Real Estate Program Review

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Prepared for:

Prepared for:

Committee on Investments

Committee on Investments

Presented by:

Presented by:

Gloria Gil

Gloria Gil

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Managing Director, Real Assets

Managing Director, Real Assets

September 11, 2007

September 11, 2007

Real Estate Program Review

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The Role of Real Estate

ƒ Enhances the diversification of the total UCRP and GEP portfolios

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Historically, real estate has a low (or even negative) correlation to other

financial asset classes

ƒ Income component of total return helps pay benefits and fund expenses

ƒ Provides competitive risk-adjusted returns relative to other asset classes

ƒ Can serve as a hedge against inflation in certain market and economic

conditions

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Primarily possible when supply and demand levels are in equilibrium

during times of greater-than-expected inflation

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Enhanced strategy attributes:

ƒ Moderately under-serviced assets with correctable flaws

ƒ Emphasis on growth in income and value

High Return strategy attributes:

ƒ Properties that require major – repositioning

– redevelopment

– financial restructuring ƒ Includes new development ƒ Emphasis on growth in value

Real Estate Investment Strategies

ƒ Investment grade, income-producing properties – usually located in primary markets

– in good physical condition

– stabilized occupancy levels with credit-worthy tenants

ƒ Emphasis on stable income and modest value growth

Public REIT strategy attributes:

ƒ Investment grade, income-producing properties ƒ Emphasis on stable income and modest value

growth Core U.S. REITs -Enhanced Return

Global Real Estate Securities

-High Return

Risk

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Real Estate Allocation

Target Allocation: UCRP GEP

University Plan Assets (as of June 2007)*

$47.8 B $6.4 B

Real Estate Allocation $2.4 B (5.0%) $500 M **(7.5%)

Program Inception

October 2004

Currently Funded $490 M (0.9%) $177 M (0.3%)

Allocation as of June 2007

Number of Funds 24 21

Amount Committed $1.3 B (2.8%) $316 M (4.93%)

Unfunded Commitments $823 M (1.7%) $171 M (0.3%)

*One quarter lag

**GEP target allocation was increased from 5% to 7.5%, effective July 1, 2007. August 23,2007 Real Estate Program Review (I-4)

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Real Estate Performance Returns

UCRP GEP

Total Return (Net of Fees) 20.9 % 28.0%

NCREIF Benchmark 16.6% 16.6% Out performance

(Basis Points)

430 bps 1,220 bps

Annual Return as of 6/30/07 ( One Quarter Lag)

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Investment Strategy

Investment Strategy

ƒHow Managers Add Value:

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Significant off-market, direct deal flow

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Acquisition at discount to replacement cost

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Short-term lease rollover, ideally at below-market rents

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Lease-buyout potential reflecting change-of-use or tenancy

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Significant disparity between market rents and new construction rents

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Growth locations with expanding demographic base, limited zoned land

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Investment Strategy

Investment Strategy

ƒCreate value through direct acquisition, hands-on management and disposition:

(Closed end funds unless indicated otherwise)

Fund Strategy

% of Committed Capital

Open-end, US Core - All Property Types 6%

Open- end, US Value Added (2 Funds) 14%

Closed-end, US Value Added –All Property Types 7% Closed-end, US Value Added – Office, Industrial, Retail 2%

ƒSpecific market and tenant knowledge

Closed-end, US, Europe (20%) Value Added – Office Focus 6%

Closed-end, US High Return – Hotel Focus 2%

Closed-end, US Value Added – Apartment Focus 3% Open-end, US Value Added – Industrial Focus (Warehouses near airports and seaports) 4%

Closed-end, US High Return – Senior Housing 3%

Closed-end, US, Europe (10-20%)- Public to Private, Finance Restructuring 11% All Property Types

Closed-end, Diversified Global – R.E. Operating Companies, Europe & Japan 3%

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Investment Strategy

Investment Strategy

ƒInfill locations with barriers to competitive development

Fund Strategy

% of Committed Capital

Close-end, US Value Added – All Property Types 6%

Closed-end, US High Return – Office, Retail, Mixed-Use 2% (Low to middle income urban areas)

Closed-end, US High Return – Multi-family, Retail 4% Closed-end, Western US Value Added – Office, Industrial 3% Closed-end, US, Western Europe, Canada, Japan – All Property Types 3% Closed-end, Europe (50%-55%), Asia (20%-25%), Mexico(10%),US (15%) 4%

High Return – All Property Types

ƒUnderutilized assets, land expansion, under maintained assets

Closed-end, US, Mexico (10%) High Return – All Property Types 6% Closed-end, US High Return – Joint Ventures – All Property Types 3%

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Planned UC Real Estate Strategy Mix as of December 2007

