Proposed Investment in GLP China Logistics Fund I

Memorandum to: State Investment Council
From: Christopher McDonough, Acting Director
Subject: Proposed Investment in GLP China Logistics Fund I

The New Jersey Division of Investment (“Division”) is proposing an investment of $75 million in GLP China Logistics Fund I, L.P (“GLP”). This memorandum is presented to the State Investment Council (the “Council”) pursuant to N.J.A.C. 17:16-69.9.

The Division is recommending this investment based on the following factors:

  • Attractive Environment: The Chinese logistic warehousing market is characterized by a limited supply of competitive modern stock, high barriers to entry (including limited quotas for land in suitable locations) and an increasing sophisticated customer base that views over 75% of the current stock as obsolete. Due to these factors, development yields can be approximately 8.75% with a projected unlevered Internal Rate of Return of 14% for a 10 year holding period. This compares favorably to other property types (office and residential mostly) in China and industrial in the US and Europe, which have shown development yields closer to 6-7.5%.
  • Successful Track Record: GLP owns five times the gross floor area of their nearest logistic warehouse competitor in China. As of 3Q12, the properties were 92% leased. Additionally, GLP has been able to develop properties at an average historical yield of 9% with only a 5.6 month lease-up period. The firm also has a team of 471 experienced local professionals working across 20 offices in China.
  • Defined Pipeline and Established Sponsor: The fund offers investors an immediately visible investment pipeline consisting of projects that GLP, the parent entity, will contribute to the fund. This pipeline consists of approximately 22 projects and 1.7 million square meters of gross floor area, and is primarily in the form of land to be developed by the fund. The fund will also benefit from GLP’s development pipeline, consisting of 6.8 million square meters under option or Memorandum of Understanding (MOU).
  • Strong alignment of interest with GP: GLP will commit $750 million or 51% of the total capital commitments to the fund. This is the largest commitment that GLP has made to any of its underlying funds to date and amounts to ~42% of the firm’s 6/30/13 cash assets.

A report of the Investment Policy Committee (“IPC”) summarizing the details of the proposed investment is attached.

Division Staff and its real estate consultant, R.V. Kuhns and Associates, Inc., undertook extensive due diligence on the proposed investment in accordance with the Division’s Alternative Investment Due Diligence Procedures.

The fund utilized M3 Capital Partners (HK) Limited (the “placement agent”) as third-party solicitor in connection with the potential investment. Staff has determined that the placement agent and its representatives met the registration, licensing and experience requirements set forth in the Division’s Placement Agent Policy (the “Policy”). Pursuant to the Policy, the fund has disclosed the contract between the fund and the placement agent, specifying the scope of services to be performed by the placement agent and the fee arrangement between the placement agent, the general partner and any other third party.

We will work with representatives of the Division of Law and outside counsel to review and negotiate specific terms of the legal documents to govern the investment. In addition, the proposed investment must comply with the Council’s regulation governing political contributions (N.J.A.C. 17:16-4).

Please note that the investment is authorized pursuant to Articles 69 and 71 of the Council’s regulations. The GLP China Logistics Fund I, L.P. will be considered a non-core real estate investment, as defined under N.J.A.C. 17:16-71.1.

A formal written due diligence report for the proposed investment was sent to each member of the IPC and a meeting of the Committee was held on September 5, 2013. In addition to the formal written due diligence report, all other information obtained by the Division on the investment was made available to the IPC.

We look forward to discussing the proposed investment at the Council’s September 19, 2013 meeting.

Source: State of New Jersey State Investment Council