Managing Principal at Westport Capital

Partners LLC. Prior to founding Westport Capital Partners,

Mr. Bernard was a Principal at Oaktree and the Portfolio

Manager for Oaktree’s real estate funds. He was

responsible for the management of a series of closed‐end

real estate funds with over $2 billion in total committed

capital. Prior to joining Oaktree in 1995, Mr. Bernard was a

Managing Director at TCW and Portfolio Manager of the

TCW Special Credits Distressed Mortgage Fund. Prior to

that, he was a partner at Win Properties, Inc., a national

real estate investment company for eight years. Before

joining Win Properties, Mr. Bernard was with Time

Equities, Inc., a New York real estate company for three

years. He began his career as a Staff Accountant at Price

Waterhouse in New York. Mr. Bernard has been on several

corporate, university and charity boards. Mr. Bernard

holds a B.S. in Business Management and Marketing from

Cornell University.

15%

15%

10%

10% 15%

15%

10%

10%

Target Property Types

Residential OfficeDistressed Municipal Finance Mixed UseIndustrial RetailHospitality Residential Energy

3

SEAN F. ARMSTRONG, CFA, PRINCIPAL

Prior to joining Westport in 2006, Mr. Armstrong was a

Managing Director at Oaktree Capital Management and

one of the real estate group’s senior professionals. His

responsibilities included the acquisition and management

of numerous property and debt investments, and he

participated in several complex asset‐level and company

level debt restructurings. Mr. Armstrong also spearheaded

Oaktree’s real estate investments in Japan and Europe.

Prior to joining Oaktree in 1995, Mr. Armstrong was a Vice

President in the TCW Special Credits real estate group. Mr.

Armstrong was among the first professionals hired at the

creation of the Special Credits real estate group in 1994.

Before joining the real estate group, Mr. Armstrong

worked for two years as a credit analyst in TCW’s high

yield bond group. During that time, Mr. Armstrong

developed very strong credit analysis skills, which were

employed in the analysis of many investment

opportunities in the TCW and Oaktree real estate funds.

Mr. Armstrong was formerly a director of Lodgian, Inc., a

Delaware corporation listed on the American Stock

Exchange. Mr. Armstrong graduated with a B.S. in

Biomedical Engineering magna cum laude from the

University of Southern California, where he was elected to

Phi Beta Kappa. He went on to earn an M.B.A. in Finance

magna cum laude, also from the University of Southern

California. He is a CFA Charterholder.

W. GREGORY GEIGER, PRINCIPAL

Before joining Westport in 2006, Mr. Geiger was a

Managing Director at Oaktree Capital Management and

one of the real estate group’s senior professionals. He was

principally responsible for making property investments,

including several large development and entitlement

projects that required complex negotiations with private

and governmental agencies to achieve successful

outcomes. He has also worked on numerous debt

restructurings that have required resolving bankruptcy and

other litigation issues. Mr. Geiger joined Oaktree in 1995

after serving as a Vice President in the TCW Special Credits

real estate group. Prior to joining TCW, Mr. Geiger spent

two years with the national real estate consulting and

brokerage firm of Julien J. Studley, Inc. and six years with

Langdon Rieder Corporation, a Los Angeles‐based

consulting firm, where he represented corporate clients in

the acquisition of office and industrial facilities. Mr. Geiger

holds a B.S. in Mechanical Engineering from Cornell

University and an M.B.A. in Real Estate Finance from the

Anderson School of Management at UCLA. Mr. Geiger is a

licensed Professional Engineer and an instrument rated

pilot.

