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Callan LLC600 Montgomery StreetSuite 800San Francisco, CA 94111Main 415.974.5060Fax 415.291.4014www.callan.comMemorandumTo:Mississippi Employees’ Retirement SystemFrom:Callan LLCDate:October 2020Subject:Heitman Value Partners Fund V, L.P.This memorandum is intended to provide an overview of the Heitman LLC (“Firm” or “Heitman”) ValuePartners Fund V, L.P. (“HVP V”, “Fund” or “Fund V”) real estate commingled fund. Mississippi PublicEmployees’ Retirement System (“MSPERS”) is an existing investor with Heitman through a 50 millioninvestment in Heitman Value Partners II, a 50 million investment in Heitman Value Partners III, and a 50 million investment in Heitman Value Partners IV. This memorandum provides a summarized reviewof Heitman and the Fund V offering.Review ProcessCallan reviewed the Fund’s documents, including the Limited Partnership Agreement, Private PartnershipMemorandum and marketing presentation, and met with the team to discuss Fund V. Additionally, Callanconducted a video meeting on June 24, 2020. The below professionals from Heitman were inattendance:NameMr. Tom McCarthyTitleSenior ManagingDirector, PortfolioManagerNameMs. Shauna DillsTitleSenior Vice PresidentStrategy1HVP V is the fifth in a series of value added diversified closed end commingled funds managed byHeitman. HVP V will broadly continue with the same strategy and investment structures pursued by theprior funds within the Heitman Value Partners series and will continue to target a 12% to 14% net IRRand a 14% to 16% gross IRR. It is anticipated that half of the return will be derived from current income,and half from appreciation. Heitman is targeting 1 billion in commitments. The Fund will pursue a valueadded strategy that focuses on physical, operational or financial transformation of assets. The team willinvest in a portfolio of property-level partnerships with public and private REITs and real estate operating1The Fund’s strategies are paraphrased and quoted from the Heitman Value Partners V, L.P. PPM and presentation,Heitman’s response to Callan’s Questionnaire and representative information provided to Callan’s Real Assets Group.267/584
companies. A full array of property types will be targeted. Leverage is limited to 60% of gross propertyvalue at the Fund level.The Fund is expected to consist of ten to thirty investment programs, which are estimated to consist ofthree to six assets per investment program, with the exception of self-storage, single-family rentals, andmedical office buildings. For those property types, the Fund will likely aggregate portfolios with jointventure partners and these portfolios will have a higher number of smaller assets. The gross value foreach asset is expected to range from 25- 100 million (excluding smaller assets like self-storage, singlefamily rental and medical office buildings, which are typically part of a larger portfolio). No more than 15%of the aggregate Commitments may be invested in a single investment. The Fund’s typical investmentsize will range from 25 million to 150 million of equity. The average holding period is expected to rangefrom three to seven years.The Fund strategy will focus on three primary themes, including (1) Delinked Sectors, (2) Growth Sectors,and (3) Contrarian Markets and Sectors. The Delinked Sector strategy will target sectors that are lessdependent on economic growth and that have defensive characteristics. Income is emphasized as a keyreturn driver. The Team believes that these sectors have initial yields that exceed those of primaryproperty types and have drivers that are different from traditional property types. This strategy will seek toaggregate sector-specific portfolios and acquire certain underperforming assets in need of repositioningor renovation. Heitman expects 40% to 60% of the Fund will consist of Delinked investments.Specifically, within the Delinked Sectors strategy the Fund will target: Medical Office portfolio aggregation; Self-Storage portfolio aggregation, acquisition of assets under stress due to new supply, andacquisition of underperforming assets in need of renovation of repositioning; Student Housing acquisition of underperforming assets in need of renovation of repositioning; and, Data Center and Life Science development.The Growth Sectors strategy will seek to capitalize on shifting demographic growth trends to invest inareas where demand exceeds supply and has a greater probability of net operating income growth. TheGrowth Sectors strategy will focus on: Apartment renovation – Reposition suburban properties that cater to family renters in high incomesubmarkets with good school districts; renovate in-fill apartments in urban locations to compete as lowcost alternatives to new construction; Single Family Rental – Create portfolios through development2268/584
