Ivanhoé Cambridge's 99 Problems?

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Marie-Eve Fournier of La Presse reports that CDPQ's massive real estate subsidiary, Ivanhoé Cambridge, let go of roughly 60 people and 12 vice-presidents. The article is in French but I translated it below using Google and edited where necessary:
The real estate subsidiary of la Caisse de dépôt et placement dismissed some sixty employees, including a large part of the team of vice-presidents responsible for shopping center management, La Presse has learned.

Among the 57 people forced to leave Ivanhoé Cambridge, 12 occupied posts at the vice-presidency level, whether in Quebec or elsewhere.

According to our information, the team of senior managers responsible for shopping centers (retail) therefore lost more than half of its members at once, since they were between 15 and 20.

Spokeswoman Katherine Roux Groleau declined to specify everyone's position or identity, but the 12 VPs were "not all in the business unit of the malls," she said.

Ivanhoé Cambridge argues that this "business decision is necessary in the repositioning of its portfolio" and has nothing to do with the "competence" of the people affected. We know that the Caisse subsidiary wishes to divest a third of its shopping centers. In addition, the departures will "make the structure more flexible and agile" in a context where "the real estate industry is changing."

The list of executives concerned notably includes Roman Drohomirecki, who held the position of executive vice-president and chief operating officer for the retail sector since 2016. His position is abolished. He was appointed at the same time as Claude Sirois as president of Ivanhoé Cambridge Shopping centers (in May 2016).

Remember that Claude Sirois was dismissed last February. His departure had coincided with the publication, a few days later, of the financial results. "We cannot be satisfied with the performance of 2019. In any case, I am not," said then the new president and chief executive officer of Ivanhoé Cambridge, Nathalie Palladitcheff.

Vice President Leasing of Shopping Centers Jean Landry is also among those who learned on Tuesday that they were losing their jobs. Her position is also abolished, confirmed Ms. Roux Groleau. Mr. Landry was in direct contact with Quebec retailers.

Johanne Marcotte takes off

Ivanhoé Cambridge also offered a promotion to Johanne Marcotte, qualified by the organization as "a woman of talent". She will be Vice President, National Operations, a newly created position. As such, she will have a team of 300 people under her responsibility and "oversee all operations of shopping center operations in Canada".


Ivanhoé Cambridge has chosen not to announce the news publicly.

According to her profile on LinkedIn, Ms. Marcotte has been vice-president, operations, shopping centers, for Quebec for 4 years. She joined Ivanhoé Cambridge in 1998 as director of the Les Rivières shopping center. Previously, she had worked at the Galeries de Hull and at Place Vertu.
Martin Jolicoeur of Le Journal de Montréal also reports the axe falls at Ivanhoé Cambridge:
The poor financial performance of the real estate arm of la Caisse de dépôt et placement du Québec prompted Ivanhoé Cambridge to make major layoffs in the past two days.

According to the information obtained, a total of 57 people were dismissed by the real estate company on June 17 and 18. Twelve were vice-presidents and 17 worked from Quebec.

Ivanhoé Cambridge management confirmed the information to the Journal and the number of layoffs that have taken place.

"Out of respect for their privacy, we choose not to identify them," said her spokesperson, Katherine Roux Groleau.

Little to do with the pandemic

Contrary to popular belief, this restructuring has little to do with the pandemic and its devastating consequences on the entire property sector, and shopping malls in particular.

Roux Groleau maintains that this "streamlining of the organization chart" was planned long before COVID-19 hit. And that the latter will in fact only accelerate the trends already identified.

In the past few months, Ivanhoé Cambridge’s new CEO, Nathalie Palladitcheff, has repeatedly said that she’s dissatisfied with the company's performance and wants to reduce its exposure in shopping malls.

The Caisse currently has 46, including 25 in Canada. Faced with the growth of online commerce, she already said in February that she wanted to divest a third of them to focus on the industrial logistics and office sectors.

In 2019, its portfolio will have provided the Caisse de depot et placement with a negative return of -2.7%, while its benchmark had jumped by 1.4%. In 2018, the real estate subsidiary achieved a return of 7.8%.
Alright, it's Saint-Jean Baptiste Day in Quebec and while everyone is enjoying "la Fête nationale", a lot of former employees of the Caisse's real estate subsidiary are in a bad spot through no fault of their own.

