CPPIB Bolsters Real Estate, Private Debt

PE Hub Network reports that the Canada Pension Plan Investment Board (CPPIB) and Boston Properties Inc. have formed a joint venture to develop Platform 16, an urban office campus in San Jose, California:
According to terms of this deal, CPPIB will have 45 percent ownership stake in Platform 16 while Boston Properties will have a 55 percent ownership stake. This is the second joint venture between Boston Properties and CPPIB following the Santa Monica Business Park campus in Santa Monica, California in 2018. Boston Properties is a developer, owner and manager of U.S. office properties.
CPPIB put our a press release on this joint venture:
Boston Properties, Inc. (NYSE: BXP), the largest publicly traded developer, owner and manager of Class A office properties in the United States, and Canada Pension Plan Investment Board (CPPIB) have formed a joint venture to develop Platform 16, a 1.1-million-square-foot Class A urban office campus near Diridon Station in downtown San Jose, California.

Boston Properties entered into a 65-year ground lease for Platform 16 in November 2018. As part of that ground lease, the Company secured the right to purchase all of the underlying land during a 12-month period commencing February 1, 2020 at a purchase price of approximately US$134.8 million.

CPPIB will have a 45% ownership interest in the Platform 16 joint venture. Boston Properties will retain the remaining 55% ownership stake and provide customary development, property management and leasing services. This agreement is the second joint venture between Boston Properties and CPPIB following the Santa Monica Business Park campus in Santa Monica, California in 2018.

Located on a 5.4-acre site, Platform 16 is adjacent to Google’s planned eight-million-square-foot transit village and Diridon Station, the largest multi-modal transportation hub in the Bay Area, consisting of Caltrain, VTA light-rail, the ACE train, and the planned BART and high-speed rail lines.

“We are pleased and honored to have Canada Pension Plan Investment Board as our partner on this exciting development, expanding the relationship between BXP and CPPIB,” commented Owen D. Thomas, CEO of Boston Properties. “We look forward to bringing this project to market and broadening our footprint on the West Coast.”

“Platform 16 is ideally located in one of the largest technology hubs in the country. With easy access to public transportation, as well as local housing, culture, food and entertainment, Platform 16 will help companies attract and retain the talent they need to support their growth,” stated Aaron Fenton, Vice President, Development for Boston Properties.

This joint venture partnership between CPPIB and Boston Properties will support the development of the planned three-building campus. The partners expect the buildings to feature large floorplates ranging from approximately 25,000 to 90,000 square feet, 15-foot floor-to-floor heights, 16 large outdoor terraces that give the project its name, along with multiple indoor and outdoor workspaces, and on-site amenities including a large fitness and wellness facility and conference center. Platform 16 will have immediate access to the adjacent Guadalupe River Park and various retail and restaurant amenities.

“Partnering with Boston Properties on the Platform 16 development is a great example of our real estate strategy in the United States. We are very pleased to further our relationship with a best-in-class owner and operator and we look forward to expanding our office portfolio in the dynamic Bay Area,” said Hilary Spann, Managing Director, Head of Real Estate Investments, Americas at CPPIB.

Boston Properties has secured approvals and entitlements for the development of Platform 16, completed design plans and begun to clear the site. Construction could commence in the next six months, depending on market and other conditions.

More information about Platform 16 can be found at www.platform16sj.com.

About Boston Properties
Boston Properties (NYSE: BXP) is the largest publicly-held developer and owner of Class A office properties in the United States, concentrated in five markets - Boston, Los Angeles, New York, San Francisco and Washington, DC. The Company is a fully integrated real estate company, organized as a real estate investment trust (REIT), that develops, manages, operates, acquires and owns a diverse portfolio of primarily Class A office space. The Company’s portfolio totals 50.9 million square feet and 193 properties, including 12 properties under construction. For more information about Boston Properties, please visit our website at www.bxp.com or follow us on LinkedIn or Instagram.

