Trouble at CDPQ's Ivanhoé Cambridge?

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André Dubuc of La Presse wrote an article today stating the cleanup has commenced at Ivanhoé Cambridge, the Caisse's real estate subsidiary. The article is in French so I translated it using Google and edited where necessary:
Ivanhoé Cambridge has terminated the employment of the manager in charge of shopping centers in the wake of disappointing results produced by the real estate subsidiary of the Caisse de dépôt et placement du Québec.

Claude Sirois, President, Retail, left the organization ten days ago, Ivanhoé Cambridge spokesman Sébastien Théberge confirmed to La Presse.

 "The position of President, Retail has been abolished," wrote Mr. Théberge in an email. To enable us to succeed in an increasingly complex and constantly changing market, we must be more agile, simplify our organization and bring teams together."

Mr. Sirois was appointed President, Retail in May 2016. He joined the organization in January 2005. He holds a Bachelor of Administration from McGill University and an MBA from HEC Montreal.

Another position in the Retail team was abolished simultaneously, but the organization refuses to identify the position and its incumbent.

Last Thursday, the Caisse's senior management pointed to the poor performance of its real estate subsidiary to explain why the institution had not reached its benchmark in 2019, the first in five years.

The asset manager returned 10.4% compared to 12.0% for its benchmark.

Ivanhoé Cambridge lost $1.1 billion in 2019, with a negative return of 2.7%, compared to a positive return of 1.4% for its benchmark index. The gap between the institution's performance and its benchmark index persists over five years.

Change of direction

The real estate portfolio has lagged behind its index for years, without the Caisse being concerned about it in the past.

It no longer seems to be the case.

"We cannot be satisfied with the performance of 2019. In any case, I am not," said the new president and chief executive officer of Ivanhoé Cambridge, Nathalie Palladitcheff, when the results were unveiled. Ms. Palladitcheff has led Ivanhoé since the fall, when Daniel Fournier retired. Charles Emond also took over from Michael Sabia at the head of the Caisse de depot in early February.

 The Caisse will sell a third of its 25 shopping centers in Canada over the next few years, said Ms. Palladitcheff.

The Caisse has already started the evaluation of each of its shopping centers in Canada. About a third (eight or nine shopping centers) will be sold. Ultimately, the 16 or 17 shopping centers that will remain the property of the Caisse will have to reinvent themselves.

"Shopping centers are undergoing profound changes with the rise of online commerce and changing consumer habits around the world. Canada had been particularly protected, but global trends are accelerating, "said Ms. Palladitcheff.

In addition to shopping centers in Canada, the Caisse has 18 shopping centers in Brazil, as well as one in the United States, Germany and China. In Brazil, it sold two shopping centers in 2019 and plans to sell more in 2020 in order to benefit from the state of the Brazilian economy.
Last week, I went over CDPQ's 2019 results and stated the following:
The other benchmark that irks me is the Real Estate benchmark. In 2019, the real estate portfolio posted a -2.7% return, underperforming its benchmark which gained 1.4%. The press release states the following:
Even though current returns were steady and investments in funds, equities and the industrial sector offered good performance, the overall return was affected by falling valuations in the Canadian shopping centre sector and, to a lesser extent, residential real estate in New York, in light of new regulations to control rent increases. Long-term debt revaluation related to lower interest rates in the United States also reduced net asset values.

With the market continuing to undergo fundamental changes, Ivanhoé Cambridge will accelerate the transition under way, which aims to lower the weight of more traditional assets and prioritize opportunities in tomorrow’s sectors. Major structural trends such as urbanization, sociodemographic changes and new technologies will guide future investments and foster the development and revitalization of neighbourhoods, as well as the development of connected environments, incorporating cutting-edge industrial solutions.
Two comments. Obviously there were major write-downs. CDPQ's real estate subsidiary, Ivanhoé Cambridge, is way overexposed to Canadian shopping centers and it is slow to transition out of these into global logistics properties. In my opinion, it did not properly anticipate the fundamental shift that came along with the rise of e-commerce.

The other thing I can say is Ivanhoé Cambridge could have done a better job with its existing shopping centers.
Please note, I had made a mistake in my initial comment and said Real Estate "severely underperformed its benchmark which gained 8.8% but that benchmark figure was over five years, not for 2019.


Anyway, I see the Caisse has "fixed" its Real Estate benchmark from the days of Richard Guay to make it a lot easier to beat but even with this easier benchmark, Real Estate still underperformed in 2019 by 410 basis points (-2.7% vs 1.4%).

And not just underperformed, it got clobbered registering a loss of 2.7% which translates into $1.1 billion.

The Caisse says that "the overall [real estate] return was affected by falling valuations in the Canadian shopping centre sector and, to a lesser extent, residential real estate in New York, in light of new regulations to control rent increases. Long-term debt revaluation related to lower interest rates in the United States also reduced net asset values."

So, the Caisse took major write-downs on its Canadian shopping centers and it's looking to unload a third of them most likely at deep discounts.

The fall guy in all this is Claude Sirois who was appointed President, Retail back in May 2016.

But before you point the finger at Mr. Sirois, blaming him for these losses, you might also want to point the finger at this guy:


That's right, Daniel Fournier, the now retired former President and CEO of Ivanhoé Cambridge who ruled the organization with an iron fist. He made millions and left before all this hit the fan.

