Friday, June 30, 2017

CPPIB Bets Big on Houston?

Matt Scuffham of Reuters reports, Canada Pension Plan to buy U.S. REIT Parkway for $1.2 billion:
Canada Pension Plan Investment Board said on Friday it would buy Houston-based real estate investment trust Parkway Inc (PKY) for $1.2 billion, its second significant U.S. investment this week.

Canada's biggest public pension fund, which is one of the world's biggest real estate investors, will pay Parkway stockholders $19.05 per share and a $4 special dividend, the companies said on Friday.

Shares of Parkway were up 12.3 percent at $22.87 in morning trading. That was slightly below the $23.05-per-share deal value, which represented a 14 percent premium to the stock's average price in the past month.

"Parkway fits well with CPPIB's long-term real estate strategy to hold stable, high-quality assets in large U.S. markets," said Hilary Spann, who heads the pension fund's U.S. real estate investment arm.

Parkway, in which private equity firm TPG Capital has a 9.8 percent stake, said it owned 19 Houston properties totaling about 8.7 million square feet.

CPPIB Chief Executive Officer Mark Machin had said in November that he saw U.S. opportunities arising from President Donald Trump's election victory, citing the expectation of increased fiscal stimulus, less regulation and more economic activity.

The CPPIB, which manages Canada's national pension fund and invests on behalf of 20 million Canadians, has been diversifying from its domestic market by acquiring assets such as real estate and infrastructure around the world in addition to buying publicly traded stocks and bonds.

The pension fund is most heavily invested in the United States, which accounts for about 39 percent of its C$317 billion ($245 billion) of assets, according to its 2017 annual report. Asia is a distant second at 18 percent.

On Wednesday, CPPIB agreed to invest up to $1 billion to buy oil and gas assets in the United States in a partnership with Encino Energy Ltd.

HFF Securities LP was Parkway's financial adviser, and Hogan Lovells US LLP was its legal adviser.
Prashant Gopal and Scott Deveau of Bloomberg also report, Canada Pension Plan Agrees to Buy Parkway for $1.2 Billion:
Canada Pension Plan Investment Board agreed to buy Parkway Inc., a real estate investment trust with properties in the Houston area, for $1.2 billion.

The $23.05-a-share cash offer, which consists of $19.05 a share plus a $4 special dividend to be paid prior to the the deal’s completion, is about 13 percent more than Parkway’s closing price on June 29, the companies said in a statement today. TPG Capital and its affiliates, which own about 9.8 percent of the REIT, have agreed to vote in favor of the deal, which is expected to close in the fourth quarter.

The deal helps CPPIB, Canada’s largest pension fund, expand in Houston, where earlier this week it announced a $1.25 billion partnership with Encino Energy LLC that will focus on U.S. oil and gas acquisitions. The area’s office market was hit by the 2014 plunge in oil prices, making it sensible for a company like Parkway to go private, according to Jeffrey Langbaum, an analyst with Bloomberg Intelligence.

The pension fund won’t “have to answer to public shareholders every three months about why the stock price isn’t going up and why the market is blah,” Langbaum said in a phone interview.

Parkway has 19 office properties in the Houston area that were about 88 percent leased as of March 31, according to the statement.

CPPIB probably liked the portfolio because of its “high cap rate and low price-per-pound acquisition cost” relative to real estate in more expensive cities, John W. Guinee, an analyst with Stifel Nicolaus & Co. Inc., said in a phone interview. Cap rates, or net income divided by purchase price, are a measure of yield for property investors.

Houston Spinoff

The Houston assets were a spinoff of the merger in 2016 of Parkway Properties Inc. and Cousins Properties Inc. Shares of the new company had fallen 15 percent through yesterday since they began trading in October. They were up 12 percent to $22.86 at 11:12 a.m. New York time today.

CPPIB has been an active real estate investor for decades. Most recently, it acquired three U.S. student housing portfolios through a joint venture, Scion Student Communities, for $1.6 billion in March. In February, it bought a stake in a group of offices from Parkway in a deal that valued the portfolio at $1.04 billion.
You can read all the latest press releases from CPPIB here. These two deals total US$ 2.2 billion, which is a very significant investment even by CPPIB's standards.

So why did CPPIB make such a significant investments in Houston-based Parkway and Encino Energy?  Do its senior managers see a bottom in oil prices? While this is possible, it's also important to note that like all large pensions, CPPIB is a long-term investor with a long horizon so it doesn't need to pick the bottom in any of its investments.

On Friday, which is the last day of the quarter, oil prices are up and that is boosting energy shares. Some believe this is the beginning of another reflation trade similar to what happened in early 2016.

I'm skeptical on reflation but I do see a potential short-term tradable bottom in oil and energy (click on images):



Still, with central banks around the world increasing their hawkish tone (much to my dismay and horror), it's hard to see the beginning of a sustained rally in oil prices and energy shares.

Again, this is my short-term view and has nothing to do with CPPIB's decision to invest in Parkway and Encino Energy which is a long-term investment decision.

Some might be asking why not invest in Calgary and the answer is CPPIB (rightly) wants to diversify away from its Canadian exposure.

I can't add much more without speaking to Mark Machin or other CPPIB representatives on their view on oil prices and to get more details on these deals.

But one thing I know is Houston is a very popular and diverse city which is growing fast and it's important to note its economy has a diversified away from energy into other sectors like healthcare and manufacturing. In other words, there's a lot more to Houston than oil & gas (see the clips below).

Lastly, as we celebrate Canada 150, I was thinking of a few great Canadians that I admire most and one amazing Canadian always comes at the top of my list. 

I wish all Canadians a Happy Canada Day. We are very lucky to live in this great country. I also wish our southern neighbors a Happy 4th of July. Enjoy the long weekend.



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