About Canada Pension Plan Investment Board
Canada Pension Plan Investment Board (CPPIB) is a professional investment management organization that invests the funds not needed by the Canada Pension Plan (CPP) to pay current benefits in the best interest of 20 million contributors and beneficiaries. In order to build diversified portfolios of assets, CPPIB invests in public equities, private equities, real estate, infrastructure and fixed income instruments. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, San Francisco, São Paulo and Sydney, CPPIB is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At June 30, 2019, the CPP Fund totaled $400.6 billion. For more information about CPPIB, please visit www.cppib.com or follow us on LinkedIn, Facebook or Twitter.
This is another excellent real estate joint venture for CPPIB where it takes a significant minority ownership stake (45%) with a trusted and proven partner, Boston Properties, which is taking the majority ownership stake (55%), effectively ensuring great alignment of interests.

As stated in the press release, Boston Properties (NYSE: BXP) is the largest publicly-held developer and owner of Class A office properties in the United States, concentrated in five markets - Boston, Los Angeles, New York, San Francisco and Washington, DC.

The exact terms weren't released but the press release states Boston Properties entered into a 65-year ground lease for Platform 16 in November 2018 and as part of that ground lease, the company secured the right to purchase all of the underlying land during a 12-month period commencing February 1, 2020 at a purchase price of approximately US$134.8 million.

San Jose, California is a hot commercial real estate market spurred on by the growing and dominant tech industry in the region. This investment could be part of a broader CPPIB theme to address disruptive technologies.

There are, however, some issues to contend with. In her Forbes article, Hipsturbia, Co-Living And More Emerging Trends That Will Shape Real Estate In 2020, Brenda Richardson delves deep into a report by the Urban Land Institute and PwC, Emerging Trends in Real Estate 2020 and finds that rents in some markets are definitely feeling the squeeze:
The housing affordability crisis is coming to a head, inhibiting employers seeking workforce housing and prompting city officials to change zoning laws.

High-cost markets such as Washington, D.C., Boston, Los Angeles, San Francisco and San Jose, California, cite affordability as a critical issue and not just for lower-income households. “The missing middle — medium-density housing filling a key market niche as well as the affordability gap — is a concern in those markets, as it is for San Diego and Jacksonville, as well as for Cleveland and Detroit,” the report states.
Those of you who want to better understand real estate trends in the United States should read the entire report here. I note the following on page13:
Some large employers are taking matters into their own hands. In a highly publicized move, Microsoft announced a three-year, $500 million investment to spur housing development across the Puget Sound markets. A 21 percent increase in jobs this decade had stressed a housing stock that had grown by only 13 percent, resulting in a massive rise in home prices and rents. The company’s program contains components addressing low-income housing, middle-income housing, and programs for the homeless. Redmond, Kirkland, and Bellevue are pursuing a “cooperative strategy” with private firms, but Seattle has demurred under opposition from local community groups.

When conditions exacerbate housing affordability, some jurisdictions turn to rent control at a time when about half of American renters—over 21 million households—spend more than 30 percent of their income on housing. This has been the case in Oregon, which passed a statewide rent-control law early in 2019. The California legislature was grappling with proposals to cap rents under various formulas as it met during summer 2019. New York State, in June, expanded its rent protection laws just as they were about to expire. Politics? Sure. But the politics only arise as a result of the market conditions. (New York even has a party with the name “The Rent Is Too Damn High.”)

Whatever the populism behind the politics, investors are taking note.

One opportunistic investor immediately reacted to the New York State legislation by withdrawing from multifamily acquisitions in Brooklyn, observing, “There is a new ‘class’ of legislators and other elected officials, elected by populists from both ends of the political spectrum. This can create bad policy and bad law.” The head of investment sales for a major brokerage said, “Complex issues are more and more reduced to sound bites, and this potentially can lead to big mistakes in the rush to judg-ment.” A sophisticated West Coast fund manager pointed out, “With effective demand constrained as rents hit a practical limit, rent control is now a national/international wave.”