PETER ARONSON, PRINCIPAL

Before joining Westport in 2006, Mr. Aronson was a

Managing Director at Oaktree Capital Management’s

Japanese and German affiliates. Mr. Aronson joined

Oaktree in 1998 and helped lead Oaktree’s real estate

efforts in Japan and Germany. Mr. Aronson helped open

Oaktree’s Tokyo office in 1998, where he worked until

2004 when he moved to Oaktree’s Frankfurt office. In both

locations, Mr. Aronson was responsible for leading the

sourcing, underwriting, acquisition, management and

disposition of both distressed debt and property

investments. Prior to joining Oaktree, Mr. Aronson was an

associate for five years at the law firm of Paul, Hastings,

Janofsky & Walker LLP, where his practice focused on

general real estate transactions. Mr. Aronson received a

B.A. degree magna cum laude from The American

University and a J.D. cum laude from Georgetown

University Law Center. He is a member of the State Bar of

California.

JORDAN SOCARANSKY, PRINCIPAL

Prior to joining Westport in 2006, Mr. Socaransky spent

four years as an associate in the real estate group at

Oaktree. His experience includes the acquisition,

management and disposition of both property and debt

investments. Prior to Oaktree, Mr. Socaransky was an

Analyst in Salomon Smith Barney’s Global Real Estate and

Lodging Investment Banking Group for two years,

specializing in mergers, acquisitions and capital raising. Mr.

Socaransky holds an Honors Business Administration

Degree from the Richard Ivey School of Business at the

University of Western Ontario, Canada.

Process

The investment process for Fund IV is described in the

following phases: Sourcing/Acquisitions, Due Diligence,

Asset Management and Portfolio Management and Risk

Management.

4

SOURCING / ACQUISITIONS

The Westport team is jointly responsible for sourcing new

potential acquisitions. Primarily, the team leverages a

network of relationships with real estate owners,

operators and managers, financial institutions,

corporations, brokers, financing sources including local

operating partners. They will seek properties that are “off

the beaten path” or perceived as being out of favor by

other investors. The fund will focus on assets that have

suffered inadequate capitalization, prior mismanagement

and poor leasing. They are looking to take advantage of

seller’s strategic or financial motivations. They have a

strong preference for privately negotiated transactions

rather than competitive auctions.

The team meets formally twice a week. In the first weekly

meeting, the team members update the rest of the firm on

what they are seeing in the market and updates on any

specific deals they are working on. In the second weekly

meeting, the four Principals on the Investment Committee

vote and must jointly agree on any potential transactions.

DUE DILIGENCE

The due diligence process starts with a macroeconomic

and real estate market assessment on a broad scale and

then the firm looks specifically at each potential

investment with a financial analysis, legal review and

environmental analysis. Westport will evaluate rent and

sales comparables, engineering reports and leases and

conduct tenant interviews before closing on a transaction.

ASSET MANAGEMENT

The Westport team generally expects to maintain its own

in‐house capability to manage, develop, redevelop and

reposition assets. Local operating partners are also used to

help source private market transactions and take

advantage of local market knowledge. When joint

ventures with local operating partners are utilized,

Westport requires significant capital contributions to align

interests with the operating partners and will structure

transactions to maintain substantial control over strategic

decision making. The Westport team will oversee each

property’s business plan, including budgeting, capital

expenditures, tenant improvements and financial

performance.

PORTFOLIO MANAGEMENT

The Investment Committee, which consists of four senior

Principals at the firm detailed above, must agree on all

transactions, both acquisitions and dispositions. All team

members meet formally twice a week and informally

throughout the week. Typically, Investment Committee

members are aware of the progress of a potential deal and

give input throughout the process.

Risk Management



limited to:


conditions such as changes in GDP growth and

unemployment rates.




characteristics.

▪ Investor demand – the relative attractiveness of

the asset class relative to other investment

alternatives will drive capital flows and affect

supply and demand characteristics.





include:






▪ Leverage – opportunistic funds will utilize highly

leveraged structures on investments. This adds

5

additional volatility, default risk and interest rate

risk through the use of floating rate structures.



liability and availability of permanent financing,

WCP IV has several provisions in place to mitigate the risks

associated with investing in real estate assets. These

include diversification by property type and geography,

across the US and Europe. European investments are

expected to be no more than 15% of the total fund.

