CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER INTERDEPARTMENTAL CORRESPONDENCE Date: February 14, 2012 To: Retirement Board Members From:4/J Sangeeta Bhatia, Retirement Plan Manager Subject: Board Agenda Item NO.7: Report on Organizational Changes at Prudential Real Estate Investments (February 22, 2012, Regular Retirement Board Meeting) In December 2006, the Retirement Board approved an investment of $50 million in Prudential Real Estate Investor's (PREI) PRISA Fund, an open-end Core real estate investment fund. In June 2007, the Retirement Board approved an investment of $21.5 million in PREI's PRISA II Fund, an open-end Value-Add real estate investment fund. As of December 31, 2011, the market value of the Retirement Plan's (Plan) investment in PRISA was $45.9 million, and the fund has generated a since-inception Internal Rate of Return (IRR) of -1.75%. As of the same date, PRISA II's market value was $19.1 million, and the fund's IRR was -3.41%. On January 25, 2012, PREI notified Retirement Staff (Staff) of significant organizational changes resulting from the implementation of one facet of the firm's succession plan. Dale Taysom, PREl's Chief Operating Officer, announced his intention to retire at the end of 2012, and his upcoming departure provided the impetus for the organizational changes. These changes impact the Plan's investments in the following ways. First, Kevin Smith will be leaving his position as Senior Portfolio Manager for PRISA to become head of PREl's United States business division. Cathy Marcus will take over for Mr. Smith. Ms. Marcus has been with PREI for 13 years and has served as a portfolio manager for PRISA since 2004. PREI is beginning a search to fill Ms. Marcus's vacated portfolio manager position. Second, Roger Pratt will be leaving his position as Senior Portfolio Manager for PRISA II to become PREl's Chief Risk and Investment Officer for the United States and Latin America. Terry McHugh will assume the Senior Portfolio Manager role being vacated by Mr. Pratt. Mr. McHugh has been with PREI for 31 years and has served on PRISA II's portfolio management team since 2002. The Chief Risk and Investment Officer position being assumed by Mr. Pratt was created in 2009 as a result of the financial crisis. This position was originally filled by one individual who had a global risk management mandate. It is now being split into two positions and divided by geography. Mr. Pratt will assume responsibility for the United States and Latin America, and Broderick Storie will cover Europe and Asia. Mr. Storie is the former Chief Operating Officer for the Asia Pacific region for Pramerica Real Estate 7.1 Investors which is another subsidiary of Prudential. The former Global Chief Risk and Investment Officer, Dave Bradford, will become the head of Global Client Service. Courtland Partners (Courtland), the Plan's real estate consultant, and Staff participated in a series of conference calls that addressed the organizational changes affecting PREI. Courtland believes that PREI is taking the necessary and prudent steps to ensure continuity of management of PRISA I and II. Courtland staff and Retirement Office staff will continue to closely monitor the performance of both funds and report back to the Retirement Board should any concerns arise. The following documents are attached: • Press Release from PREI • Correspondence from Courtland SB:JW:SV:DB 7.2 ~ Prudential News Release For Immediate Release Contact: Theresa Miller January 25,2012 - 973-802-7455 [email protected] PREI® announces leadership changes.. PARSIPPANY, N.J.-Prudential Real Estate Investors today announced several changes to its senior leadership team, including establishing a succession plan for its global chief operating officer, naming a leader for the newly formed global client services team and announcing a new head of its U.S. business. PREI®, ranked among the world's largest real estate investment management and advisory businesses, is a unit of Prudential Financial, Inc. (NYSE: PRU). Global COO Dale Taysom has announced his intention to retire at the end of2012. Eric Adler will succeed Taysom and work closely with him throughout 2012 to transition into the role while retaining his current role as head ofPREI's European business, Pramerica Real Estate Investors. In his European role, Adler will be assisted by a newly formed European executive committee consisting ofAndrew Radkiewicz, Jan­ Baldem Mennicken, Phil Barrett, Gerhard Wittl and Raimondo Amabile. George von Werz's responsibility for the non-European activities of Pramerica AG, PREI's Munich-based business, remains unchanged. "A test of any business is its capacity to manage change so it maintains its competitive position over time," said J. Allen Smith, PREI's CEO. "During his 34 years at PREI, Dale has worked tirelessly on behalf of our clients and I will miss his partnership. We are heartened to have the depth of talent that enables us to handle his departure without disrupting