The axe fell hard at Ivanhoé Cambridge and not surprisingly, most of the cuts came in Retail which has been struggling (cuts are not only there but it is the hardest hit division).

I've already covered troubles at Ivanhoé Cambridge in late February when I stated it was absolutely wrong to just blame Claude Sirois, the former President of Retail, for all their problems.

I don't want to go over the entire comment here, so take the time to read it, but I was obviously extremely wrong about the former CEO of Ivanhoé Cambridge, Daniel Fournier, in praising him over the years.

The guy created a fortress there, hired a bunch of VPs, SVPs and EVPs and he "retired" along with Sabia right before it hit the fan (someone told me yesterday that Fournier is getting a $500,000 a year pension which just floored me).

No, Fournier and Sabia aren't responsible for COVID-19 but there was an appearance they knew what the hell they were doing in real estate. Obviously, it was all a show. They were way overexposed to shopping malls (still are) and it's up to the new real estate chief, Nathalie Palladitcheff, to clean up the mess her predecessor left behind.

And don't kid yourselves, the pressure is on Ms. Palladitcheff and her team to perform in a very difficult environment, especially after last year's lousy performance.

Don't get me wrong, the pandemic is hitting the real estate divisions of all major Canadian and global pensions, but it's hitting the ones overexposed to shopping malls particularly hard.

For years, Ivanhoé Cambridge was growing by leaps and bounds and a lot of "excess fat" accumulated there at the VP, SVP and EVP level (Fournier and Sabia were basically placing their people in high positions).

Ms. Palladitcheff cut a lot of fat and she most likely didn't have a choice. She's running a leaner organization and has to focus on performance first and foremost because they lost money last year and underperformed their peers.

Still, when I look at its leadership structure, it seems very "top heavy" to me at the EVP and SVP level. Why do we need all these people there? Hopefully they are all performing and adding value to justify their big compensation!

I also noticed that Ivanhoé Cambridge's Board now includes three EVPs from CDPQ: Macky Tall who chairs Ivanhoé's Board, Maarika Paul and Kim Thomassin.

The fact that these three sit on the Board and Macky is the Chairman tells me Charles Emond isn't taking a "hands off approach" to real estate. He wants to know exactly what is going on there and placed the right people on the board to stay informed and make sure they are running a tight ship.

Like I said, I have no doubt there was pressure placed on Nathalie Palladitcheff to make drastic cuts and she herself has publicly stated she's not happy with the performance of the Caisse's largest and most important subsidiary.

She's an extremely sharp lady, really knows her stuff and communicates well but she has a daunting challenge ahead of her. And to be honest, I think the organization needs to hire a few more people on the strategy & investment side, some really smart senior analysts or directors and they don't have to be real estate experts, just smart people who understand markets, trends and economics.

As I stated last month on this blog, I believe real estate is undergoing a paradigm shift.

In a nutshell, here is my thinking:
  • Working from home isn't everyone's preference but it's here to stay.
  • Employees don't need to stress every morning to commute into work. They can sleep a lot better and wake up to log in to work.
  • Millennials prefer working from home but so do senior partners at law firms and accounting firms who don't want to be exposed to COVID-19.
  • Companies are looking to cut costs and improve productivity and renting large office space is questionable in a post-COVID-19 world.  
  • Tech companies are increasingly shifting to work remotely and they are increasingly major anchor tenants of top office buildings so if they are doing this permanently, there's big trouble ahead for office buildings.
  • Also, tech companies hunting for talent are setting the new trend by allowing their employees to work from home indefinitely, and others will follow their lead or risk being left behind in the talent war.
  • The name of the game is flexibility. Employers offering their employees the flexibility to work from home will not only attract the best talent, they will be able to diversify and attract more women with young children and even people with disabilities who are more comfortable working from home.
  • This shift in work opens up the possibility of further globalizing the service sector. Goldman Sachs recently said it will honour job and internship offers to 1,460 Indian graduates and students this summer, the equivalent of a quarter of its workforce in the country, forging ahead with expansion plans despite uncertainties due to the Covid-19 pandemic. Who's to say Goldman (and others) won't hire cheaper offshore labor to do jobs they are currently paying professionals a lot more to do?
  • So, if companies are going to hire more women with young children and people with disabilities, that's good but if they use this new normal of working from home to offshore service sector jobs, that's not good as it exacerbates inequality and it's deflationary.
  • There is a fundamental shift going on in terms of the nature of work, working from home will make it easier to hire more disadvantaged groups but it will also make it easier for big companies to offshore high-paying service sector jobs to India, China and elsewhere.
  • Working from home is much better for the environment, no question about it, so from an ESG perspective, it makes a lot of sense to allow people the flexibility of working from home.
Now, I recently had the opportunity to talk to OMERS's new CEO, Blake Hutcheson, who formerly ran Oxford Properties, and he shared some insights on real estate:
  • He mentioned that it's "harder to build a culture"when people aren't at the office.
  • He told me their industrial portfolio has done extremely well because of the rise of e-commerce as has their multifamily portfolio because "people need to live somewhere and with unemployment high, rental properties remain very attractive." 
  • He said retail is suffering due to the pandemic and that will remain a challenging area but they brought it down to 15% of  the total portfolio. 
  • Where I found his comments interesting was in the office space. He said that some companies will need more "elbow room" and increase their rental space, others will not as their employees work from home, and the WeWorks will find it hard to rent rotating office space. 
  • He estimates demand for office space will fall by "15% over the next 5 years in a worst case scenario" and reminded me these are long-term leases so the decline in demand won't be felt all at once (maybe 3% a year).
On those last points, Brookfield's CEO, Bruce Flatt, came out to also say the pandemic won't be the end of office space, citing some of the very same points:



Today I read that Brookfield, one of the world’s biggest real estate investors, is seeing higher demand for office space as workers return and try to spread out:



Of course, I wouldn't expect Brookfield to say the sky is falling on office space!

Earlier this week, Bruce Flatt's competitor, Blackstone's Stephen Schwarzman said he sees a "big V" economic rebound in the next few months:



I remain highly skeptical. The IMF poured some cold water on a V-shaped economic recovery and insolvencies are starting to pile up:







So, with unemployment still at depression levels and fiscal stimulus coming to an end, I don't see how demand for office space is increasing, nor do I see any V-shaped economic recovery.

Also, Wall Street is cutting bonuses and getting ready for massive layoffs which isn't exactly bullish for office space:



By the way, GNC isn't the only company filing for bankruptcy. I already discussed how Neiman Marcus's bankruptcy will sting CPPIB and OMERS. OTPP acquired GNC years ago although I'm not sure if they sold their stake.

GNC is a big tenant at malls so if they shutter their stores, it's not good news.

All this to say Johanne Marcotte and her big team at Ivanhoé Cambridge are going to have a monumental task of revamping their malls.

I agree with one real estate lawyer I know, "malls are struggling but the land is worth a lot, you can build condos and homes on it which is why smart investors see malls as a long-term hold."

While this is true, you still need to take construction and development risk.

Anyway, in other news, Ivanhoé Cambridge, Bouwinvest and Greystar launched a EUR1bn Paris student and young professionals accommodation venture:
Global real estate institutional investment companies Ivanhoé Cambridge Holdings UK Ltd (Ivanhoé Cambridge) and Bouwinvest Real Estate Investors (Bouwinvest) alongside Greystar Real Estate Partners (Greystar), have launched a new ‘develop-to-core’ venture focused on funding purpose-built student accommodation (PBSA) and young professional accommodation in the Greater Paris Region, with an investment capacity of EUR1 billion.

This newly created platform will be governed through its board composed of Ivanhoé Cambridge as a majority shareholder, Bouwinvest and Greystar, which will also operationally manage the venture. The objective is to deploy funds to target new acquisitions, including ground-up developments and projects already under construction. The venture has already identified a significant pipeline of opportunities in the Paris Region and is targeting a number of initial acquisitions over the coming months.

 The venture will focus on delivering best-in-class student and young professional accommodation, including exceptional amenities and services, with a preference for locations with exposure to the extensive Greater Paris public transport projects. This focus is aligned with the shareholders strategy in other major European cities, focusing on hubs with stable employment and long-term persistent rental housing demand, such as London, Berlin, Amsterdam and Vienna.

The venture will leverage Greystar’s expertise of nearly 30 years in rental housing (conventional multifamily, student and senior living) in more than thirteen countries and its vertically integrated global investment management platform, enabling the venture to deploy this global knowledge whilst specifically tailoring its accommodation and services to local requirements.