Most in the real estate industry regard rent regulation unfavorably. One major institutional investment manager takes a more tempered point of view, though. “Rent control may become more prominent and hurt upside return potential, but could also provide for more steady, reliable investments to emerge.”

Renters are not simply looking to government for solutions, and probably do not have the time to wait for legislative edicts. Co-living is observably a more frequent phenomenon, as our focus group in Southwest Florida noted, saying that “this is starting to drift into adult living arrangements.” There is even a pop-culture reference for this trend: the “Golden Girls” model. Several firms are promoting advantages beyond just costs—such as an increased experience of community, mutual decision-making, and even shared ownership.

If we are at a critical moment for housing, perhaps that is not entirely such a bad thing. After all, adaptation is the key survival skill in a world of Darwinian evolution. The real estate industry can be counted on to adapt, and the trend in housing is almost assuredly not the “same old” extension of the direction taken in the decade just past.
Anyway, I will leave you read the entire report here, it is excellent and even though I see a great future for CPPIB's joint venture with Boston Properties on Platform 16, I just wanted to highlight some ongoing issues that need to be taken into consideration as the rental squeeze continues in this hot market.

In a related story, Bloomberg's Paula Sambo noted last month that CPPIB is extending a push into private credit to help fill a need for yield made scarce by low interest rates:
The nation’s biggest pension manager has increased its private debt investments from C$5.1 billion ($3.4 billion) in 2011, to C$32.7 billion at the end of March, its annual report shows. Investments in private credit were virtually zero in 2006. The growth of its allocations in less liquid assets has borne fruit, said its senior managing director and global head of credit investments John Graham.''

CPPIB, with more than C$400 billion of assets, is pushing further into private debt -- where borrowers bypass traditional capital markets -- to make up for dwindling yields elsewhere. With concerns about a new global economic slowdown causing interest rates to plunge, and about $15.6 trillion of global debt paying less than zero, it’s increasingly urgent for portfolio managers to find new sources of returns. CPPIB has also boosted assets in private equity and real estate, and is looking further afield for gains, targeting growth in emerging markets and Asia.

“Getting paid for the lack of liquidity is certainly something that we’ve been very successful at in the credit side,” Graham said in an interview.

Liquidity Issues

Graham currently oversees about C$40 billion in credit investments, with around 80% of that speculative grade. This includes corporate, real estate and structured deals.

While it’s benefited CPPIB, Graham is cognizant of the risks, as demand leads to a deterioration in deal terms. Investors could also get saddled with losses if credit conditions sour and they can’t unload under-performing assets.

“We’re seeing less and less liquidity across the board, and in some of these markets I’m not sure if there is liquidity at all,” he said. “Whether or not it’s a big issue is going to be very institution specific.”

CPPIB returned 1.1% in the quarter ended June 30, as net assets grew C$8.6 billion to top C$400 billion for the first time. Pension funds invest in a variety of assets including low-risk government bonds. While that means they profit from fixed-income rallies, falling yields have also driven up future liabilities -- threatening their ability to meet obligations.

The Ontario Municipal Employees Retirement System is also planning to increase its private credit investments amid a push into private markets more broadly, Mark Redman, its global head of private equity, said in an interview with Bloomberg TV. The C$97 billion pension fund currently allocates about 50% of its investments to non-public markets, he said.

“You have to be more creative, private markets give more opportunities to add value,” he said. From a valuation perspective, these assets suffer less volatility, which means returns can be managed more effectively, he said.

Middle Market

CPPIB remains bullish on the U.S. middle-market, where it invests through Antares Capital, which has about $24 billion in assets. Antares is prepared to swoop in to buy assets from cash-strapped lenders when the cycle turns, its chief executive officer said in July.

“We really do try to get deep diligence on every single deal,” Graham said. He added that CPPIB sees good opportunities to invest in companies that will survive a downturn in the credit cycle.