Medical Office development;Senior Housing development in high-income, high-amenity locations;Self-storage ground up development and conversion; andIndustrial development in secondary markets.The Contrarian Markets and Sectors strategy will target out-of-favor markets and sectors that are seeinglesser capital flows and better relative pricing. Heitman believes opportunities exist resulting fromnegative investor sentiment and changing market conditions, and that these opportunities have mispricedrisk and return characteristics. Additionally, certain sectors and markets have recapitalizationopportunities driven by borrower distress, loan maturities or other financial pressure. Specifically, the Anexample of a Contrarian investment is the acquisition of an existing student housing asset by Fund IV.Contrarian strategy will target: High quality assets that will survive a market downturn that can be acquired at attractive pricing; Situational opportunities arising from Covid-19 distress – recapitalize quality sponsors and/or assetssuffering from Covid-19 related distress; and, Structured investments – capitalize on market dislocation to extract better terms and downsideprotection.The Fund will exclusively invest in North America, focusing specifically on assets in the US. The Fundmay invest up to a maximum of 10% of the aggregate commitments in Canada and Mexico. The priorfunds within the series do not have any international exposure. The Fund will be diversified acrossproperty sectors with up to 50% of the Fund invested in specialty sectors which include self-storage,manufactured housing, student housing, senior housing (including assisted living), age-restrictedresidential, hotels, single family homes, parking facilities, data centers, unentitled land, encumbered landand mixed-use facilities. Within the specialty sectors, Heitman expects to emphasize self-storage,student and senior housing. Medical office is defined as a subset of office in the Fund documents. Thefollowing table highlights the sector and region exposure of the prior funds within the ialty (Medical Office, Senior Housing,Student Housing, Self-storage, Condominium,HVP IHVP IIHVP IIIHVP 62%3269/584
HVP IHVP IIHVP IIIHVP d Hotel)RegionEastWestMidwestSouth*For Fund IV, 23% of capital currently allocated to joint venture investments has not been identified for a specificregion.It is anticipated that the majority of Fund’s investments will be structured as joint ventures with a series ofoperating partners. Heitman has an existing network of relationships with both public and privateoperating companies, many of which were partners in the prior Heitman Value Partners funds. Heitmanseeks operating partners that are large and established and that have experience with institutionalinvestment partners. Heitman will require co-investment by the operating company entity alongside theFund to provide alignment of interest. It is expected that operating partner co-investment will rangebetween 5% and 50% of total equity. Typical co-investment is 15%, however there is no stated target forco-investment levels. The Fund will typically control at least a 50% economic interest in each partnership.The Fund will have the right to approve all major decisions with respect to a partnership or its properties.Operating partners typically manage all day-to-day operations of an investment subject to jointly approvedannual operating and capital budgets. Provisions in the joint venture agreements usually provide forshared decision making regarding annual business plans, major capital decisions and exit strategies.The Fund will generally seek to retain the right to approve or reject all investment proposals after theventure is formed.Investments may be structured as equity, preferred equity or debt. For the prior Fund, Heitmancategorized debt into two categories, one which is traditional debt origination or ownership and a secondthat includes the use of debt for structural reasons, such as participating loans or loans with the intent toacquire equity. Fund V does not have a limit or definition of debt investments. However, the team hasagreed to limit debt investing to one-third of committed capital. This increase in limitation is to allow forstructuring that may be unique to the current market environment. Additionally, Heitman has a dedicateddebt vehicle that originates loans that the HVP team will not compete with. Most likely, the majority debtinvestments would take the form of preferred equity investments or assuming the loan with the goal ofacquiring the asset.The Fund may invest in new development. Heitman plans to mitigate development risk by forming jointventures where the operating partner has secured building permits and financing. Typically, Heitmanrequires that a developer be responsible for recourse on construction loans as well as cost overruns.4270/584