 Paris is home to a high concentration of world-class higher education institutions, an exciting cultural scene and attractive job prospects, which continue to attract domestic and overseas students. The French capital is also characterised by an imbalance in the supply of high-quality student accommodation, signalling significant opportunities for the new venture.

Karim Habra, Head of Europe & Asia-Pacific, Ivanhoé Cambridge, says: “Greater Paris and co-living markets for student and young professionals are major growth areas for our European strategy. At the same time, the Covid-19 crisis is accelerating trends towards more premium flexible products and services in key locations. We believe this is the right time as the ’alternative’ housing market is well positioned with these trends and Paris is highly attractive given its higher-education institutions, while there is a significant growing demand for student housing. We are delighted to do this with Bouwinvest as well as with Greystar, one of our major strategic partners across the world.”

Robert Koot, Director European Investments, Greystar Real Estate Partners says: “The fundamentals of the student and young professional market are very robust. Demand for high quality – but affordable – housing from student populations in metropolitan areas around the world remains strong. We have already invested in this segment in the Netherlands and Australia and via this new joint venture are now broadening our exposure and diversifying our allocation to France. This investment contributes to Bouwinvest’s objective of achieving a long term solid return in a sustainable and responsible manner. Ivanhoé Cambridge and Greystar are well-known to us and are excellent partners.”

Hideki Kurata, Managing Director – France, Greystar, says: “We have been active in France for close to two years and have built a successful portfolio of owned and managed assets across the country. Our new venture with Ivanhoé Cambridge and Bouwinvest will give us significant fire power to deliver on our plans to utilise our expertise in investing, developing and operating high quality student accommodation assets across the world to build a highly amenitised portfolio from the ground up in an underserved global city with strong market fundamentals. Paris is home to a number of world-class employers and higher education institutions and famously has a vibrant culture that attracts both domestic and international students to study. Coupled with the city’s ambitious public transport programme, which will further improve connections across Paris, there is no better time to get this venture off the ground.”
I like student housing as an investment but many foreign students are struggling to get visas to study in the US or Europe, COVID is causing all sorts of problems.

Still, over the long run, this is a great, recession-proof investment. The competition at top universities is heating up all over the world and Paris, London, Boston, New York and other cities remain very attractive cities where student housing is critical to attract top students. The same goes for all other cities.

Having Bouwinvest and Greystar Real Estate Partnerson as a partner on this deal is also very reassuring.

Not surprisingly, Ms. Palladitcheff, a native from France, is increasing Ivanhoé Cambridge's investments in that country (like this office deal).

Lastly, I read Jay-Z's Roc Nation is suing its New York landlord for 'stalling on sublease agreement in retaliation' for the $75 million company failing to pay rent since April:
Jay-Z's Roc Nation is suing its New York landlord for allegedly stalling on a sublease agreement in retaliation for the $75 million company failing to pay its rent since April.

The entertainment company filed a lawsuit Tuesday claiming Ivanhoe Cambridge delayed signing off on subleases for parts of the building at 1411 Broadway in Manhattan's Garment District because of a dispute over unpaid rent, according to Crain's.

In the suit, Roc Nation said it had made plans for three tenants to sublease parts of the space in its former headquarters and accused the landlord of holding back on signing them.

It claims Ivanhoe Cambridge is acting out of retaliation because Roc Nation stopped paying rent on the building back in late April, according to Crain's.

Roc Nation says it had invoked a force-majeure clause in the lease, where both parties are freed from contractual obligations because circumstances beyond their control arise - such as the coronavirus pandemic - and make the contract impractical or impossible to uphold.

Ivanhoe Cambridge argues the pandemic does not trigger the clause, Crain's reported.

Roc Nation is asking the court to rule that it is right to use the clause and to order the landlord to sign the subleases.

Several businesses have invoked this clause in recent months and stopped paying rent amid the pandemic.

The move has sparked a number of court disputes and some landlords have blasted companies for taking advantage of the global health crisis to not meet their lease agreements while they maintain healthy finances.

New York City's real estate market has been hard-hit by the pandemic with several firms reporting vast swathes of renters skipping rent payments during lockdown.

Vorndado, one of the city's biggest commercial landlords, said last month that 80 percent of its retail tenants had missed payments in April and May.

Forty percent of its office tenants also skipped payments.

Meanwhile, Empire Realty Trust reported that a quarter of its office tenants did not pay rent.

