Proposed Investment in Hammes Partners III, L.P.

Memorandum to: State Investment Council
From: Christopher McDonough, Director
Subject: Proposed Investment in Hammes Partners III, L.P.

The New Jersey Division of Investment (“Division”) is proposing an investment of up to $50 million in Hammes Partners III, L.P. (“Fund”). This memorandum is presented to the State Investment Council (the “Council”) pursuant to N.J.A.C. 17:16-69.9.

The Fund will have a substantially similar investment strategy to previous Hammes funds, focusing on the acquisition and development of medical office buildings and ambulatory care centers across the United States. Hammes plans to acquire existing assets directly from healthcare providers and develop new assets to be occupied predominantly by said healthcare providers.

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

  • Experienced Management Team: Hammes’ senior management team has over 29-years average experience and has been involved in over 750 healthcare facilities.
  • Unique Nationwide Platform: Hammes has proprietary sourcing capabilities through an affiliated advisory firm and through an affiliated property services firm which manages over 3 million square feet of healthcare assets.
  • Market Opportunity: An aging population and increased healthcare spending support need for healthcare services. Industry cost pressure, consolidation and modernization needs emphasize the need for quality healthcare real estate. Favorable tenant characteristics and lease structures provide stable cash flow and higher return from current cash.
  • Track Record of Strong Performance: As of December 31, 2016, the net returns for Fund I are 20.6% Internal Rate of Return (“IRR”) and 2.4x Multiple on Invested Capital (“MOIC”), making it a top quartile fund based on Preqin’s Quartile Rankings. Fund II is projected to have net returns of 11.5% IRR and 2.0x MOIC, and is generating a current return of 10.5% on assets held more than 12 months.
  • Significant Alignment of Interest: The General Partner will make a significant equity investment of 2% of the fund or up to $12 million. The Fund will have a fully pooled carry. The manager will have no competing mandates.
  • Portfolio Fit: The Division’s real estate portfolio is significantly underweight in office space at 26.5% compared with 37.7% for the NCREIF ODCE index. Medical office has outperformed traditional office by 200 basis points over the past cycle. The vacancy rate for medical office assets is 8.5% compared to 11.8% for traditional office properties.

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

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

The Fund utilized Probitas Funds Group, LLC (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. We have obtained a preliminary Disclosure Report of Political Contributions in accordance with the Council’s regulation governing political contributions (N.J.A.C. 17:16-4) and no political contributions have been disclosed. We will obtain an updated Disclosure Report at the time of closing.

Please note that the investment is authorized pursuant to Articles 69 and 71 of the Council’s regulations. Hammes Partners III, 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; a meeting of the IPC was held on January 12, 2017 and an update was provided to the IPC on May 12, 2017. 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 May 24, 2017 meeting.

Source: State of New Jersey State Investment Council