Leverage will be capped at 50%, while actual experience in

prior funds has been 15‐40% leverage. In addition, no

single investment will be greater than 20% of the portfolio.

The largest percentage for a single investment in prior

funds was approximately 15%.

Potential Concerns

One of the firm’s Principals recently resigned in 2014 to

pursue other opportunities. Scott Chernoff had been with

Westport since 2006 and had expertise in retail properties,

residential and golf course development. Mr. Chernoff has

been the only Principal to leave the firm since inception.

Overall, the firm is smaller in scale than some of its

competitors at $1.3 billion in assets under management.

However, the firm is focused on a single strategy / fund

platform and is not engaged in other lines of business.

Fund IV will begin investing opportunistically in Europe (up

to 15% of the fund). Prior funds were focused on

opportunities in the U.S. They have moved one

professional (Vice President Stephen Woodard, Asset

Management) full time to London and plan to hire one to

two additional professionals in that office. Other members

of the team will spend considerable time in the London

office to assist in sourcing deals and vetting transactions.

In the team’s history, they have experience investing in

distressed assets across the globe, including Europe and

Asia. Performance Since the firm’s inception in 2006, they

have closed three funds with a total of $1.3 billion raised.

Fund I was a difficult 2006 vintage, pre‐global financial

crisis that has only had a slight positive return. Post global

financial crisis, the firm’s funds have generated 14‐21%

gross IRRs, using modest leverage ranging from 15‐40%.

Performance

Since the firm’s inception in 2006, they have closed three

funds with a total of $1.3 billion raised. Fund I was a

difficult 2006 vintage, pre-global financial crisis that has

only had a slight positive return. Post global financial crisis,

the firm’s funds have generated 13-18% gross IRRs, using

modest leverage ranging from 15-40%.

Westport

Vintage

Year

Equity Raised

($MM) IRR Gross

Fund I 2006 $262 1.1%

Fund II 2008 $35 13.0%

Fund IIA 2008 $275 14.0%

Fund IIB 2009 $82 14.4%

Fund III 2011 $571 17.5%

Fund IIIB 2012 $43 12.6%

Recommendation

Verus recommends Westport Capital Partners Fund IV as

an effective way in which to gain access to the

opportunistic real estate space. The Firm’s experienced

investment team provides for a high level of expertise in

the execution and management of real estate

transactions. At the same time, the current condition of

real estate markets also suggests an attractive entry point

for an opportunistic strategy. Fund IV offers a more

conservative leverage approach to distressed real estate

compared to other managers, but one that, ultimately,

seeks to deliver attractive risk‐adjusted returns.



Manager Evaluation Gerding Edlen Green Cities III, L.P.

LAST UPDATED: SEPTEMBER 2015

STRATEGY BASICS

Asset Class: Opportunistic / Value Added Real Estate

Firm Inception: 1996 (Gerding Edlen Investment Management founded in 2009

Firm Assets: $1 billion

Target Fund Size: $350 million ($400mm cap)

Target Return: 14% Net IRR

Currently Committed: $235 million

Initial Close: February 2015

Final Close: February 2016


Min. Capital Commitment: $5 million

Investment Period: 3 years

Term: 7 years + two 1-year ext.

Annual Management Fee: 1.5%

Incentive Fee: 20%


Catch-Up Provision: None

GP Contribution: 1% up to $3 million

Firm Background and History Gerding Edlen Development, Inc. (GEDI) was founded in 1996 by Mark Edlen and Bob Gerding. Mark was a real estate broker at Cushman Wakefield, while Bob Gerding was a real estate investor and developer. The firm started out with mostly build to suit development for local high net worth relationships in the Portland, Oregon area. The firm began to expand outward in the early 2000’s and started to work on larger transactions

that put them on the institutional map. The firm has become an industry leader in energy efficient construction and LEED-certified development (Leadership in Energy and Environmental Design). They built the first LEED Platinum office building in the U.S. in 2006 and have developed or retrofitted a total of 60 LEED certified properties. LEED certified properties typically exhibit higher levels of sustainability through efficient use of energy, water, air quality and materials.