The credit team, numbering just under 100 employees in Toronto, New York, London and Hong Kong, is currently focused on growing in Asia and emerging markets. The fund is looking to grow particularly in China, India and Brazil. Emerging markets account for around 10% of the credit portfolio.

“These are markets that are going to grow, they are going to be increasingly relevant in the global economy and it makes sense to spend time to build out capability and the infrastructure to invest,” he said.
CPPIB's John Graham is in charge of a very important asset class, private debt.

In August, I discussed why the UK's RailPen and Church of England Pension are aiming to significantly boost their allocation to private debt, and went into detail on the risks and opportunities of this hot asset class.

Last week, I attended the CAIP Quebec & Atlantic conference at Mont-Tremblant, Quebec where I heard a panel discussion on private debt:
Capturing the Strength and Momentum in Private Debt and Alternative Credit Growth: The Remarkable Achievements of a Small Asset Class

Wednesday, September 25, 2019, 9:15 AM - 10:15 AM

There are enormous opportunities to be found in private debt and alternative credit growth. In 2018, assets under management globally by private debt funds reached $638 billion, with aggregate capital raised surpassing the $110 billion mark. Hear about the latest developments in asset-back debt, direct lending, and alternative credit. Access the full spectrum of credit instruments to deliver absolute performance while limiting your duration risk and interest rate sensitivity.

Moderator: Vishnu Mohanan, Manager, Private Investments - Halifax Regional Municipality Pension Plan

Theresa Shutt, Chief Investment Officer - Fiera Private Debt
Ian Fowler, Co-Head North America Global Private Finance & President, Barings BDC - Barings
Larry Zimmerman, Managing Director, Corporate Credit, Benefit Street Partners

Synopsis: This morning, we all listened to an interesting panel on private debt, one of the hottest asset classes right now. I came a tad late when they were going over the pros and cons of sponsored versus non-sponsored deals.

In non-sponsored deals, you rely on third party data on quality of earnings and other data.

Theresa Shutt said they focus on corporate credit and companies with audited statements. "If there is trouble, we want to see how management behaves in a downturn, we have good covenants."

She said to ask private debt managers a simple question: "Tell me about your bad months." She added: "Our recovery has been quite high".

I like that, asked Theresa to write a guest comment for my blog on this hot asset class.

Ian Fowler focused a lot of alignment of interests and said to look at two things:

  1. Target return
  2.  Fee structure
He warned "investors are overpaying for beta" and said you can expect 6-8% unlevered return but as the market gets hot, spreads are being compressed, managers are making higher risk loans to meet targeted return, and skimming is occurring where they are using investors' money to generate income on their platform."

Larry Zimmerman also warned investors to beware of private debt managers "building syndication deals".

Theresa Shutt warned not to just talk to principals, "ask about compensation, focus on culture". She said they use ESG in all their underwriting criteria.

I asked the panel how to prepare for another 2008 crisis and they told me to "focus on first not second lien loans" and remain highly diversified, avoiding deep cyclical sectors.

Interestingly, in the US, non bank private debt funds have been very active in the middle market and act to stabilize the market in case of a downturn.

Ian Fowler told us to look at average debt spread, style drift, and leverage.

I need to cover private debt in a lot more detail but Ian told me after that average PE multiples are priced at 12x so there is no room for error. "It's the same thing in private debt, you need to see how deals are being priced and beware of alignment of interests as spreads get compressed and managers try to fulfill their target return".
At the conference last week, I also covered a panel discussion featuring Vito Dellerba, Director, Investments, Sovereign Debt, Fixed Income - Caisse de dépôt et placement du Québec (CDPQ):
Vito focuses on spread over sovereign focusing on emerging markets opportunities in quasi-government corporations (owned at least 50% by governments), securitization of royalty streams, PPPs and more.

He said the five factors of investing in his space are:
  1. Interest rate risk
  2. Sovereign risk
  3. Sponsor or project risk
  4. Liquidity premium
  5. Complexity premium
They have a mix of internally managed and externally managed funds "across the spectrum, generally absolute return funds."

