ALASKA PERMANENT FUND CORPORATION
RESOLUTION OF THE BOARD OF TRUSTEES OF THE ALASKA PERMANENT FUND CORPORATION SETTING OUT INVESTMENT POLICIES RELATING TO
REAL ESTATE INVESTMENTS
RESOLUTION 04-07
(This resolution supersedes Resolution 00-10 and any other prior resolution or part of a resolution that established real estate investment policies.)
The Board of Trustees ("Board") of the Alaska Permanent Fund Corporation ("APFC") has determined that it is in the best interest of the Alaska Permanent Fund ("Fund") to invest a portion of the Fund's assets in private equity real estate, real estate investment trusts (REIT's), private mortgages, and commercial mortgage backed securities (collectively "real estate"). Real estate investments are intended to enhance the overall investments of the Fund and contribute to the APFC's investment strategy by safeguarding the principal of the Fund and lowering overall volatility while generating a relatively high current return.
To effect its investment strategy, the Board has established policies and guidelines from time to time for the investment of Fund assets in real estate. With respect to investments in REITs, mortgages, and commercial mortgage-backed securities, the Board has selected investment managers who are authorized to acquire and dispose of individual assets for the Fund. With respect to all other permissible real estate investments, discretion in the selection, administration, and disposition of assets is delegated to the Executive Director, who may, subject to policies and guidelines of the Board, further delegate various of those functions to APFC staff and the APFC's private equity real estate investment managers. The Executive Director, through the Chief
The Board recognizes that it must periodically review the real estate investment guidelines to determine whether the guidelines still adequately reflect applicable law, the Board's policies, and recent developments in the financial markets and safeguard the Fund's real estate investments and enhance the performance of those investments. During these reviews, the Board may, at its discretion, modify, clarify, and restate the investment policies and guidelines governing real estate investments.
This resolution is the result of a comprehensive review of Resolution 00-10 and the practices of other large institutional investors and is intended to supersede Resolution 00-10 and any other resolution or part of a resolution that established real estate investment policy.
NOW, THEREFORE, BE IT RESOLVED by the Board of Trustees that the following policies and guidelines shall govern the investment of Fund assets in real estate:
I. Investment Objectives. The return objectives for the APFC's real estate portfolio are as follows:
A. Total Return: The long-term return objective for the APFC real estate portfolio is to exceed the composite return derived from a combination of 70% NCREIF NPI Index and 30% Morgan Stanley REIT Index, calculated on a time-weighted basis over rolling five-year periods.
B. Income Return: Income, which is defined as cash distributed to the Fund, is expected to produce 50-60% of the nominal total return over rolling five-year periods.
II. Investment Policies/Guidelines.
investment that are substantially identical to ERISA should be followed.
B. Portfolio Composition. The following portfolio composition target ranges apply to the real estate portfolio:
Portfolio Target Target range
Public Real Estate 30% 15% - 50%
Private Real Estate 70% 50% - 85%
C. Authorized Investments.
1. In accordance with AS 37.13.120(g), the APFC may invest assets of the Fund in the following real estate investments:
a. equity ownership of real property ["private and public equity real estate"]; b. mortgages secured by a first lien on real property ["private debt"] and
commercial mortgage-backed securities ("CMBS") ["public debt"]; c. a combination of debt and equity ownership of real property; and
d. interests in one or more title-holding entities, privately or publicly held real estate investment trusts ("REITs"), real estate operating companies ("REOCs"), or other entities whose assets consist predominately of any combination of the foregoing.
2. Investment Structures—Private Real Estate. The Board recognizes that, regardless of investment structure, private real estate is an illiquid asset class. Vehicles that
maximize investor control are preferred. The APFC may use the following investment structures for the real estate portfolio:
a. Separate Accounts: Separately managed accounts are the preferred investment vehicle as they provide the APFC with control, alignment of interest, and lower cost.
b. Collective Investment Vehicle: Any legally permissible vehicle is permitted, including joint ventures, limited partnerships, real estate investment trusts, and limited liability companies.
to the following:
i. the co-investor(s) must be a corporation, partnership, limited liability company, trust, or other entity that:
• is organized and operated for the purpose of making real estate investments; and
• embraces investment objectives and goals that are substantially consistent with those of the APFC; and
ii. the controlling agreement(s) must include a right to buy a co-investor's interest, at minimum, in proportion to the Fund's interest in the property. d. The APFC may be a general partner in an equity investment in real estate so long
as APFC staff has determined that the risks to be incurred as a general partner are appropriate in light of the perceived benefits. If the partnership form is used, staff shall specifically consider the adequacy of liability and other insurance coverage.
e. The APFC may invest in open-end, commingled funds provided the types of properties listed in paragraph 3 a – e of this Section C, Part II, comprise at least 95% of the value weighted holdings, excluding cash and other short-term investments, at the time of the initial investment.
