Wednesday, July 13, 2011

A Frank Discussion With Two Real Estate Pros

On Tuesday, I went for lunch with Frédéric Blondeau and Benoit Caron of Gestion de Placements Eterna, a Quebec trust company founded by Alphonse Tardif in 1928 and successfully managed by three generations of the Tardif family. The company is now run by his grandson, Paul Tardif.

Frédéric contacted me, telling me he and Benoit are fans of my blog. I was more than happy to meet them and talk about markets, pensions, the Quebec SARA Fund, Quebec's financial community, global REITS and commercial and residential real estate.

Let me first say these are two standup individuals, the type of people who renew my faith in real estate investment professionals. I say this because apart from a handful of people I've met in the past in institutional real estate, most of the investment professionals in this asset class are slimy, sleazy, unethical, arrogant, ruthless sharks who only care about their pockets (true of most individuals in finance but particularly true of real estate guys and gals). And I mentioned this to them because most of the "shady characters" I know are now working together in Montreal for a well known private equity fund (that's another scandal!).

Frédéric and Benoit struck me as highly professional, highly ethical and extremely sharp individuals. The fact that they chose to work at Eterna tells me a lot too because this firm has a stellar reputation in Quebec. They both have extensive experience on the buy and sell side. Frédéric was a founding member of Presima, the Caisse's real estate division that was sold to the National Australia Bank. Interestingly, the Caisse never disclosed the terms of the deal and how much they received for the sale of this division, but I will closely examine Presima and Otéra Capital, the Caisse's real estate debt subsidiary, in a future comment. Too many individuals have asked me to look into these operations and I promised them that I will look at all public records.

Benoit Caron worked as an analyst at Montrusco Bolton, Canaccord Genuity where he ranked high on the Brendan Woods survey, and then moved to the National Bank Financial as a VP, Fundamental Research on Infrastructure and Engineering. We spoke about the sell-side and the "constant pressure of being bullish on markets." I worked as an economist at the National Bank Financial back in 2000-2002 and remember the bear market following the tech meltdown. I was the assistant to Clément Gignac, the Chief Economist then who is now Quebec's Minister of Economic Development, Innovation and Export Trade. Never forgot what Clément told me: "In a bear market, investors rediscover the value of economists." So true, which is why along with Stéfane Marion, Vincent Lépine and Martin Roberge who was the Chief Strategist at the time, we garnered most of the soft dollars during that recession.

Frédéric and Benoit told me that they've been reading my comments on seeding Quebec hedge funds and they're in full agreement with many of my opinions. As I told them: "Look , the Caisse screwed up and they invited me into their offices to 'set me straight'. I may have been too harsh in my criticism of the SARA Fund, but the truth is there is hardly any seeding going on. All I see is René Perreault and his rich buddies getting richer. It's a big club, the Quebec club."

I added: "I got nothing personal against Jean-Guy Desjardins. The man in an entrepreneur, made more than a few people multi-millionaires, including a former boss of mine. I give him credit, unlike many powerful Quebecers who just talk the talk, Jean-Guy Desjardins walks the walk and he delivered on his promises. But what really frustrates me is how political this file has become. It's simple, if done properly, everyone wins by seeding Quebec hedge funds, including depositors, Quebec's financial community and the thousands of university students studying finance who end up leaving for Toronto or New York because there are no jobs for them here. And what really makes me angry is that we've wasted billions in failed venture capital programs and call 'seeding hedge funds' too risky when the opposite is actually true."

I really hit my point when I said: "There is a petty, jealous behavior in Quebec. Quebecers say they're proud but they don't support their own talent, forcing many of their brightest to leave. It's disgusting and really not necessary. We have amazing talent in this province which Quebec's institutions don't want to promote and see succeed. That's what Ontario Teachers' did in Ontario and that's exactly what we should be doing here."

Frédéric and Benoit agreed it's difficult to raise money in the current context but they added "no doors are closed, it's just that people want to see us perform a bit before trusting us with their savings." They got an important mandate from SSQ which is public and a few others that are not public. They specialize in global REITS, an extremely liquid market. They're looking to start a hedge fund on global REITS but are proceeding cautiously, taking their time to set up the back and mid office properly, wanting to show institutions that they are ready for the institutional setup. I commended them on this approach and think it speaks volumes on their professionalism and integrity. They're not willing to cut corners and in a rush to raise assets until they are ready to properly handle the inflow on the operational and risk management side. Others do not have the luxury of having Eterna's support staff backing them and are scrounging to get by.

We ended with a frank discussion on the real estate market. Benoit told me that he sees the slump in US residential real estate continuing because too many mortgages are still under water. He told me that the spread between existing home prices and new home prices is at a historic low where it's more attractive to buy an existing home. Moreover, "with youth unemployment at historic highs" many new home entrants can't afford to buy houses. All this bodes well for rental units, especially apartment buildings.

We both agreed that fiscal tightening pretty much ensures more quantitative easing by the Fed, which will be a boon for Wall Street but not for Main Street. As I told him: "There is simply no choice for the Fed but to counteract any fiscal tightening that comes from the debt deal." He told me he sees the ECRI indicator "rolling over," which doesn't bode well for global growth.

Finally, and most interesting, Frédéric and Benoit agreed with me that the Canada bubble will burst and that Canada's mortgage monster stands to lose billions and is in a very tenable position. According to Benoit: "Too many people are way over-leveraged, are mortgaged to the hilt buying houses they can't afford, and they risk getting killed when they lose their job or if rates rise. If we suffer a slowdown that is just 20% of the US slump, we're in big trouble. It's simply not true that real estate prices won't get hit in Canada; this isn't the 1970s, and people are in for a shock in the coming decade."

I found the whole conversation fascinating. I told them when I wrote my comment on post-deleveraging blues in March 2009, I totally (and erroneously) ignored REITs because I didn't know enough about the market and honestly thought REITs were cooked. They turned out to be among the best performers since. I leave you with a Yahoo Daily Ticker interview with Gary Shilling, the deflation king, who sees another 20% drop in housing to cause recession in 2012.

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