In 2009, Gerding Edlen Investment Management (GEIM) was founded to begin a fund platform for investing institutional capital. GEIM currently has over $1 billion in assets under management with a total of 37 employees. The four senior partners (Mark Edlen, Kelly Saito, Roger Krage and Molly Bordonaro) average over 25 years of real estate experience. The Investment Management firm is owned by Kelly Saito (51%), Molly Bordonaro (9%) and 40% by Gerding Edlen Development, Inc. (GEDI). GEDI is majority owned by Mark Edlen along with eight additional owners.

Strategy Background Gerding Edlen Green Cities III (The Fund) expects to execute on the firm’s niche expertise in the acquisition, investment, management, retrofit and/or development of urban, modern, green apartment and/or office properties within the firm's key targeted markets. The Fund expects to invest in approximately 10 to 15 properties in a select group of high growth markets (Seattle, Portland, San Francisco, Los Angeles, Chicago and Boston).

Half of the properties are expected to be multifamily development projects and half office

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renovation/retrofitting, which is an increase in office exposure from prior funds. The Fund expects to add value through the entitlement process given their history as a developer. Several of the opportunities they are finding currently involve re-entitling older office buildings into development projects for multifamily, where they can demand a higher premium for the land use. These tend to be off market transactions where they make an offer on the land contingent upon completion of the entitlement process which allows them a minimal initial capital outlay until the entitlement process is complete or near complete. Leverage will be capped at 60% loan to cost, which is similar to prior funds.

Green Cities III is targeting $350 million with a hard cap of $400 million. To date, they have closed on $85 million with another $150 committed for the next close on October 26, which will bring the fund to $235 million. The firm has another $150 to $200 million in various stages of due diligence and expects to have another close on December 31, 2015 and a final close on February 18, 2016. The fund is targeting a 14% net IRR to investors, which is down slightly from Fund II’s 16% net IRR target. This is reflective of a more competitive environment to purchase properties, while not increasing the Fund’s risk profile.

The management fee for the Fund is 1.5% annually with an incentive fee of 20% over an 8% preferred return. There is no catch-up provision for the General Partner. The management fees are charged on committed capital during the investment period, then on invested capital thereafter.

Key Investment Professionals The firm has 37 employees with a stable team and low turnover. The four senior partners (Mark Edlen, Kelly Saito, Roger Krage and Molly Bordonaro) average over 25 years of real estate experience.

Both Mark Edlen and Roger Krage have transitioned much of the day to day business management responsibilities to Kelly Saito and Molly Bordonaro over the last several years, but the two remain fully involved

at the Investment Committee, which is the approval entity for any transactions in the funds. The key person provision in the Fund is triggered if any of those four individuals are removed from fund management.

Key Person provisions are triggered if any one of these individuals are not devoting substantially all of their business time to the Fund. Bios for Key Persons are listed below.

INVESTMENT COMMITTEE

Professional Title Years Firm

Years Exp.

Kelly Saito President 18 22

Molly Bordonaro Senior VP 6 15

Mark Edlen CEO 18 30

Roger Krage Senior VP 12 34

Kelly Saito

Mr. Kelly Saito has been involved in real estate for his entire 22-year professional career. His areas of expertise include all aspects of real estate investment and development including project sourcing, feasibility, financing, planning, construction, leasing and property operations. Mr. Saito is responsible for overseeing acquisitions and development. Kelly was among the first employees of Gerding Edlen—hired during the company’s first year of operation in 1996. Prior to that, he was a sales consultant for an international commercial real estate firm. Mr. Saito is a member of the firm’s Investment Committee. He received a Bachelor of Arts degree in Business Administration, Finance and Marketing at the University of Oregon.