He said the Caisse focuses on five emerging markets: Brazil, India, China, Columbia and Mexico but his team focuses on all these except China.

They like dislocations where they can fund long term opportunities which need funding. "Some markets have funding opportunities that go out 7 years and then they fall off a cliff. We like those opportunities because we are patient, long-term capital."

He said they are "very methodical in their approach and leverage off the entire infrastructure of the organization." Due diligence is critical in their process.

He travels a lot to "pitch issuers looking for financing" and meets a lot of CFOs. They have a global network with local knowledge.

Vito warned investors: "Emerging Markets are most complex and heterogeneous markets in the world. You need to respect that and use specialist managers."

He said ESG is used throughout their process and gave the example of Brazil where it's known "corruption is rampant."
All this to say, when it comes to private debt, make sure you have the right alignment of interests and if venturing into emerging markets, be prepared because your due diligence will need to be extra thorough.

John Graham and Vito Dellerba know all this. In fact, Graham talked about private debt last June in an interview published on CPPIB's website:
“For the first time in CPPIB’s history we are going to have all of our credit investors in one department,” says Graham. “Credit as an asset class is one of the largest globally and this change is going to provide the opportunity to have all of the experts together to build a global, diversified credit portfolio that maximizes value for CPPIB.”

The shift is crucial to support our strategic mandate to become an increasingly global investor and properly respond to the opening of credit markets in China, India and Latin America.

Graham notes those markets are less developed than credit markets in North America and Europe, and makes viewing credit through a broad lens increasingly important.

“We are going to have a mandate across the credit spectrum from investment grade to non-investment grade, and corporate to asset-backed lending,” he says. “It’s a broad mandate and we are currently developing a go-to-market strategy for new geographies, leveraging the breadth in a deliberate and methodical way.”

Graham adds this new approach to credit investing will differentiate CPPIB from organizations that house credit within regional departments, asset class groups (such as real estate), or separate it based investment grade and non-investment grade.

“When you invest in emerging markets, the lines between these asset classes – or these segments of the asset classes – are very blurred,” he says. “Having all investors within one department allows us to look beyond product labels and focus on the underlying risk/return trade-off.”

Graham says the department will continue to be a fundamental credit investor and ensure CPPIB is focusing on the credit worthiness of each individual investment.
Perhaps one of the best and largest deals CPPIB ever did was acquire GE's lending arm, Antares Capital, back in 2015. This acquisition allowed CPPIB to significantly scale into the US mid-market lending space.

The leadership team running Antares Capital, is one of the best in the world, which is why back in 2016, Northleaf Capital Partners acquired a 16% stake in Antares from CPPIB, cementing a strategic relationship for Antares’ Asset Management initiative (CPPIB remains the majority owner).

Interestingly, Northleaf Capital Partners (Northleaf) recently announced it has raised an additional US$1 billion in capital from Canadian, U.S., European and Asian investors across its global private markets program, including $500 million from CPPIB and the Caisse, reflecting continued strong investor interest in private equity, private credit and infrastructure investments:

These recent commitments include capital raised for Northleaf’s mid-market infrastructure and private credit programs, as well as significant new commitments to mid-market private equity and secondaries custom mandates managed on behalf of two of Canada’s largest institutional investors. Building on the firm’s strong growth momentum, this new capital brings Northleaf’s private equity, private credit and infrastructure commitments raised to more than US$13 billion.

“Our mid-market global private markets platform continues to create long-term value for our investors,” said Stuart Waugh, Managing Partner at Northleaf. “We appreciate the confidence that both existing and new investors have placed in our team, track record and investment strategies.”

As part of this most recent capital raise, Northleaf has grown its successful custom private equity and secondaries investment mandates on behalf of Canada Pension Plan Investment Board (CPPIB) and Caisse de dépôt et placement du Québec (CDPQ), respectively. Northleaf has extended its longstanding private equity investment partnership with CPPIB through an innovative evergreen fund structure that will offer CPPIB access to the Canadian private equity market. Northleaf has also expanded its customized global secondaries investment partnership with CDPQ which focuses on mid-market private company secondary transactions.