Development in HVP I totaled 10% of invested equity in HVP I, 20% of invested equity in HVP II, 19% ofinvested equity in HVP III, and currently totals 17% of invested equity in HVP IV. The Fund documentscurrently allow for 30% of Fund commitments to be targeted to development. Additionally, unentitled landis not specifically addressed in the documents or limitations, however the team has indicated it wouldchange the documents so that acquisitions wholly made up of unentitled land are not permitted.Leverage will be employed as a part of the strategy. The current Fund documents include a 60% leveragelimitation at the Fund level and an 80% limit at the investment level. The team intends to utilizeinvestment level financing without recourse to the Fund. Cross-collateralization will not be pursued,unless the investments are part of a single partnership. Additionally, Heitman will utilize a credit facility inorder fund investments or pay expenses in advance of capital contributions. In HPV IV, the facility waslimited to 50% of aggregate commitments, however there is no longer a limit as Heitman has observed atightening of lender terms that may reduce the availability of the line. Any borrowing from the creditfacility must be repaid within nine months of being drawn, however will likely be paid down earlier.Sponsorship and Team2Founded in 1966, Heitman LLC is a global real estate investment management firm. Heitman invests incommercial real estate directly or in publicly traded real estate securities. In 2014, Old Mutual plc, theultimate parent OMAM Inc., initiated an internal restructuring in which it established three new entities thatwere inserted into the Old Mutual group’s corporate structure, including OM Group (UK) Limited (“OMGroup (UK)”), a holding company that was established to hold Old Mutual plc’s interest in its US assetmanagement line of business, and OM Asset Management plc (“OM Asset Management”), a publiccompany (and subsidiary of OM Group (UK)) whose shares are traded on the New York Stock Exchange.OM Group (UK) sold approximately 20% of its interest in OM Asset Management plc per an IPO effectiveOctober 2014. Additional shares in OM Asset Management were sold by OM Group (UK) per a secondaryoffering in June 2015, and in another offering in December 2016. In March of 2017, Old Mutualannounced that it had reached agreement with a third party, HNA Group Co., in which HNA would acquirea significant portion of its remaining share interest in OMAM. As a result of the share sales and the HNAtransaction, Old Mutual’s holdings in OMAM were ultimately reduced to approximately 5% by year-end2017, triggering a change in control and presenting the ability for the employee-owners to buy theremaining stake in Heitman, a transaction which closed on January 1, 2018.Heitman is headquartered in Chicago and has offices in Los Angeles, New York, London, Luxembourg,Frankfurt, Hong Kong, Tokyo, Melbourne and Seoul. Heitman closed three offices in the last five years,2This document’s sponsorship explanations are paraphrased and quoted from the Heitman Value Partners Fund V, L.P.Private Placement Memorandum, Heitman’s response to Callan’s Questionnaire and representative information providedto Callan’s Real Assets Group.5271/584
Dusseldorf, Germany in 2016, Munich, Germany in 2019, and Warsaw, Poland in 2019. The offices inGermany were closed due to the departure of the single employee in those offices, and the firm no longerfocuses on Poland as part of its European strategy. Heitman is comprised of 310 professionals globally.As of June 30, 2020, Heitman had approximately 42.6 billion of gross assets under management aroundthe world, with the majority of the assets under management in North America. The table below highlightsthe firm-wide assets under management over recent years.Assets Under Management 50,000 mm 40,000 30,000 20,000 10,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2Q20Gross AUMNet AUMThe employee ownership pool at Heitman is now at 37 individuals. A table highlighting the currentowners is located in the Appendix. The addition of new employee owners is evaluated annually by seniorofficers who are also current owners at Heitman. If an equity owner of the Firm leaves the partnership,whether by death, disability, retirement, or voluntary or involuntary termination, their ownership isreallocated to the current equity owners.The Fund will be led by Thomas McCarthy, who will serve as the Portfolio Manager. Thomas McCarthyalso serves as the Senior Managing Director of Private Real Estate Equity in North America. It isanticipated that 75% of his business time will be spent on the HVP fund series, while the remainder willbe for Investment Committee duties and firm management. Thomas serves as the Portfolio Manager for alongstanding separate account vehicle and participates on the firm’s Executive Committee, Board ofManagers, Global Management Committee, Private Equity Valuation Committee, and North AmericanPrivate Equity Investment Committee.6272/584