Molly Bordonaro

Molly Bordonaro oversees the Firm’s investment management practice including the co-mingled institutional real estate funds and the asset management group. Ms. Bordonaro has more than 15 years of commercial real estate experience including transactions, financing, management, and leasing and fund development. Prior to joining Gerding Edlen, Ms. Bordonaro was a principal in the Portland office of The Gallatin Group, securing public financing for large private-public real estate projects. Concurrently, she

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was a co-founding director of an investment fund specializing in the financing of real estate developments in low and moderate-income areas. From 2005 - 2009, Ms. Bordonaro took time out from real estate to serve as the United States Ambassador to the Republic of Malta, becoming the first American diplomat to receive Malta’s highest medal of honor. She has also served as a member of the U.S. Congressional Commission on the Advancement of Women in Science and Technology, and as a member of the board of directors of the Fannie Mae Corporation and Moda Health. Ms. Bordonaro is a member of the Firm’s Investment Committee. She received a Bachelor of Arts degree at the University of Colorado.

Mark Edlen

Since 1996, when Mark Edlen co-founded Gerding Edlen with his good friend Bob Gerding, who passed away in 2009, the Firm has become a leader in urban-infill development and sustainable real estate. With more than 63 LEED certified buildings, Mr. Edlen has been a pioneer in urban development and the creator of the 20-minute living concept. Mr. Edlen is also the vision behind the Firm’s Principles of Place, understanding how community plays a pivotal role alongside design and technology in the success of their real estate properties. Mr. Edlen embraces this fundamental philosophy of communities that integrates neighborhoods, educational institutions and builds strong business, government and community partnerships. Mr. Edlen is a member of the Firm’s Investment Committee. He received a Bachelor of Science degree and MBA in Finance from the University of Oregon.

Roger Krage

Roger Krage is responsible for all aspects of obtaining construction and permanent financing. Mr. Krage’s duties include assistance in sourcing, securing and documenting capital structures (including debt and equity), as well as coordinating contracts among attorneys and clients. Prior to joining the Gerding Edlen team in 2003, Mr. Krage served as Senior Vice President and General Counsel of Crown Pacific, an integrated publicly traded forest products partnership. Before working for Crown Pacific, he acted as General Counsel of Market Transport, Ltd. for three years. Mr. Krage started his 34-year career as an attorney specializing in

real estate transactions and financing. Mr. Krage is a member of the Firm’s Investment Committee. He received a Bachelor of Science at Portland State University and a J.D. Magna Cum Laude at Gonzaga University.

Process Sourcing

Gerding Edlen's strategy is to focus on a select few markets that exhibit top performing job growth, especially with knowledge based jobs in high-tech and healthcare such as: Seattle, Boston, Los Angeles, Portland, Denver and Chicago. These tend to be “Youth Magnet” cities with disproportionately high growth of the Millennial population (18-34 year olds).

Gerding Edlen has expertise, experience and contacts within each of these markets As a result, in Fund I and Fund II, Gerding Edlen purchased eight of fourteen deals off market. The other deals were acquired through specific relationships. For Fund III, the Firm will continue to focus on the markets and source deals in five general areas: (1) Gerding Edlen will use its brokerage background to work directly with the appropriate brokers in each of the targeted markets; (2) Reach out to local owners and establish relationships, contacts or partnerships; (3) Networks of contacts with banks and financial institutions to gain access to information about distressed deals; (4) Leverage the firm’s reputation for sustainable development and re-development to attract and find potential opportunities; and (5) Continue to work with both labor groups and government on finding specific deals in the Fund's targeted markets.

Acquisitions

Gerding Edlen will manage the investment selection and due diligence process for the Fund by designating an experienced Acquisition Team consisting of one or more Gerding Edlen principals, a development manager, and an analyst to identify investment

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opportunities for the Fund in each targeted city. The Acquisition Team is led by Kelly Saito. He oversees three acquisition specialists divided by region and works daily with them in each of the markets to ascertain the best opportunities for the Fund. Since the team is currently invested in Seattle, Portland, San Francisco, Los Angeles and Boston, their development team readily available in each of these markets to assess the physical and environmental attributes of each potential investment opportunity and the extent and cost of retrofitting or developing the building in order for the building to qualify as a green Class A “tenant attractive” property. The team is vertically integrated with in house development and property management, allows them to assess opportunities and appropriately underwrite to the market and to value added construction costs. They incorporate in house and third party research to support any underwriting assumptions and provide an analysis of each market where they are looking to make an investment. All of the due diligence is operated in house with third party contracts for anticipated items such as environmental, engineering or property inspections.