3. Property Types—Private Real Estate. Fund assets may be invested in the following types of private real estate:
a. office buildings; b. retail buildings; c. multi-family housing; d. industrial buildings;
e. mixed-use buildings (combinations of types listed in a-d, above);
f. land, located within the market area in which the Fund holds an existing private equity real estate interest, and that is acquired:
g. land purchased for the purpose of granting or entering into a ground lease where the land is improved by a completed and substantially rented building of a type listed in a-e, above.
4. Geographic Restrictions. Under AS 37.13.120(g)(16), Fund assets may be invested only in properties located in the United States. However, Fund assets may be invested in REITs or commingled funds that in turn hold some assets in non–U.S. markets so long as the value of the non-U.S. assets in any individual REIT or individual commingled fund does not exceed five percent (5%) of the total value of that REIT's or commingled fund's holdings at the time of the initial investment. D. Diversification. To minimize risk from regional economic imbalances, property
performance volatility, and management style, APFC staff shall diversify the Fund's real estate investments by investment type, property type, property location, major tenants, and manager. Staff shall report the degree of diversification across these dimensions to the Board on a regular basis.
E. Leverage. It is the Board's preference to derive returns through executing real estate strategies, as opposed to financing strategies, however:
1. investments may be structured to include borrowing from third parties if the use of borrowing enhances the investment's return and can be supported by the property's value and income; and
2. real estate investments shall not be structured to include debt with recourse to the APFC or the Fund (other than customary carve-outs for misappropriation of rents, insurance or condemnation proceeds, or similar items) beyond the APFC's
commitment to the entity established to hold title to the property. F. Development/Property Life Cycle. Private equity real estate must be either:
1. improved by completed and substantially rented buildings; or
2. located within the market area in which the Fund holds an existing private equity real estate interest and acquired either:
b. to retain or service the needs of existing tenants. G. Investment Authority/Control.
1. Internal.
a. Except as delegated to an external investment manager under paragraph 2.a of this Section G, final approval of real estate investments is given to the Executive Director to be exercised in accordance with the policies set out in this Resolution 04-07. The Executive Director may delegate to the APFC's Chief Investment Officer and/or the Manager of Real Estate Investments authority to approve (and execute documents relating to) the acquisition or disposition of an interest in real estate.
b. The Executive Director is authorized to enter into, execute, and amend contracts with existing external managers that the Executive Director considers necessary, convenient, and desirable for the purposes of this Resolution 04-07 and to take such other action as is necessary, convenient, and desirable to carry out the purposes of this resolution. In the execution and monitoring of contracts with investment managers, the Executive Director shall ensure that applicable statutes and policies established by the Board are followed.
2. External.
a. The following discretionary matters may be delegated to external investment managers who shall serve as fiduciaries under Board-approved policies and guidelines:
i. determining whether to acquire or dispose of private equity real estate investments;
ii. management and oversight of all operational and administrative matters involving the property and/or the investment;
iii. collection and disbursement of cash, maintenance of fiscal records, financial reporting to investors; and
and financial statements.
b. The following discretionary matters may not be delegated to external investment managers:
i. entering into agreements related to investment decisions that have impact on long term value of the investment including, but not limited to, decisions to finance or refinance any portion of an investment or guarantee the
obligations of another;
ii. reviewing investment performance; and
iii. exercising a right to buy or sell between partners.
c. All investments made on behalf of the APFC shall be subject to:
i. portfolio diversification guidelines established in this Resolution 04-07 policy; and
ii. the Investment Strategy, Tactical Plan, and specific manager's Manager Investment Plan in effect when the investment is made.
3. Authority/Control Issues—Co-investment.
a. Agreements governing the relationship between the APFC and its co-investors must require that the APFC be provided written notification in advance on all matters of significance as to the performance of the investment, including proposals for sale, mortgage, refinance, loan call, acceleration, conveyance, material modifications to financing agreements, declarations of default, major capital expenditures, approval of annual budgets, and appointment and
termination of investment managers for the property.
b. The APFC shall retain the right to sell the Fund's interest in any equity real estate co-investment. However, exercise of such right may be made contingent upon approval, right of first refusal, buy-sell, or any similar right of co-investors in accordance with procedures set out in a joint investment agreement.
c. The retention and termination of asset management services shall be determined jointly by the co-investors.
situation or non-registration of a manager under the Investment Advisors Act of 1940, an investment manager is unable to act in a fiduciary capacity to the APFC, the APFC may appoint an independent fiduciary to be responsible for assuring, as necessary, the performance by the investment manager and other of the manager's duties and responsibilities required under paragraph 2, Section H of this Part II.