Roc Nation - which was valued at $75 million by Forbes last year - no longer uses the Garment District building after it outgrew the space and moved to a bigger building in the upmarket Chelsea area of Manhattan last year.

Jay-Z founded the company 12 years ago and counts Kanye West, Rihanna and Mariah Carey as just some of its star clients. 
Oh boy, the last thing CDPQ needs is some high-profile dispute with Jay-Z's Roc Nation (meanwhile, tenants of Ivanhoé Cambridge shopping centres in Quebec were granted support measures.)

But that article tells me a lot of real estate companies are in a world of hurt as renters skip on their rent due to the pandemic.

I noticed today, as stocks got hit hard as virus resurgence concerns grow, real estate and cyclical sectors were the worst-performing sectors:


And that's where I'll end this long comment, not much of a "Fête nationale" for me so far.

As far as the title of this comment, I just looked up Jay-Z's top 50 songs and chose one but my younger and hipper wife told me: "You have never listened to any Jay-Z songs and 99 Problems isn't really appropriate for your audience."

She's right, not a huge Jay-Z fan but I'm still keeping the title. 

On that note, enjoy the rest of Saint-Jean Baptiste Day, Bonne Fête Nationale!

Below, CNBC's Robert Frank joins "Squawk Box" to discuss why Manhattan real estate prices could drop 10% this year as NYC attempts to reopen.

Second, Howard Lorber, executive chairman of Douglas Elliman and CEO of the Vector Group, joins "Squawk Box" to discuss the state of the New York City real estate market amid the coronavirus pandemic.

Also, Cadre is a technology platform for commercial real estate investing. Ryan Williams, co-founder and CEO of Cadre, joins "Squawk Box" to discuss how the sector is faring during the pandemic.

Fourth, Ivan Kaufman, Arbor Trust Realty CEO, joins "Squawk on the Street" to discuss how the coronavirus pandemic has changed the real estate business.

Lastly, Dr. Tarika Barrett, COO at “Girls Who Code," joins "Squawk Alley" to discuss promoting diversity following the results of a CNBC Technology Executive Council survey.

Listen very carefully to her, she is spot on and offers great insights on why companies need to offer more flexibility to attract women with young children (and others, like people with disabilities).

Update: Someone who knew Daniel Fournier and the history of CDPQ's Real Estate activity shared this with me after reading this comment:
I think that operationally you are quite off base on facts. During his 10 years and from everything I saw and heard Daniel did not grow Retail, which was a legacy activity due to history. Rather, he got rid of previous retail stuff around the world assembled by René Perreault, ex. Rockland and Champlain Mall onto Cominar.

However I guess he had not done more aggressively/ or completed on the rest of retail which was more premium. These and Quebec offices were their only corporately managed properties. All his repositioning during his tenure was done as joint ventures with reputable best of breed. Jonathan Gray/ Blackstone, Callahan, Hines... incidentally which is the high impact route I would have taken and he realized very fast in such Caisse setting. He did so in major offices (CIBC Toronto ongoing, Paris etc) , logistics, some residential, opportunistic etc

To me and for what it’s worth, simply chopping say six Retail VPs is an accountant’s knee jerk reaction, something to be avoided, and yes, his successor is an accountant. It has zero impact but more fundamentally who then benefits pragmatically operationally?

It seems to me one needs pretty senior people with history of dealing with national/ international chains, even restructuring, and it sends one hell of a signal if working on a sale or worse still if contemplating a partnership with a financial or even strategic party.

Lastly, a Board getting into real estate has to realize that it is directional, function of interest rates and markets and illiquid. Based on 40 years personal allocation, I would certainly not to go overboard, especially at the interest rate level juncture of the last 5 years.
I thank this person for sharing his insights, especially on operations and needing senior people on the ground. He's right, Fournier did inherit "a Retail legacy" which he tried to clean it up, but he was painfully slow and left a mess for his successor.

As far as Ms. Palladitcheff's credentials and decisions, I don't question them. Many real estate experts are chartered accountants and even MBAs, so I doubt this was a "knee-jerk reaction" and not well thought out.

Also, others who worked with Fournier told me: "There were a lot of people warning Daniel about certain risks but he was more concerned with relationships and politics." Somehow this doesn't surprise me, too many leaders are more focused on politics than performance, much to the detriment of their pension clients.





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