Caisse, CPPIB Closing Huge Deals?

Benefits Canada reports, Caisse investing in cell tower builder, CPPIB in California office park:

La Caisse de dépôt et placement du Québec is teaming up with global investment manager AMP Capital Investors Ltd. to provide more than $657 million in financing to U.S. developer Tillman Infrastructure.

The investment will help finance the building of new telecommunications towers across the U.S., providing new ground for carriers to cover, as well as boosting the country’s overall communications infrastructure. The agreement could eventually reach up to $1.3 billion based on future growth needs.

Currently, Tillman owns and operates a portfolio of cellular towers, in addition to its construction activities.

“With Tillman’s strong leadership and seasoned experts, along with our partner AMP Capital, we look forward to contributing to Tillman’s great potential. It has a competitive product that delivers coast-to-coast speed and efficiency,” said Marc Cormier, executive vice-president of fixed income at the Caisse, in a press release. “The company will only continue to benefit from a growing demand for data that will drive mobile infrastructure spending and development for years to come.”

Over the next few years, mobile service providers are expected to spend 15 to 20 per cent of their revenue on capital expenditure to meet the growing demand from consumers and to cater to increasing data traffic, according to the press release. As well, merger-and-acquisition activity within the sector is expected to grow.

“We are excited to have found great partners in CDPQ and AMP Capital to fuel the next stage of our aggressive growth plans,” said Suruchi Ahuja, chief financial officer at Tillman. “We are committed to continue to be the carrier-friendly and carrier-preferred infrastructure provider, and a true partner to our customers as they focus on expanding their coverage and capacity across the nation.”

In other investment news, the Canada Pension Plan Investment Board is forming a joint venture with Boston Properties Inc. to purchase a business park in Santa Monica for about $825 million.

The office, in Santa Monica’s Ocean Park neighbourhood, is part of 47 acres and includes 21 buildings making up about 1.2 million new square feet of rentable property. The CPPIB is investing about $193 million to gain a 45 per cent ownership of the park, while Boston Properties, which will be operating and managing it, is investing more than $236 million.

“We are very pleased to establish a partnership with Boston Properties to acquire Santa Monica Business Park,” said Hilary Spann, managing director, head of Americas and real estate investments at the CPPIB, in a press release. “The investment provides us with immediate scale in the West [Los Angeles] office market with a top-tier owner and operator, and we look forward to growing our relationship in the future.

“Santa Monica consistently sees strong demand, driven by technology and media firms in the area, and the supply constraints make this asset attractive for CPPIB to hold long term.”

These are two great deals for the Caisse and CPPIB.

The Caisse put out a press release, CDPQ and AMP Capital agree to provide up to US$1.0 billion to finance Tillman’s U.S. Tower Rollout:

La Caisse de dépôt et placement du Québec ("CPDQ"), one of North America’s largest institutional investors, and global investment manager AMP Capital announce that they will provide US$500 million of financing to Tillman Infrastructure (“Tillman”), an American developer and owner of telecommunication tower infrastructure. This initial investment will help finance the construction of new telecommunications towers across the United States. These new structures will satisfy demand for coverage in additional locations, provide new service opportunities for carriers, and increase the overall communications infrastructure in the U.S. Under this agreement, the investment could eventually reach up to US$1 billion based on future growth needs.

Founded in 2016 and based in New York, Tillman builds, owns and operates a portfolio of cell towers, which are core infrastructure assets used by wireless carriers to relay their cellular signals to mobile subscribers. Tillman began construction on its first sites in late 2017 and is actively building in over three dozen states across the U.S.

In the next few years, mobile service providers plan on spending 15 to 20% of their revenue on capital expenditure to meet the growing demand from consumers and to cater to ever-increasing mobile data traffic. This represents approximately US$40 billion in yearly investment. M&A activity within the sector is expected to increase the expenditure of telecom companies looking to capture the significant potential of 5G and the data market.

This is a large private debt deal which is an operation overseen by Marc Cormier, executive vice-president of fixed income at the Caisse.

On its website, this is what I read about Tillman Global Holdings:

Founded by Sanjiv Ahuja, Tillman Global Holdings is a holding company focused on building businesses with long-term value. The firm invests in and manages telecommunications towers, small cells and smart city businesses in both developed and emerging markets.

And that's about it. It's basically a private holding company that focuses on building telecommunications towers, small cells and smart city businesses in both developed and emerging markets and empahsizes long-term value creation.

Why is this important? Well, it's a private company which is growing fast, doesn't want to give up an equity stake, doesn't have access to corporate bond market, most likely can't get favorable long-term financing from banks which typically focus on short-term loans, so it makes sense to partner up with AMP Capital and the Caisse.

What does the Caisse get in return? It's lending money to a great private company providing it a long duration loan at favorable rates which are more than long bond rates.