The Fund will be overseen by the Heitman North America Private Equity Investment Committee. TheInvestment Committee will vote on all major Fund decisions and be involved in the ongoing Fundactivities and strategy. More detail on the Investment Committee process is included in the InvestmentProcess & Portfolio Management section. The Investment Committee is detailed below. All of theInvestment Committee members are also owners of the firm. Full biographies for the InvestmentCommittee and broader team, and an organizational chart, are included in the Appendix.Heitman North America Private Equity Investment CommitteeNameTitle and RoleMaury TognarelliChief Executive OfficerThomas McCarthyLewis IngallYears withFirmYears InvestmentManagementExperience363736373135Senior Managing Director, PrivateEquity – North America, PortfolioManagerSenior Managing Director, ClientService & MarketingPete FawcettManaging Director, Portfolio & AssetManagement3338Mary LudginSenior Managing Director, Head ofGlobal Research3035The Fund will utilize the broad resources of Heitman’s North American private equity team for the variousrequired investment functions. These functions include asset management, acquisitions, capital markets,and closing and due diligence. The following table highlights, in addition to the asset management andfinance team specifically assigned to the Fund, the Heitman North American private equity team membersthat are expected to be involved in the Fund’s investment activities. Acquisitions, Closing and DueDiligence, and Research professionals are only shown at the Senior Vice President level and higher.Heitman North American Investment Team (HVP team in Bold)NameThomasMcCarthyColleen RyanTitle and RoleSenior Managing Director, Private RealEstate Equity – North America, PortfolioManagerSenior Vice President, Asset Manager, CoPortfolio ManagerYears 37273/584
Years withFirmYearsInvestmentManagementExperienceSenior Vice President, Asset Manager717Tom KrumwiedeSenior Vice President, Asset Manager1336Jim MeyerSenior Vice President, Asset Manager3030Michael TrenchSenior Vice President, Asset Manager1414Ryan MatyasViviana De LaPazCorey ScuglikVice President, Asset Manager77Assistant Vice President, Finance Manager 18Assistant Vice President, Finance Manager88Mark MulfordAssistant Vice President712Rick YorkeSenior Associate 15Larson RobinsonAssociate24Ryan MatyasViviana De LaPazBrian PieracciVice President, Asset Manager77Assistant Vice President, Finance Manager 18Managing Director, Acquisitions2222John ClementExecutive Vice President, Acquisitions3535Erin SpearsExecutive Vice President, Acquisitions117Michael TrenchSenior Vice President, Value-Add, Acquisitions1414David BuskoAshishKaramchandaniRoss HousnerSenior Vice President, West312Senior Vice President, East, Acquisitions214Senior Vice President, East, AcquisitionsSenior Vice President, Director, Closing & DueDiligenceSenior Vice President, Closing & Due Diligence3133434525Senior Vice President, Closing & Due Diligence3041NameTitle and RoleChris FruyTom KellyGeoffrey DundonByron BalchGretchenDiDomenicoJohn UnhockSenior Vice President, Closing & Due Diligence617Senior Vice President, Closing & Due Diligence2739Mary LudginSenior Managing Director, Research3035Leslie ChuaSenior Vice President, Director, Research420Olin NeedleExecutive Vice President, Director, Research23328274/584
NameEmi AdachiTitle and RoleSenior Vice President, Deputy Director,ResearchJeffrey Bingham,CFASenior Vice President, ResearchYears While the overall North American Private Equity team members are actively involved in the Fundinvestment process and activities, they are not dedicated to the Fund and are also active on behalf of allof Heitman’s North American commingled funds and separate accounts. Specific to the Fund, in additionto Tom McCarthy, Colleen Ryan, who has worked on Fund II through IV, has been designated as coportfolio manager for Fund V. Chris Fruy, Tom Krumwiede, Jim Meyer, Colleen Ryan, Michael Trench,Ryan Matyas, and Mark Mulford will spend 100% of their time on the portfolio and asset management ofthe Value Partners funds as well as other funds or separate accounts.The Acquisition, Due Diligence & Closing, and Research professionals will also be involved in executingthe Fund strategy. Heitman’s North American Acquisition team will focus on sourcing, underwriting andacquiring direct real estate assets on behalf of the Fund. The Acquisitions team is led by Brian Pieracci.Additionally, Heitman has an in-house capital markets expert, David Maki, who leads the Real EstateDebt group and is involved in implementing interest rate hedging strategies and advising on theplacement of property- and portfolio-level financing. The Due Diligence & Closing team takes over fromthe Acquisitions team once an investment has been approved by the Investment Committee. Heitman’sDue Diligence & Closing team is led by Tom Kelly. This team is responsible for final negotiation of allacquisition documents, physical and environmental reviews, and verification of all financial, legal andoperational aspects of the property.Overall, Heitman’s North American private equity team