the service our investors expect of our organization." In a newly created position that expands PREI's efforts to provide the best possible client services, Dave Bradford has been named head of global client service, a role in which he will coordinate closely with the global marketing team led by Mark Chamieh and Les Lockwood. Through his 17-year tenure at PREI, Bradford has held several roles, including senior portfolio manager for PRISA, PREI's flagship core commingled open­ ended fund, and head of non-U.S. investment operations. Roger Pratt and Broderick Storie will work together to manage Bradford's previous responsibilities as chief risk and investment officer, with Pratt covering the U.S. and Latin America and Broderick Storie responsible for Europe and Asia. -more­ 7.3 Page 2 Additionally, Kevin R. Smith, who most recently served as senior portfolio manager of PRISA, will become head ofthe U.S. business, effective immediately. Smith has been with PREI for 30 years in a number of portfolio and asset management roles. Cathy Marcus succeeds Kevin as senior portfolio manager of the core strategy. A 13-year veteran of PREI, Marcus has been a portfolio manager for PREI's core strategy since 2004. Finally, Terry McHugh, with 31 years of experience at PREI, has been appointed senior portfolio manager to replace Roger Pratt and lead PRISA II, the company's U.S. value-added open-end commingled strategy. McHugh has been a longtime member of the PRISA II portfolio management team. PREI is a leader in the global real estate investment management business, offering a broad range of investment vehicles that invest in private and public market opportunities in the United States, Europe, the Middle East, Asia, Australia and Latin America. Headquartered in Parsippany, N.J., PREI also has offices in Atlanta, Chicago, Miami, New York, San Francisco, Lisbon, London, Luxembourg, Madrid, Munich, Paris, Abu Dhabi, Istanbul, Mexico City, Rio de Janeiro, Sao Paulo, Beijing, Hong Kong, Seoul, Singapore, and Tokyo. In addition, the company has representatives in Milan and is establishing a presence in Sydney (pending regulatory approval). As of September 30, 2011, the company managed approximately US$48.6 billion in gross real estate assets ($30.3 billion net) on behalf ofmore than 490 clients worldwide. For more information, visit http://www.preLcom. Prudential Financial, Inc. (NYSE: PRU), a financial services leader with approximately $871 billion of assets under management as of September 30,2011, has operations in the United States, Asia, Europe, and Latin America. Prudential's diverse and talented employees are committed to helping individual and institutional customers grow and protect their wealth through a variety ofproducts and services, including life insurance, annuities, retirement-related services, mutual funds, investment management, and real estate services. In the U.S., Prudential's iconic Rock symbol has stood for strength, stability, expertise and innovation for more than a century. For more information, please visit http://www.news.prudentia1.com/ (8 PmdentiBl , . --- 7.4 COlTRTLAND PARTNERS, LTD. INSTITUTIONAL REAL ESTATE SERVICES 200 PUBuc SQUARE 10866 WIlSHIRE BOULEVARD SUlTE2530 SUlTE830 CLEVELAND, OH 44114 Los ANGELES, CA 90024 TELEPHONE: (216) 522-0330 TELEPHONE: (310) 474-3040 FAX: (216) 522-0331 FAX: (310) 474-3002 MEMORANDUM DATE: FEBRUARY 22, 2012 FROM: COURTLAND PARTNERS Lm. ("COURTLAND") To: Los ANGELES DEPARTMENT OF WATER AND POWER EMPLOYEES' RETIREMENT PLAN (''WPERP'') SUBJECT: ORGANIZATIONAL CHANGES AT PRUDENTIAL REAL ESTATE INVESTORS ("PREI") EXECUTIVE SUMMARY This memorandum is in response to a press release issued by PREI on January 25, 2012, with respect to several issues arising from changes to its senior leadership team. These issues include: how to establish a succession plan to address the departure of PREl's global Chief Operating Officer ("COO"), choosing a leader for the newly formed global client services team and announcing a new head of its U.S. business. Given that WPERP is an investor with PREI through Prudential PRISA, a core open-ended fund ("PRISA") and Prudential PRISA II, a value-added open-ended fund (''PRISA II"), WPERP has requested Courtland's views regarding how the organizational issues/changes at PREI may impact the management and performance of PRISA and PRISA II. The following tables summarize WPERP investments in PRISA and PRISA II: PRISA Original Commitment (4Q2006) $50,000,000 Amount Called $51,893,305 Unfunded Commitment $0 Distributions/Return of Capital $0 Equity Value $44,479,286 Net Internal Rate of Return -3.4% Equity Multiple 0.86 Source: WPERPj Courtland Partners Peiformance Measu~ment Report 3Q 2011. PRISA II Original Commitment (2Q2007) $21,500,000 Amount Called $22,121,589 Unfunded Commitment $0 Distributions/Return of Capital $0 Equity Value $18,506,359 Net Internal Rate of Return -5.5% Equity Multiple 0.84 Source: WPERPj Courtland Partner! Peiformance Measu~ment Report 3Q 2011.