That's basically what private debt is all about. Lending money to  private companies to finance their growth and operations, receiving a decent rate of return in exchange for loans which are typically long-term in nature (long duration loans are a better match for long duration liabilities).

What's the risk? The risk is credit risk but this company is well-managed and growing fast, is in a great space where secular growth is there despite any cyclical downturn, and I'm sure both AMP Capital and the Caisse did their due diligence carefully on this deal.

Why not take $1 billion and invest it in the stock market or US Treasurys or corporate bonds? Again, the stock market and corporate bond market is fully if not overvalued, stocks are at historic highs and spreads at historic lows, and Treasury yields are also at historic lows.

The Caisse is basically allocating risk wisely because it wants a better return than investing in Treasurys and more certainty than investing in corporate bonds or stocks which are volatile.

Also, as I stated above, these private debt deals are long-term in nature and are a better match for the duration of the Caisse's long-term liabilities.

Another big advantage? Up to one billion in financing is a very scalable deal, it's easier doing these type of deals than investing in many hedge funds or private equity funds where you also pay heavy fees and risk getting mediocre returns.

Interestingly, Canada's large pension funds have superseded banks in the long-term lending business. Banks don't make long-term loans at favorable rates. In fact, they typically don't make long-term loans because of regulations and running the risk of a duration mismatch because their deposits (liabilities) are short-term in nature and they need liquidity to cover any liabilities.

Pensions have long-term liabilities, a long investment horizon, and are better suited for these type of private lending deals.

There is, however, a lot of competition in private lending from global pensions and sovereign wealth funds and private equity funds so returns are coming down.

And there is a risk because private lending like all lending thrives when rates are low and the economy is growing. If rates rise and the economy falters, it can impact private lending, especially in regards to riskier deals.

But again, I want to emphasize Tillman Infrastructure is growing and mobile customers around the world are demanding better communication infrastructure to keep up with the growing demand for video and other data.

In fact, I remember listening to Glenn Hutchins, co-founder of Silver Lake Partners, here in Montreal a couple of years ago at a conference where he said the "world is going 5G" and those who aren't up to speed will be left behind in terms of technological revolution (watch this WSJ interview which I embedded below).

Anyway, those are my thoughts as far as the Caisse financing Tillman Infrastructure to grow its operations in telecom towers.

As far as CPPIB's real estate deal, Kirk Falconer of PE Hub reports, CPPIB partners in $627.5 mln buy of Santa Monica Business Park:

Canada Pension Plan Investment Board (CPPIB) has partnered with Boston Properties Inc (NYSE: BXP) in a joint venture to buy Santa Monica Business Park, a Santa Monica, California office and retail business park.

The 47-acre property was acquired for about US$627.5 million, including US$11.5 million of seller-funded leasing costs.

As part of the joint venture, CPPIB will invest US$147.4 million to obtain a 45 percent interest in the park.

Hilary Spann, CPPIB managing director and head of Americas real estate investments, said the deal gives the pension fund “immediate scale” in the West Los Angeles office market.

PRESS RELEASE

Boston Properties and Canada Pension Plan Investment Board Complete the Acquisition of Santa Monica Business Park in Santa Monica, California

BOSTON, MASS/ TORONTO, CANADA — July 23, 2018: Boston Properties, Inc. (NYSE: BXP), one of the largest public owners and developers of office buildings in the United States, and Canada Pension Plan Investment Board (CPPIB) announced today that they have formed a joint venture and completed the acquisition of Santa Monica Business Park in the Ocean Park neighborhood of Santa Monica, California for a purchase price of approximately US$627.5 million, including US$11.5 million of seller funded leasing costs after the effective date of the purchase and sale agreement.

Santa Monica Business Park is a 47-acre office park consisting of 21 buildings totalling approximately 1.2 million net rentable square feet. Approximately 70% of the rentable square footage is subject to a ground lease with 80 years remaining, including renewal periods. The ground lease provides the joint venture with the right to purchase the land underlying the properties in 2028 with subsequent purchase rights every 15 years. The property is 94% leased.

“We are excited to expand our presence in the Los Angeles region with the acquisition of Santa Monica Business Park,” commented Owen D. Thomas, CEO of Boston Properties. “The Santa Monica market has demonstrated strong growth in demand and rental rates from a variety of world class tenants and industries. With the acquisitions of Santa Monica Business Park and Colorado Center in 2016, Boston Properties along with its joint venture partners now owns 2.3 million square feet and controls 24% of the Santa Monica Class A office market, creating a strong platform for us to continue to grow in the West LA markets. We are also very pleased and honored to commence a relationship with Canada Pension Plan Investment Board, a leading global investor in commercial real estate.”