has remained relatively stable and has notundergone a high level of turnover. One senior level employee departed in the last five years. JamesChristensen, Senior Vice President in Asset Management left the firm in 2015 for another opportunity.His responsibilities were absorbed by the Asset Management team. There have been two senior leveladditions to the HVP team, Michelle Monhaut, Vice President of Asset Management, who currentlyfocuses more on Heitman’s core open-end fund, will transition to the HVP asset management team asthere is an acquisition in place for HVP IV where she has significant expertise. Additionally, Chris Fruy,Senior Vice President, who joined the firm in Research in 2013 is now in asset management focused onapartment deals. Heitman anticipates firm headcount to expand by 30 professionals across all functionsincluding acquisitions, asset management, and loan origination. Some positions to be filled have beenput on hold during the Covid-19 pandemic, but Heitman is actively interviewing for a senior investment9275/584
role that would work on the HVP team. Across the broader firm there was additional turnover in the NorthAmerican Private Equity team. See below for a broad list of additions and departures at the Senior VicePresident level and above across the Acquistions, Due Diligence & Closing, and Research teams.Additions (last 5 years)NameJeffrey BinghamTitle and RoleSenior Vice President, InvestmentResearchYear JoinedFirmYears ndaniSenior Vice President, Acquisitions201814Erin SpearsExecutive Vice President, Acquisitions201817Bradley FuSenior Vice President, Director,Acquisitions201820David BuskoSenior Vice President, Acquisitions201712Departures (last 5 years)NameTitle and RoleYearsHiredYearDepartedReason forDepartureOtherOpportunityWilliam BeamSenior Vice President, Acquisitions20052018James BachnerExecutive Vice President, Acquisitions19812018OtherOpportunityHoward EdelmanExecutive Vice President, Closing &Due Diligence19792019RetirementElizabeth MaddoxSenior Vice President, Closing & DueDiligence19982019RetirementKurt JovySenior Vice President, n WarsawSenior Vice President, AssetManagement20092020RetirementThe sponsor co-investment is targeted to be 2% of the total fund raise, or up to 20 million. For the priorFund, as the firm had just undergone an employee buyout, Heitman’s co-investment was targeted to be atleast 3,000,000, fully funded by Heitman employees. For Fund V, the GP co-investment structure willlook more similar to that of Funds I – III when OMAM provided 90% of the co-investment capital. For10276/584
Fund V, the GP co-invest will be funded in part by a sponsor capital vehicle which Florida State Board ofAdministration (“SBA”) invests in. The vehicle will invest across all Heitman Fund GP co-investmentsstarting with HVP V. The vehicle is 100% passive and there are no GP rights in the entity for FloridaSBA. Florida SBA is also a limited partner in HVP V and will recuse themselves from all AdvisoryCommittee matters that pertain to General Partner/Limited Partner issues. Florida SBA will voteaccording to their LP interest only. Similar to OMAM, Florida SBA will provide 90% of the GP capital forHVP V. In addition to the senior Heitman team, the opportunity to participate in the GP co-investmentwas provided to any accredited investors within the firm. Heitman expects that there may be 30 to 50individuals participating in the co-invest at minimal levels of 25,000. The table below highlights thepersonal co-investments from key Heitman professionals within the prior HVP funds.NameMaury TognarelliJohn ClementThomas McCarthyLewis IngallMary LudginTotalHVP CoInvestment 135,000 135,000 135,000 135,000 135,000 675,000HVP II CoInvestment 125,000 125,000 125,000 125,000 125,000 625,000HVP III CoInvestment 215,671 215,671 215,671 215,671 215,671 1,078,355HVP IV CoInvestment 160,000 150,000 160,000 150,000 150,000 770,000Similar to the arrangement with OMAM, Florida SBA will receive 25% of the carried interest with theremaining 75% allocated to Heitman employees who invest in the Fund on a pro rata basis and additionalunits are allocated to employees working on execution of the Fund strategy, including portfoliomanagement, client service, acquisitions, accounting, and research. Historically the majority of unitshave been unallocated and held for additional distribution.All carried interest that corresponds to employee co-investment is vested immediately, while all othercarried interest allocations vest evenly over five years. If an employee is terminated with cause, he/shewill forgo all units not associated with their co-investment. If a Key Person departs prior to thecommitment period, all carried interest allocations will be forgone. For any employee that receivedcarried interest but does not participate in the co-investment, all carried interest units vest evenly over fiveyears.Investment and Portfolio Management ProcessThe investment process begins with sourcing which is performed by the in-house acquisition team inconjunction with the research team. The research team works to frame the Firm's view on the direction ofthe economy, capital markets and property markets; creating investment strategies; identifying targetmarkets; creating investment strategies reflective of current capital and property market conditions, while11277/584