H. Investment Management Agreements.
1. Investment management agreements must include specific provisions for termination of the investment manager's services.
2. Any agreement with an investment manager with respect to any real property
investment shall provide that the investment manager shall act in a fiduciary capacity and in the best interest of the APFC with respect to such investment. Subject to paragraph 2 b, Section G of this Part II, and any limitation on the investment manager's authority contained in such agreement, the investment manager shall be solely responsible for the acquisition and disposition (as applicable) and operation of that investment and for performing all other responsibilities associated with the investment management function, including the engagement of professionals such as accountants, engineers, and architects, as necessary to fully protect the interests of the investment entity. In carrying out its responsibilities, the investment manager shall, among other actions, employ local property managers; obtain property and liability insurance; enter into maintenance, repair, and janitorial service contracts; advertise property for lease or rent; prepare and execute leases and rental agreements; employ leasing agents and pay leasing commissions; undertake alterations, improvements, and repairs; pay taxes, assessments, and utilities; and take all other actions and pay all other charges in connection with the ownership and operation of the real property investment. The costs of the foregoing shall be paid by or through the investment entity that holds title to the property in which the Fund holds an interest.
I. Investment Guidelines.
a. Acquisition of Private Equity Real Estate Investments.
i. Private Equity Requirements Related to "Substantially Rented" (defined as those properties that satisfy the following conditions at the time of
acquisition and funding):
Core Non-Core
Physical Test At least 80 percent of the physical net rentable area must be leased and at least 65 percent of the physical net rentable area must be leased and occupied by tenants on an arms-length basis.
At least 65 percent of the physical net rentable area must be leased and at least 50 percent of the physical net rentable area must be leased and occupied by tenants on an arms-length basis.
Income Test The property must be sufficiently leased to generate income sufficient to cover operating expenses and, if applicable, debt service.
ii. Guarantees, letters of credit, holdbacks, master leases, and other similar enhancements may be taken into account in determining whether a property is substantially rented.
iii. In determining whether property is substantially rented, the investment manager responsible for the acquisition shall exercise its discretion as appropriate to verify the credit quality of actual leases, master leases, guarantees, letters of credit, and similar enhancements, as applicable. iv. An investment will be considered an investment in real estate "improved by
completed and substantially rented buildings" so long as the investment as a whole meets that test, even though each individual piece of real estate within the transaction, or series of related transactions, might not meet the test. b. Additional Capital Contributions: The APFC shall not obligate itself or the Fund
to make any capital contributions beyond those called for under the initial
additional contribution.
c. Custody of Closing Documents: Evidence of title to real property, trust deeds, and other original closing documents relating to equity real estate investments shall be held in custody as determined by the appropriate investment entity, under the advice of the investment manager and subject to the consent of the APFC.
d. Property Managers: All private equity real estate in which the Fund is invested must be leased and managed by professional property managers who are compensated at market rates.
e. Ground Leases: Property consisting of improvements only and subject to a ground lease may be acquired so long as the term of the ground lease (excluding unexercised renewals) exceeds both the remaining depreciable life and the expected holding period for the asset.
f. UBTI: Investments should be evaluated and structured to take into account the tax, if any, that would be payable by title-holding entities or prospective purchasers on any unrelated business taxable income ("UBTI") generated by those investments.
g. Lease Structure: Multi-tenant and single tenant properties are permitted. h. Hazards: Environmental hazards (asbestos content, toxic wastes, etc.) and the
potential of natural disasters (earthquakes, floods, etc.) shall be evaluated as part of due diligence prior to investment acquisition. Where feasible and
cost-effective, insurance coverage should be used to mitigate these risks.
i. ADA Compliance: As part of due diligence, a determination must be made that a proposed private equity real estate investment is in compliance with the Americans With Disabilities Act of 1990 ("ADA") prior to the time of the investment. The establishment of adequate reserves to undertake ADA
compliance and a schedule for completion of such compliance may be taken into account in lieu of this requirement.
i. Publicly traded mortgages shall consist of CMBS secured by first mortgage positions. Private mortgages shall consist of a diversified portfolio of whole loans secured by first mortgage positions.
ii. The APFC shall invest Fund assets only in mortgage loans of "investment grade" quality.
iii. The APFC shall invest Fund assets only in CMBS meeting minimum debtor ratings of BBB- for Fitch and Standard & Poor's or Baa3 for Moody's.