Planned UC Real Estate Strategy Mix as of December 2007

August 23,2007 Real Estate Program Review (I-4)

HIGH RETURN Commingled $890 Million 29% ENHANCED Separate Accts $300 Million 10% "BUILD TO CORE " Separate Accts $600 Million 19% REITs $300 Million 10% CORE Commingled $100 Million 3% ENHANCED Commingled $895 Million 29%

10 Apartm ent 11% Office 40% Industrial 20% Retail 8% Hotel 6% Other 15%

Property Type Diversification

Property Type Diversification

UCRP

GEP

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US Domestic

International*

Real Estate Geographic Diversification

UCRP - $498 Million GEP - $175 Million

UCRP - $29 Million GEP - $10 Million

August 23,2007 Real Estate Program Review (I-4)

12 Pacific Mountain West North Central East North Central Southwest Northeast Mideast WEST* Pacific $64 Mountain $6 MIDWEST* WN Central $4 EN Central $16 SOUTH* Southwest $13 Southeast $21 EAST* Mideast $17 Northeast $34 Southeast

Total Amount of Equity Invested $175 million

GEP US Domestic Investments

August 23,2007 Real Estate Program Review (I-4)

13 Pacific Mountain West North Central East North Central Southwest Northeast Mideast WEST* Pacific $175 Mountain $22 MIDWEST* WN Central $11 EN Central $46 SOUTH* Southwest $30 Southeast $74 EAST* Mideast $54 Northeast $86 Southeast

Total Amount of Equity Invested $498 million

UCRP US Domestic Investments

August 23,2007 Real Estate Program Review (I-4)

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Team Overseeing Real Estate Portfolio

Gloria Gil Managing Director Real Assets Rebecca Stafford Investment Officer Real Assets

The Townsend Group

Institutional Real Estate Consultants

Headquartered in Cleveland, with satellite offices in San

Francisco and Denver

Advises 80+ clients with aggregate real estate allocations in excess of $70

billion

32 professionals dedicated to real estate research, fund due

diligence and performance measurement

Marie Berggren CIO

Cay Sison

Senior Investment Analyst Real Assets

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Real Estate Activities and Goals

ƒ Committed the following funds: 15- High Return $ 840 million 11 - Enhanced $ 845 million 1 - Core $ 100 million Total 27 Funds $1,785 million

Medium-term goals:

ƒ Implement Board approved changes (Aug. 2006 & May 2007) to policy guidelines to: - permit investment in separate accounts

– broaden allowable strategy allocation ranges – increase international exposure

ƒ Conduct searches for: (To be completed by March 2008)

– REIT separate account managers - (US and International mandates) – Core separate account managers - (“Build to Core” mandate)

– Enhanced separate account managers – (“Value Added” mandate)

– Real Estate Consultant – contract expired June 30, 2007 –now on month-to-month contact

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• 280-unit garden style apartment complex

• Approximately $46 million

($164,000/unit).

• Equity Invested - $14 million

• Construction started in April 2005

Closed - April 2007

• 61% Leased as of 7/31/07

• The average unit size is almost 1,000

square feet and residents will enjoy a modern clubhouse/fitness center

• Located in a major NE City

Strategy: New Development

Sample Apartment Investment

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• 140,467 square feet

• Approximately $27.8 million ($198/sq.ft)

Acquired on an all-cash basis

• Closed in August 2007

• 93% leased to 25 tenants, anchored by

Wild Oats, Marshals and Target

• Stabilized retail center with limited

near-term rollover and currently leased to a diverse group of national, regional, and local retailers

• Current rents 15% below market • Center underwent significant

redevelopment in 2003

• Well-located in an affluent, infill

submarket in the Midwest

Strategy –Stabilized Core Property

Sample Retail Investment

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• 54- story high-rise under construction in

downtown metropolitan area on the West Coast

• Approximately $936 million total cost

• Equity commitment $134 million

• 1,001 hotel rooms

• 224 for-sale condominiums – 75% reserved

• 215,400 square feet of conference center

space

• $2.5 billion sports, residential and

entertainment district being developed

• Designed to be the region’s most

in-demand hospitality location

Strategy: New Development/Condo Sales

Sample Hotel Investment

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• Largest office REIT acquisition in the

US.

• All-in cost of $38.7 billion,

Equity invested - $6 Billion

• 89% of real estate located in top-tier,

supply constrained coastal markets

• 75% of portfolio sold in 4 months –

Deal generated - 2.5x to 3x multiple

• Majority of the assets are Class A

Central Business District (CBD) towers

• Significant potential for operational

improvements corporate/property level

Sample Office Investments

August 23,2007 Real Estate Program Review (I-4)

Strategy : Public to Private

Acquisition

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Overview of Current Real Estate Funds

Overview of Current Real Estate Funds