As part of the joint venture, CPPIB will invest US$147.4 million for a 45% ownership in the Business Park. Boston Properties will provide customary operating, property management and leasing services to, and will invest US$180.1 million in the joint venture. In addition, the acquisition was completed with US$300.0 million of financing. The mortgage financing bears interest at a variable rate equal to LIBOR plus 1.28% per annum and matures on July 19, 2025. At closing, the borrower under the loan entered into interest rate swap contracts with an aggregate notional amount of $300.0 million through April 1, 2025, resulting in an effective fixed rate of 4.063% per annum through the expiration of the interest rate swap contracts.

“We are very pleased to establish a partnership with Boston Properties to acquire Santa Monica Business Park. The investment provides us with immediate scale in the West LA office market with a top tier owner and operator, and we look forward to growing our relationship in the future,” said Hilary Spann, Managing Director, Head of Americas, Real Estate Investments, CPPIB. “Santa Monica consistently sees strong demand, driven by technology and media firms in the area, and the supply constraints make this asset attractive for CPPIB to hold long term.”

What can I add? This is a big, scalable commercial real estate deal in a hot and growing US market where CPPIB wisely partnered up with Boston Properties to co-invest with.

Real estate and infrastructure are long-term asset classes which provide a better duration match between pensions' assets and liabilities.

I don't know what the cap rates are in Santa Monica's commercial real estate but I figure they're low like most hot markets because demand is high and valuations are too.

Still, CPPIB isn't looking to flip these properties any time soon, this is going to be part of their long-term core holdings where they will receive decent rents (ie. stable cash flows or yield) and see decent price appreciation in the long run.

The key for CPPIB and the Caisse is finding large, scalable transactions in private markets and to do this they need the right partners all over the world and the right internal teams to manage these assets.

By the way, CPPIB has been busy on many deals lately, you can read its latest press releases here.

One noteworthy investment, Reuters reports CPPIB to co-invest in China rental housing with local partner Longfor:

Canada Pension Plan Investment Board (CPPIB) said on Thursday it will invest in China’s rental housing sector with local property developer Longfor Group (0960.HK), with an initial targeted investment of $817 million.

The companies will invest in China across major cities - Tier 1 and core Tier 2 - via developments, acquisition and master-lease of commercial assets to be converted into rental housing, CPPIB said in a statement.

Beijing-based Longfor, China’s No. 9 homebuilder by sales value, is one of the most aggressive players in the policy-supported rental housing sector, with a target to add 45,000 new units in the second half to its 20,000 unit portfolio. It expects operating income from renal housing business to be over 3 billion yuan ($448.60 million) in 2020.

The company was the first in the country to issue bonds to the public for the business, as Chinese developers have been rushing to raise funds, including via the securitization and debt market, since the second half of last year for the low-return sector.

China announced plans in August to launch pilot programs in 13 major cities, including Beijing and Shanghai, to develop rental housing projects in an effort to ease a housing shortage.

“Demand for modern, quality rental housing amongst young professionals and new graduates in China is growing rapidly, and through this collaboration, we are pleased to have the opportunity to participate in this fast-growing sector of Chinese real estate and to further diversify our investments in the market,” said Jimmy Phua, CPPIB’s Asia head of real estate investments.

CPPIB and Longfor first started collaborating in 2014 with investments in retail malls and mixed-use projects.

I've already covered CPPIB's big investments in Chinese properties. There are risks but this is another big, scalable, long-term real estate deal in China with a uniquely positioned partner (Longfor Group) which knows the market well.

Still, even though this is a big deal, it's important to remember that the US market represents the overwhelming allocation for CPPIB in terms of commercial real estate but China and other emerging markets are growing fast.

Hope I covered these deals well. If you have anything to add or correct, feel free to contact me at LKolivakis@gmail.com.

Below, tech investor Glenn Hutchins spoke with WSJ Editor-in-Chief Gerard Baker about the future of global economic growth and how technology and cryptocurrencies could revolutionize finance, at the World Economic Forum meeting in Davos, Switzerland earlier this year.

Great conversation, listen to what he said about markets and the 5G revolution.

Second, Sanjiv Ahuja, Chairman of Tilman Global Holdings, talked about the "Golden Era of Mobile Innovation" in 2015. Another great clip, listen to his approach to building long-term value in businesses all over the world and his views on the mobile revolution (echoes Hutchins's views).

Ahuja was formerly the Chairman and CEO of LightSquared, a company he created with Harbinger Capital Partners CEO Philip A. Falcone following Harbinger’s acquisition of Sky Terra and he is still considered one of the most powerful people in wireless.

I love the way he eloquently speaks with authority and clarity, mastering his subject matter only the way someone with deep knowledge of the industry can. And he "loves infrastructure" and the predictability of its returns. The Caisse and other pensions share his views.

Lastly, I embedded a clip on Santa Monica's Busines Park. After viewing it, I kept thinking: "Who in their right mind wouldn't want to work and live out there?".