3. REITs. The provisions dealing with best execution and proxy voting of the Board's resolution establishing investment policies for equity securities in effect at the time of the trade or vote, as applicable, shall apply to REITs in the real estate portfolio. III. Alaska Outreach. The APFC will actively seek, either together with compatible
co-investment partners or alone, as appropriate, in-state co-investment opportunities to be included in the Fund's real estate portfolio if the in-state investment opportunity has a risk level and expected yield comparable to other investment opportunities available to the APFC. The Board of Trustees will appoint one of the APFC's external real estate investment managers as its Alaska Manager to actively seek, on behalf of the APFC, investments that meet these parameters.
IV. Planning.
A. Investment Strategy. APFC staff shall prepare a real estate investment strategy for the real estate portfolio ("Investment Strategy"). The Investment Strategy shall set out the APFC's three- to five-year objectives and implementation plan for investment and management of the Fund's real estate assets. The Investment Strategy takes effect upon approval by the Board and shall be reviewed by the staff annually and updated for consideration and approval by the Board as appropriate.
V. Reporting Procedures.
A. Investment Type. Staff shall report to the Board the Fund's investment position that incorporates allocation targets and allocation ranges for the separate investment types within the Fund's real estate portfolio.
B. Leverage: Staff shall report total portfolio level debt as a percentage of total market value of the Fund's private equity real estate portfolio to the Board on a regular basis.
C. Benchmarks: Staff shall use the following benchmarks when reporting portfolio performance results:
Portfolio Benchmark Index
Overall real estate portfolio
Customized benchmark comprised of 70% NCREIF NPI and 30% Morgan Stanley Real Estate Index
Private Equity NCREIF NPI
Public Equity Morgan Stanley Real Estate Index
D. Accounting/Financial Reporting: Staff shall assure there is a comprehensive and
responsive reporting and monitoring system for the entire real estate portfolio, individual investments, and individual managers that meets the following criteria:
1. audited financial statements must be prepared at least annually for each private real estate investment entity;
3. cash flow from private real estate investment operations and disposition must be distributed promptly to the APFC pursuant to its instructions; investment entities may retain sufficient cash to maintain reasonable reserve levels; and
4. all private equity real estate holdings must be valued using the equity method for APFC's financial reporting purposes as reflected in the footnotes to the financial statements for the Fund.
VI. Valuation. The APFC shall follow generally accepted accounting principles for valuation of private equity real estate. As applicable, standards then in effect for accounting for the impairment or disposal of long-lived assets shall be applied to the Fund's real estate assets, including participating mortgages and equivalent obligations, in accordance with the following guidelines:
A. a real estate investment shall be reviewed by the APFC for possible impairment of value upon receipt of an appraisal or manager's internal valuation that reflects that the market value of the property is less than eighty percent (80%) of its current book value;
B. both manager's internal valuation and external appraisals may be used to establish the market value of real estate investments for purposes of analyzing permanent impairment; C. a permanent loss due to impairment in asset value shall be recognized by a charge against
current operating income if the estimated future cash flows of a real estate investment, determined on an undiscounted basis and without interest, for the estimated holding period, plus estimated net consideration to the APFC for the Fund's interest in the property at final disposition are less than the book value of the investment;
D. the amount to be recognized as an impairment loss shall be computed as the difference between the book value of the real estate investment and its current appraised market value, so long as such recognition is required by Section C of this Part VI;
E. each real estate investment that is separately carried on the books of the APFC shall be reviewed independently for possible impairment of value and may not be grouped with other real estate investments, so long as individual cash flows from an individual investment can be separately identified;
not be booked until after notification of the impairment to the Audit Committee; G. recognition of subsequent recoveries in the market value of a real estate investment for
which a permanent impairment has been recognized is not permitted;
H. to the extent of any direct conflict between standards in effect for accounting for the impairment or disposal of long-lived assets and these guidelines, the standards then in effect shall prevail; and
I. the Executive Director is authorized, empowered, and directed to take such actions as are necessary, convenient, and desirable for the recognition of a permanent impairment in the value of a real estate investment, consistent with the provisions of this Part VI relating to valuation of private equity holdings.
FURTHER RESOLVED by the Board of Trustees that Resolution 00-10 and any other resolution or part of a resolution that established real estate investment policy are hereby superseded.
PASSED AND APPROVED by the Board of Trustees of the Alaska Permanent Fund Corporation this 13th day of July, 2004.
/s/ Carl Brady
Chair, Board of Trustees
ATTEST:
