Ivanhoé Cambridge CEO Nathalie Palladitcheff's Last Assessment

Jean-Philippe Décarie of La Presse interviewed Ivanhoé Cambridge's outgoing CEO Nathalie Palladitcheff, offering a final assessment before she focuses on new challenges (translated from French):

Nathalie Palladitcheff has completed the transformation process of Ivanhoé Cambridge that she began four years ago when she was appointed CEO of the real estate division of the Caisse de dépôt, and next month she will complete her integration into current activities of the institution before leaving his position to take on new challenges.

Before leaving her position for good, Nathalie Palladitcheff wanted to take a final look at the nine years she spent at Ivanhoé Cambridge, including the last four as CEO.

In her new role, she was called upon to carry out a major transformation of the real estate asset portfolio of this division which will be integrated into the Caisse's current activities at the end of April.

“I wanted to give one last interview and meet the business community [Monday noon at the Canadian Club of Montreal] to finish things off, to explain what we have achieved in four years. I owe it to our teams, to the Caisse, to Quebecers…

“When Michael Sabia appointed me in October 2019 and Charles Emond confirmed me in my role in January 2020, they gave me the mandate to transform Ivanhoé Cambridge, that’s what we did,” explains the outgoing CEO.

As we know, the Caisse's real estate division was overexposed to the shopping center and office building sectors, well before the pandemic broke out, taken with a legacy from the late 1980s when the Caisse bought Ivanhoe Cambridge of the Steinberg family empire.

When Nathalie Palladitcheff became CEO in 2019, Ivanhoé Cambridge had generated returns below its benchmark over five and ten-year periods. In 2023, the real estate division still showed a return lower than its index over the last five years.

“But we managed to beat the index over the last three years, we will soon surpass it over five years,” the CEO told me.

Since 2020, Ivanhoé Cambridge teams have carried out no less than 300 transactions totaling 50 billion. The weight of shopping centers in total real estate assets fell from 23% to 11%, the same goes for office buildings.

“We halved our exposure to shopping centers and office buildings and doubled our exposure to the logistics and residential sectors, two sectors in strong growth. Despite the pandemic, we decided to accelerate our transformation despite a certain drop in value,” explains the CEO.

At the end of all this activity and despite a negative return of 6.2% on the Caisse's real estate portfolio in 2023 (better than the -10% of the benchmark index...), Ivanhoé Cambridge increased the net worth by 5 billion of its assets, which increased from 40 billion in 2019 to 45.6 billion in 2023.

After the transformation, integration

In addition to the sale of numerous shopping centers, Ivanhoé Cambridge is engaged in the transformation of some of them in Canada by recycling former commercial spaces into logistics centers or residential complexes, as it has undertaken to do in its Galeries d’Anjou project.

“We want to make them multi-use assets with transport, residential and businesses and thus reduce the carbon footprint of these sites,” underlines the CEO.

Could Nathalie Palladitcheff have continued her involvement at the Caisse de dépôt once the new real estate portfolio had been integrated into the institution's current activities?

“I had the mandate to transform the portfolio and it’s time to hand over the baton. I will stay until the end of the process to ensure the integration of the teams within the Caisse de dépôt and support those who will have to leave.”

“We will become more efficient by grouping human resources, communications and information technology activities within a single entity,” she observes.

Already when she joined Ivanhoé Cambridge as Chief Financial Officer in 2015, the real estate group had 1,500 employees. This number has been reduced to 490 today and will be reduced further once the integration is complete.

“We left the real estate operation to concentrate on our role as an investor. In 2021, we subcontracted our 330 employees who operated shopping centers in Canada to the American group JLL. I checked recently and our 330 ex-employees are all still working,” underlines the CEO.

Even if she leaves office in a month, there is no question for Nathalie Palladitcheff of reducing the pace and taking advantage of a moment of respite. She wishes to leverage the vision she developed during the various organizational transformation experiences she has had during her professional life.

Could her transformational experience at Ivanhoé Cambridge be used to reorganize the Quebec health system by taking the helm of Santé Québec, where all the rumors seem to be leading her?

