Proposed Investment in Northwood Real Estate Partners, L.P

Memorandum to: State Investment Council
From: Timothy Walsh, Director
Subject: Proposed Investment in Northwood Real Estate Partners, L.P & Northwood Real Estate Co-Investors, L.P.

The New Jersey Division of Investment (“Division”) is proposing an investment of $75 million in Northwood Real Estate Partners L.P (Series III) and $75 million in Northwood Real Estate Co-Investors, L.P. (“Northwood”) for a total of $150 million. 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:

  • Impressive Track Record: Northwood is led by John Kukral, former CEO and co-founder of Blackstone Real Estate Advisors. During his tenure at Blackstone from 1994 to 2005, Mr. Kukral oversaw the firm’s real estate investment activity totaling $5.8 billion across 160 separate transactions. Mr. Kukral’s impressive investment track record at Blackstone consisted of a 37% gross IRR on realized and partially realized investments as of December 31, 2005. It is important to note that out of $5.8 billion invested equity, only $40 million in principal losses were realized (0.7% of invested capital).
  • Demonstrated Investment Discipline: While Northwood finished its initial capital raise of $1.25 billion ($750 million and $502 million in the Series I Main Fund and Co-Investment Fund, respectively) in 2008, the manager demonstrated an exceptionally disciplined investment approach by only investing in one transaction during this period marked by substantial declines in the real estate and real estate debt markets. By maintaining stringent underwriting standards, the manager was able to take advantage of many attractive investment opportunities in 2010 and 2011 with very limited competition.
  • Prudent Use of Leverage: Since the firm’s inception, the management team has demonstrated a very conservative approach regarding the use of leverage to execute the Fund’s investment objectives. Specifically, of the fourteen transactions completed between August 2008 and December 2011, seven of the deals were funded entirely with equity. The current total portfolio leverage is approximately 42% on an LTV basis. Northwood only utilizes leverage in specific instances where the manager believes that the downside risk is limited.
  • Alignment of Interests: To date, Northwood has committed $85 million to the Funds ($75 million to Series I Main Fund and $10 million to Series I Co-investment Fund), to be invested on a pro rata basis with the LP commitments.

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, undertook extensive due diligence on the proposed investment in accordance with the Division’s Alternative Investment Due Diligence Procedures.

The fund utilized UBS (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 Fund will be considered a non-core opportunistic 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 May 10, 2012. 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, 2012 meeting.

Source: State of New Jersey State Investment Council