incorporating long-term economic and demographic trends; identifying target markets for execution ofinvestment strategies; underwriting individual assets to develop rent growth assumptions, in conjunctionwith Acquisitions and Portfolio & Asset Management; working with portfolio and asset managers todevelop action plans for each asset acquired; these are updated as part of the annual business planprocess; bringing capital market and property market intelligence to bear on valuations and hold/selldecisions; and establishing portfolio construction guidelines. In addition to the research team, theacquisitions team utilizes its relationships with developers, public and private owners, banks, financialinstitutions and brokers in sourcing transactions.Heitman maintains a separate investor rotation list for core and value-added investments that the firmpursues on behalf of its clients, as the acquisitions team sources all core and value-added investmentsfor the firm. All potential investments are initially evaluated by senior management for the appropriatenessfor each client, taking into consideration such factors as risk profile, investment structure, geographiclocation, execution timing constraints, portfolio objectives and property type. In the circumstance where apotential investment is deemed suitable for more than one client, the investment is allocated to the clientholding the highest priority on the applicable rotation list. Every active client of the firm is chronologicallyordered on the list based on length of elapsed time since the last investment for such client was made,with highest priority granted to the client with the longest period of elapsed time. Should an investment beallocated to a client but fail to close, the client will retain its position on the list. If a client that is nondiscretionary is offered an investment and declines to pursue it, the client retains its position on the list,but after three such events, the client is placed at the end of the rotation.The table below highlights the value added mandates managed by Heitman other than the Heitman ValuePartners fund. The HVP funds have an exclusivity clause that states it has the first look at all value-addjoint venture opportunities requiring an equity investment of 100 million or less. This exclusivity ensuresthat the Funds do not have to compete with Heitman’s separate account clients for deal flow.VehicleSeparate Account 1Separate Account 2TotalStrategyCore and Value Added - Apartment,Industrial, Office, Retail, Self-StorageCore and Value Added - All Property TypesRemaining NetAllocation ( MM) 49 50 99Once an investment opportunity has been identified as having met the investment strategy and criteria forthe Fund, detailed underwriting begins. A typical due diligence team includes the acquisitionsprofessionals who underwrite an investment, research property sector specialist(s), and the portfoliomanager.12278/584
The firm employs both a bottom-up and a top-down approach to due diligence. From the bottom-up, aquantitative and qualitative analysis of the investment and market is completed. This includes a review ofthe projected yields going forward, stability of cash flows, re-financing risk, current value versusreplacement cost, market supply and demand, and competitive position in the market. The analysis alsoincludes stress tests on key underwriting assumptions, which are varied to isolate individual impact on thereturn of the property.From the top-down, capital market conditions are evaluated along with qualitative measures such as thegeographic, property type and economic diversification attributes of the portfolio. Items monitored includeliquidity and pricing momentum, interest rate movements, projected economic growth, and other macrotrends for each of the property types. The property sector specialists from the Research team assist in theunderwriting of potential investments by providing market assumptions, such as growth rates, as well astouring all assets and markets prior to closing.Due diligence for the Fund also includes an analysis of the operating partner within each joint venture andan investment structuring process. The team specifically focuses on a prospective operating partner’scapital structure, and reviewing it
Callan LLC 600 Montgomery Street Suite 800 San Francisco, CA 94111 Main 415.974.5060 Fax 415.291.4014 www.callan.com Memorandum To: Mississippi Employees' Retirement System From: Callan LLC Date: October 2020 Subject: Heitman Value Partners Fund V, L.P. This memorandum is intended to provide an overview of the Heitman LLC ("Firm" or "Heitman") Value