It's too easy to blame Claude Sirois. A place like Ivanhoé Cambridge has many committees -- risk committees, strategy committees, investment committees, etc. Where were all these people and where was Fournier as Amazon revolutionized e-commerce for good?

For years, the Caisse's peers (especially CPPIB) were gobbling up logistics real estate, following in the footsteps of Blackstone's Jonathan Gray, who in my humble opinion is the greatest real estate investor ever. Why was the Caisse so slow to react and why did they not look to unload disastrous malls a lot earlier?

The most likely explanation is probably because nobody was interested in these legacy assets and now that the street smells blood, good luck selling these retail malls at a reasonable valuation, they're going to take a major haircut (probably already did in the books).

Keep in mind, Real Estate is the second most important private market asset class at the Caisse (after Private Equity), making up roughly $40 billion of the total $340 billion in assets.

The figures below come from CDPQ's 2018 Annual Report and show the change in geographic and sectoral exposures in Real Estate from 2013 to 2018:


As you can see, at the end of 2018, the Caisse was most exposed to Canadian (31%) and US real estate (46%) and in sectors, it's main exposures are in offices (26%) and retail (23%), but you can see the Canadian and retail exposure has been dropping over the last five years while US and industrial/ logistics have been rising.

You might be looking at these figures and saying "well, it looks like the Caisse is slowly getting out of Canadian and retail real estate over the last five years," and you'd be right, but the e-commerce revolution I'm referring to really started taking off in 2011 and as of 2018, Amazon now accounts for 5% of total US retail sales:


Amazon's dominance in e-commerce is indisputable. Others are following suit but they lag way behind and as they grow their e-commerce platforms, they too will need logistics properties to service their customers.

Now, I don't want to sound harsh and criticize Ivanhoé Cambridge which remains one of the top real estate investors in the world, it just irks me when I see articles naming the former President of Retail and insinuating he's to blame for these losses.

He's not. Claude Sirois is the fall guy but the blame goes all around and lot of people dropped the ball, including Daniel Fournier, Mchael Sabia and to a certain extent Nathalie Palladitcheff, the Caisse's new real estate chief who succeeds Fournier.

But I will give Ms. Palladitcheff credit, she owns this mess now and she's smart enough to realize that the organization needs to move forward and focus on the future.

There's no doubt she has a strategic vision which includes shifting out of retail and moving more into logistics and other growth sectors and geographies. She most likely asked Charles Emond if she can wipe the slate clean this year and write down a ton of non-performing retail assets.

That's the only explanation I have as to why CDPQ posted a loss of almost 3% in Real Estate, a tradionally boring asset class which provides good income and steady returns in between stocks and bonds.

In my opinion, Real Estate should deliver anywhere between 7% to 9% a year in the current record low rate environment.

I remember when I was working at PSP, the then head of Real Estate, André Collin, was investing in opportunistic real estate, registering 20%+ gains, trouncing his benchmark of CPI + 500 basis points (which didn't reflect the risks he and his team were taking).

Collin is now the President of John Grayken's Lone Star Funds, getting paid multi millions to invest opportunistically all over the world. Lone Star, which specializes in buying up distressed assets such as mortgages, started out in 1995 and is currently on its 20th investment fund and has aggregate capital commitments totaling approximately $85 billion.

Lastly, in my last comment going over OMERS' 2019 results, I noted that Oxford Properties posted solid retunns last year, gaining 8.3% relative to Ivanhoé Cambridge's 2.7% loss in 2019.

I don't want to misconstrue these results in any way and it's important to note that the two organizations work together on some deals like when they bought US-based IDI Logistics in early 2019.

Ivanhoé Cambridge is a large global real estate investor, one of the most important in the world. It got clobbered in 2019 because it took write-downs on non-performing retail assets in Canada. It will bounce back and I remain confident it will thrive under the leadership of Nathalie Palladitcheff who is incredibly sharp and knows where the organization needs to head:



Having said this, I think the Caisse and Ivanhoé Cambridge need to be a lot more transparent on the nature of these losses in 2019 and explain in detail the changes to the benchmark governing real estate investments over the last five years.

I'm a stickler for governance and transparency and if we had more of both, we wouldn't see articles in La Presse wrongly accusing or insinuating one person was responsible for these real estate losses. That's pure nonsense, many people are responsible, one person is taking the fall.

Below, Jonathan Gray, president and COO of Blackstone Group, joined 'Closing Bell' on Monday to talk about the stock plunge due to the coronavirus.

And an older clip where CNBC's Courtney Reagan discusses why major mall operators around the US are getting creative with their tenant mix, betting big on experiences to keep consumers coming back for more. 

Making malls great again? Good luck, it's an uphill battle but malls aren't dead and if the owners work these assets properly, they can attract foot traffic and generate revenues. Of course, coronavirus isn't good for malls and other public venues, so don't be surprised if they get hit again this year. 

Update: A real estate expert who knows the players involved shared this with me after reading my comment above:
Claude Sirois is a good guy. The problem was the pressure to continually post appraisal gains. As a result, they weren’t able to sell retail assets at their current values in a declining market. It will take 2-3 years to dial back those values. It wasn’t his policy but he is now the scapegoat. Too bad. I hope other good employees aren't targeted as well as they are solid too.
I thank this person for sharing their insights. Another person told me: "Daniel Fournier ran a tight ship but he made mistakes too and isn't as solid as Nathalie Palladitcheff when it comes to asset management. They were managing a portfolio that was fine for the 80s and 90s, not for 2020."

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