“We are very pleased to grow our longstanding partnerships with CPPIB and CDPQ, providing truly customized mid-market private equity solutions that leverage Northleaf’s deal flow, execution capabilities and active portfolio construction,” said Michael Flood, Managing Director and Head of Northleaf’s Private Equity team. “Our integrated focus on secondary market transactions, fund investments, direct minority investments and co-investments provides investors with differentiated access and exposure to mid-market private company value creation.”

Since its spin-out from TD Bank Group 10 years ago, Northleaf has continued to grow as an independent global firm, leveraging the proprietary insights and deal flow generated by its integrated private markets platform. Northleaf’s commitments under management have grown by more than fivefold to US$13 billion, its employee count has more than tripled to 140 team members and its global office network now extends to seven locations around the world. Northleaf is focused exclusively on sourcing, evaluating and managing private equity, private credit and infrastructure investments, and its portfolio includes more than 350 active investments in 34 countries, with a focus on mid-market companies and assets.
Back in April, Northleaf Capital Partners boosted its global private credit program by more than 50% to US$2.2 billion with an $800 million capital raise:
Northleaf now has more than US$12 billion in private equity, private credit, and infrastructure commitments under management on behalf of institutional and high-net-worth investors, including pension funds. Private credit is a general term for loans made to companies by lenders other than banks.

Stuart Waugh, Northleaf’s managing partner, said a large portion of the latest US$800 million capital raise is not destined for a typical closed-end fund that requires a long-term commitment with few liquidity options. Instead, Northleaf Senior Private Credit, which has more than US$500 million in investor commitments so far, will accept new investments each quarter and allow for earlier payouts than a traditional closed-end fund.

“We’ve seen some really good take-up from that,” Waugh said, adding that the open-ended investment fund plans to build a portfolio of senior secured loans to mid-market private companies in a variety of sectors across North American and Europe.

“The bulk of our investment activity is in the U.S. and Europe,” Waugh said, adding that the focus on senior secured debt is appealing to smaller funds and other investors that find the “safest” tranches of the credit stack more desirable.

Northleaf launched the private credit program a few years ago to create an integrated private markets platform with the firm’s existing investment strategies for private equity and infrastructure.
You can read more on Northleaf here. Needless to say, it's one of the best alternatives outfits in Canada, specializing in private debt, infrastructure and private equity and a great partner for CPPI, the Caisse and others.

Below, an example of why San Jose is a hot commercial real estate market. Surrounded by old industrial buildings, parking lots and small businesses the Diridon Station sits just South of the SAP Center. It is a quiet part of San Jose that has big plans in store. This is where Google plans build a major campus. Mercury News reporter George Avalos discusses why the tech giant chose this location.

Second, Owen Thomas, CEO at Boston Properties, joined Nareit in New York for a video interview at REITweek: 2019 Investor Conference discussing how they are preparing for a downturn through significant pre-leasing before development and finding great financial partners to keep leverage low. He also their major pipeline deals.

Thomas also discussed his form's success in ESG investing. Boston Properties was named a 2019 Energy Star Partner of the Year. Thomas discussed some of the key elements to establishing and maintaining a well-regarded ESG program.

“The key to it, in a very general sense, is having commitment to the cause and having a team that’s passionate about executing it,” Thomas said. While singling out the efforts of Director of Sustainability Ben Myers, Thomas stressed that “we can’t be a leader in ESG without our full team being involved.”

Third, where can you find the cash to fund your business? Phil Seefried, Founder and CEO of Headwaters MB and David M. Brackett, Managing Partner and Co-CEO of Antares Capital tackle the top trends in financing for middle-market companies at the WSJ Middle Market Summit (June 2017).

Lastly, Stuart Waugh, managing partner at Northleaf Capital Partners talks about the private credit market (April 2019). Click here if it doesn't load below.