Proposed Investment in Wheelock Street Real Estate Fund II

Memorandum to: State Investment Council
From: Christopher McDonough, Acting Director
Subject: Proposed Investment in Wheelock Street Real Estate Fund II, L.P. Fund

The New Jersey Division of Investment (“Division”) is proposing an investment of $140 million in Wheelock Street Real Estate Fund II, L.P. (the “Fund”). The Division previously committed $100 million to Wheelock Street Real Estate Fund, L.P. in October 2011. 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:

  • Successful Track Record: Since its formation in 2008, Wheelock has completed 27 transactions, investing approximately $624 million of peak equity across three investment vehicles, with two of these vehicles being separate accounts for a large Boston-based hedge fund. In total, these investments are projected to return 27% gross Internal Rate of Return (“IRR”) and 2.4x gross Multiple on Invested Capital (“MOIC”). The Pension Fund’s investment in Wheelock Street Real Estate Fund, L.P. (2011 vintage fund) is projected to achieve a 26% gross IRR and a 2.3x MOIC and is currently marked at 23% net IRR and 1.3x net MOIC as of 6/30/13. Wheelock has been able to accomplish this top quartile track record only utilizing 38% leverage (equity weighted) on a Loan to Value basis.
  • Operating Expertise: Wheelock pursues a focused, fundamentally-driven investment strategy by utilizing its verticals in its chosen areas of focus. The verticals give Wheelock a competitive advantage in sourcing opportunities, identifying value, driving operating performance, and working seamlessly between vertical teams and local operating partners. Current verticals include (i) hospitality, (ii) residential land and homebuilding, and (iii) retail. Investments sourced through the verticals are especially accretive to the Fund’s Limited Partners, as the transaction and incentive fees typically paid to the operating partners are minimized, as vertical heads and their teams play a significant role in overseeing the projects through an investment’s life cycle (acquisition, asset management, and disposition). Wheelock also pursues selective opportunistic investments in other major real estate asset classes where the firm’s principals have extensive experience, including office, multifamily, and student housing.
  • Disciplined Approach: Wheelock is raising a maximum of $625 million for Fund II, which is only slightly larger than its first commingled fund. By keeping its funds small, Wheelock can continue to patiently invest in opportunities that the manager feels are most attractive and where it can generate the best risk-adjusted returns. As previously noted, the firm employs modest leverage (38% loan-to-cost on a $1.4 billion portfolio). Moreover, 81% of the portfolio’s return is attributable to current income, and the hotel and multifamily portfolios were acquired at an estimated discount to replacement cost of 35%.

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.

As part of its due diligence process, staff determined that the fund has not engaged a third-party solicitor (a “placement agent”) in connection with New Jersey’s potential investment.

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 accordance with N.J.A.C. 17:16-69.9(c), given Wheelock’s current AUM, the Division will require contractual provisions that prevent its total investments from exceeding 20% of Wheelock’s total assets. 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 Wheelock Street Real Estate Fund II, L.P. Fund 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 December 17, 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 February 3, 2014 meeting.

Source: State of New Jersey State Investment Council