“I am focused on the mandate that I am completing and I want to support our teams until the end, but I do not intend to retire afterwards. I feel like continuing to contribute to the society that has welcomed my family and me so well,” the CEO responds very openly.

With all due respect, Nathalie Palladitcheff is a real estate expert, not a health expert, and even though she knows Quebec's health minister Christian Dubé who previously worked at CDPQ, I don't think she's the most qualified person for this new and important position (great leader but stick to what you know, real estate, and between you and me, she'd be nuts to accept this position which pays a lot less than what she can earn elsewhere and will be heavily scrutinized by everyone in Quebec. Having said this, to be fair, she is a great leader and has tremendous experience and our healthcare system needs someone competent to fix it).

Anyway, back to the interview. As you all know, the integration of CDPQ's real estate divisions is still going on, and the process isn't easy because some employees on both sides will lose their job as they streamline activities to finalize the integration.

Once completed, CDPQ expects to generate annual savings of around $100 million through the synergies achieved in its processes, resources and systems.

But don't forget, in the short run, you need to pay severance packages to a lot of employees, most of whom are losing their job through no fault of their own. 

Still, this integration of real estate subsidiaries needs to get done and it makes sense for a pack of reasons. It should have been done a while ago but nobody had the courage to do so (when times are good, everyone stays hush and spends like crazy).

Now, as far as what Nathalie Palladitcheff and her team achieved at Ivanhoé Cambridge, it was a radical shift, getting out of underperforming retail and offices and into logistics assets and multifamily properties all over the world.

Some pension experts told me that Ivanhoé Cambridge was so desperate to get rid of retail assets that they "practically gave them away" to REITs with extremely favorable terms.

I cannot substantiate these claims but it's fair to say they didn't get top dollar for these assets and that's fine, the focus was on dumping them quickly to buy better assets that will outperform over the long run.

It's the same thing when I'm trading stocks, get rid of my losers fast especially when I see better opportunities elsewhere except here we are talking about a multi-billion dollar real estate portfolio, not exactly liquid and not easy to reposition it on a dime.

When I went over CDPQ's 2023 results, I noted this on real estate:

CDPQ's 2023 results were solid and in line with what I was expecting.

Let's begin with Real Estate since that is where everyone seems to be focusing on as there are issues there.

From the Bloomberg article:

Nathalie Palladitcheff, the head of Ivanhoe Cambridge, CDPQ’s real estate arm, described last year’s environment as “hostile.” High interest rates and low occupancy have created a difficult outlook for office owners and their lenders, with more than $1 trillion in commercial real estate loans set to mature by the end of next year.

“The increase in rates impacts both the valuation and the cost of debt, and this resulted in a very significant drop in transactional volumes on a global scale,” Palladitcheff said, referring to the broader real estate market. “They have been halved in Europe, halved in the United States, even an 80 per cent drop in transactions in Germany, for example.

Ms. Palladitcheff has done wonders repositioning that portfolio, diversifying out of retail into logistics and multifamily but offices remain a problem.

Also, as she correctly points out, the increase in rates impacts both the valuation and the cost of debt, and this resulted in a very significant drop in transactional volumes on a global scale.

Given the global backdrop in real estate and the lagged performance relative to publicly-traded REITs, I wasn't surprised Real Estate recorded a -6.2% return for one year, above its index (-10%).

This has nothing to do with Nathalie Palladitcheff and her team at Ivanhoe Cambridge, all of Canada's major pension funds are going to post losses in their respective real estate portfolios in 2023 and I'll be calling out anyone who doesn't mark down assets.

The good news, or somewhat good news, it wasn't as bad as I feared.

Recall my recent post on what Norway's 2023 Fund results mean for Canadian pensions where I noted:

Total real estate investments returned -2.0 percent for the first half and amounted to 3.9 percent of the  fund at the end of the period. Unlisted and listed real estate investments are managed under a combined strategy for real estate.

Unlisted real estate investments made up 58.4 percent of the overall real estate portfolio and returned -4.6 percent, while investments in listed real estate returned 1.7 percent. 