Gerding Edlen looks to create a niche in the market by offering a number of key amenities in their apartment and office portfolios to make them more attractive to prospective tenants and therefore improve occupancy and market rental rates. There amenities can include: Fitness gyms with local trainers contracted to work onsite; sustainability – energy efficient lighting, heating, ventilation, energy controls and wastewater systems; business conference rooms, theater rooms, concierge services and shared community rooms.

Due Diligence

The Acquisition Team and the Due Diligence Team conducts multiple site visits to properties prior to an acquisition. This is done to assess the market and the property including the quality of the property's physical features, the tenant makeup and to assess the value added approach to retrofit, develop and/or reposition each property which is key to the Fund's strategy. Prior

to any acquisition the Acquisition and Investment Committee team members also walk comparable properties within the market to better understand any and all underwriting assumptions. Gerding Edlen also brings the Firm's asset and property management teams to visit the property to assess the potential market for leasing, demographics and appropriate features important to making the properties and their space more attractive to the marketplace. The Firm also uses Gerding Edlen Sustainable Solutions (GESS), which focuses exclusively on energy retrofits to assess the building's potential as well as utilize the firm’s team of partners including architects, contractors and sub-contractors to physically inspect the property and ascertain viability, costs and design for any potential retrofits for reduced operating expenses.

Investment Committee

All acquisition and dispositions in the Fund must be approved through a majority vote by the firm’s Investment Committee, which consists of the four Senior Partners described above. The Investment Committee meets on a weekly basis to review the status of each asset in the pipeline for potential acquisitions. The Acquisition Team, along with the Research Team present the competitive supply, economic and demographic conditions to the committee regarding any potential deals. All deals are stressed using worst case scenarios for rent and cap rate changes. This is done using a ten year historical lookback in each market, including past recessions. This committee also reviews each existing asset formally on a monthly basis to ensure the asset is performing in line with projections.

Asset Management

Gerding Edlen will serve as the asset manager for each of the Fund properties providing tenant relations, marketing and leasing strategies and building operations. For building performance Gerding Edlen utilizes its subsidiary GESS to consistently evaluate the performance of the building for potential energy and water savings as well as ways to improve indoor air

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quality, systems performance and execute other important operational aspects of the physical structure. Gerding Edlen's team of asset managers also works closely with the tenants to increase communications, deliver customer service and educate them on the specific green technologies within each building so that the building operates at the optimum technical proficiency while lowering overall operating expenses. In addition, since the strategy includes value added retrofits and redevelopment, the Asset Management works with the project management team to manage the redevelopment process and to work directly with the tenants during any renovations to the building or to their specific space.

Gerding Edlen’s Property Management Team reports directly to the Asset Management Group and is responsible for marketing, leasing, customer service and re-leasing by building relationships and communication with tenants. The asset management group also plays a role in the design of units and amenity spaces creating more attractive, modern building with greater features up front.

The Asset Management Team also works with the Property Managers to consistently improve each building including decreasing operating costs and increasing rents. Annual budgets are set by the Asset Management Team and approved by the Investment Committee. Monthly reports measuring performance versus original proforma and operating budgets are submitted by the Asset Management Team to the Investment Committee. The Asset Management Team also provides a Quarterly presentation to the Investment Committee on how each asset is performing to proforma and to budget. Lastly, The Asset Management group works closely with the internal research team to measure marketplace data and information on a continual basis allowing them to price and compare rents, income, expenses, and amenities to the competitive set within each marketplace

Risk Management There are a number of risks associated with investing in opportunistic real estate. These include, but are not limited to:








▪ Leverage – opportunistic funds will utilize highly leveraged structures on investments. This adds additional volatility, default risk and interest rate risk through the use of floating rate structures.

▪ Development risks – regulatory approvals, timely completion of construction, environmental liability and availability of permanent financing.

Gerding Edlen will try to mitigate some of these risks in several ways. First of all is market selection. Gerding Edlen’s research group is targeting markets that are anticipated to outperform the nation for economic and demographic growth. Specifically, the anticipated

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growth of Millennial population that are drawn to live and rent in urban locations and attracted to modern features and high “green” standards.

With regard to interest rate risk and leverage, the Fund will cap leverage at 60% at the fund level. While most of the debt is floating, short-term loans, the firm has mitigated interest rate risk in prior funds by hedging approximately 80% of the floating rate portfolio exposure. They expect to execute a similar strategy for Fund III.

Potential Concerns One of the primary concerns with this fund is the development component, which can take several years in some cases to complete a project. The recovery in the real estate markets is now several years in and at some point there will be another downturn as real estate is cyclical. The Fund is mitigating some of the development concerns by only putting significant capital in once the entitlement process is completed, narrowing the window of completion. They are only looking to develop in the multi-family sector where they are focusing exclusively in markets and submarkets that are experiencing significant growth and where new supply absorption is positive. Additionally, they are only getting involved in development projects where they can acquire the land at a discount due to the entitlement process, where they add value.

Another potential concern is the relatively smaller size of the firm. With $1 billion in assets under management and 37 employees, the firm is on the smaller side compared to some peers. The firm however, will be focused on a fewer number of transactions to complete approximately four deals per year, which is manageable. Two of the key principals (Mark Edlen and Roger Krage) have transitioned much of their day to day business management responsibilities as they look toward succession planning, however they are fully committed through the life of this fund as Key Persons on the Investment Committee.

The firm did have a number of condominium/land projects that failed in the heat of the housing bubble in

the mid to late 2000’s. These were located in Portland, Bellevue, WA and Los Angeles. There were approximately 14 transactions that generated gross IRRs of approximately -23%. There were several lessons learned in their strategy in which they do not expect to be a part of their future strategy. These included: projects that were too large with longer time horizons to bring the project to completion. Leverage was much higher in these transactions (85-90%) which is now capped at 60%. Capital outlays will be moderated or optioned until the completion of the entitlement process.

Performance Prior Fund Performance: Green Cities I

The firm’s first commingled fund Green Cities I, commenced in 2010 with $191 million of capital, has generated returns of 14.9% (gross IRR) and a 1.5x multiple through 6/30/15. The Fund invested in eight multifamily properties in urban infill markets such as Seattle, Boston, Los Angeles and San Francisco. Six of the properties were ground up development and two were existing buildings with a retrofitting/repositioning focus. All of the buildings are sustainable projects with LEED-Gold or LEED-Platinum certification goals. Six of the eight investments have been liquidated with the remaining two properties expected to be sold in the next twelve months.

Prior Fund Performance: Green Cities II

The firm’s second fund, Green Cities II, commenced in 2012 with $220 million in capital and has generated returns of 20.8% (gross IRR) and a 1.8x multiple as of 6/30/15. The fund invested in seven properties in Seattle, San Francisco, Boston and Chicago. Of these, six were multifamily development projects and one was an office renovation project. One asset has been sold with another under contract to be sold in October. The remaining assets are expected to be liquidated in the next two to three years.

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Recommendation Verus is recommending Gerding Edlen Green Cities III as part of a client’s diversified non-core real estate allocation. While we do think that pricing has been getting rich in the multifamily sector, especially in primary urban markets, we believe that the growth in these markets will lead to continued demand and strategies that “create core” properties should continue to perform. We believe that the Green Cities strategy has created a niche in the market focusing on sustainability, desired locations for office and multifamily along with amenities that are attractive to the younger, more mobile workforce that is seeking out urban living.



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