The main driver behind the negative return on unlisted real estate was the office sector, with US investments in particular falling sharply in value during the period. This was due mainly to increased vacancy, which means reduced income for investors. The return on the listed portfolio was also affected by the negative performance in the US office sector.

Why is this important?

Because as at the end of June, unlisted real estate was down 2% and at year-end, it was down 12%.

That tells me the Fund's appraisers significantly marked down unlisted real estate assets in the second half of the year as it became evident office vacancies weren't getting better and other sectors also faced challenges as rates hit financing (multifamily).

Importantly, if Norway's Fund is posting -12% in unlisted real estate, it doesn't portend well for the unlisted real estate portfolio at Canada's large pension funds (to be fair, I suspect Norway's Fund has a bit more exposure to offices but can't confirm this).

There were dramatic markdowns of unlisted real estate assets in the second half of the year and this is worth noting as Canada's large pension funds prepare to report their results.

I've already told people last week when I covered why CDPQ is integrating its real estate subsidiaries that I expect a challenging time in real estate as assets were marked down to reflect the clobbering publicly traded REITs took in 2022.

Why was Norway's unlisted real estate portfolio down 12% whereas CDPQ's real estate portfolio was down half that amount last year?

The answer is simple, Norway's unlisted real estate portfolio is made up almost exclusively of office properties which got hit hard last year (they are diversifying their unlisted real estate portfolio by sector and geography but given their enormous size, it takes time).

So, this just proves the repositioning that Nathalie Palladitcheff and her team have accomplished at Ivanhoe Cambridge is working and that's why they're beating their benchmark, adding $5.5 billion in value added over their benchmark.

As far as CDPQ integrating its real estate subsidiaries, I posted a comprehensive post with my thoughts here.

Pretty much every Canadian pension fund I covered so far posted negative returns in real estate and that doesn't surprise me one bit because interest rates rose and there were some serious writedowns in some assets.

What did surprise me is weakness in real estate was across the board, including logistics and multifamily which have been on fire over the last five+ years.

It's fair to conclude real estate is an asset class with strong challenges in some sectors but also great opportunities as this new normal works itself out.

Lone Star's John Grayken once noted in real estate, there's always value as investors own the land and he's right. 

Another real estate titan, Blackstone's Jon Gray, recently noted they see value in real estate as the Fed begins lowering rates.

I'm not sure if the Fed is going to lower rates as much as the market expects unless all hell breaks loose in markets and it panics and slashes rates.

The biggest worry right now for many large investors I speak with is what happens if inflation expectations pick up and we enter a stagflationary period like the 70s.

That will not bode well for bonds, real estate, infrastructure and private equity.

Anyway, maybe I will try squeezing one last interview with Nathalie Palladitcheff as I did enjoy our discussions in the past.

Apart from repositioning that massive real estate portfolio, Ivanhoé Cambridge was also a leader in sustainable investing and did wonders on that front. More than anything, that is her lasting legacy at CDPQ and they should all be proud of that work which continues.

Below, the LeFrak Organization CEO Richard LeFrak joins 'Squawk Box' to discuss the state of the commercial real estate market, the stressors facing the sector, and more.

Next, Gil Borok, Colliers US CEO, joins 'The Exchange' to discuss the health of commercial real estate investments in 2024, office real estate since the Covid-19 pandemic, and more.

Third, Komal Sri-Kumar, president of Sri-Kumar Global Strategies, joins 'Squawk Box' to discuss the latest market trends, the looming commercial real estate crisis, impact on the Fed's rate path outlook, and more.

Fourth, Bill Rudin, Rudin Management CEO, joins 'Squawk on the Street' to discuss whether the Federal Reserve should be worried about commercial real estate, his outlook for the real estate sector, and more.

Lastly, Jonathan Gray, Blackstone president and COO, talks about where opportunities are in the real estate sector, the impact of interest rates, managing risk and the environment for fundraising. He speaks to Bloomberg's Francine Lacqua in Rome, where he is attending the Bank of America Global Investor Summit conference. 

No doubt in my mind, Blackstone and others will be busy refinancing properties and picking up distressed loans and properties as opportunities arise. The problem again is navigating the unknowable, especially if a stagflationary environment sets in.