The CPP Investment Board has struck a partnership deal to buy five Ontario shopping centres, the first move in the Crown corporation's new investment strategy that will see it invest up to $8-billion in real estate and infrastructure over the next decade.
"This is the next step -- diversification," said John MacNaughton, chief executive officer of the board, which was created in 1997 to invest funds under the Canada Pension Plan.
Real estate is the first area where that diversification will take place, but other areas will be considered, including energy, natural resources and real return bonds.
The board currently manages $17-billion in pension funds, but expects to have $160-billion under management by 2012.
The $300-million deal announced yesterday involves the purchase of malls in Hamilton, Thunder Bay, Sudbury, Stoney Creek and Cornwall from Cadillac Fairview Corp., the real estate arm of the Ontario Teachers Pension Plan Board.
The purchase was done in partnership with Osmington Inc., a Toronto-based private real estate company controlled by David Thomson, who is also chairman of Thomson Corp., a part owner of Bell Globemedia, which owns The Globe and Mail.
Osmington was created in 1995 by industry veteran George Schott and has $1-billion in assets under management.
In 2001, a unit of Osmington acquired the assets of RT Realty Advisors Inc., the institutional real estate investment management business of Royal Bank of Canada.
Yesterday's transaction is the first under a 10-year, $200-million commitment on the part of the CPP Investment Board to Osmington. Under the terms of the partnership, the real estate company and its Redcliff Realty Advisors Inc. unit will manage the co-venture investment project.
"The way it is set up, if we perform, this is the beginning of a long-term relationship," said Mr. Schott, Osmington's president and CEO.
Mr. MacNaughton said the structure of the venture is in keeping with the board's desire to delegate investment management to experts in a given field.
"The real estate transaction is consistent with our philosophy of the virtual organization," he said. The board, based in Toronto, has 30 staff, he said, and does not intend to grow much larger.
Mr. MacNaughton said the Crown corporation will follow the same structure in its other diversification plans.
Mark Weisdorf, vice-president of private market investments for the board, said potential partners could be asset managers, institutional investors or corporations. All must bring a sizable equity commitment, have a track record and be willing to be paid based on performance and the amount of value they add, he said.
Mr. Weisdorf said he and his staff will follow a short-term and a long-term strategy for their real estate portfolio.
The first will involve investment in properties where there is a potential to add value. He described yesterday's deal as such a transaction. The New Sudbury Centre and the Intercity Shopping Centre in Thunder Bay are both leading centres in their areas, he said. The remaining three -- Cornwall Square, Centre Mall in Hamilton and Eastgate Mall in Stoney Creek -- have "significant redevelopment potential."
The other side of the board's strategy will involve the acquisition of premier properties, such as downtown office buildings, to hold in a portfolio of core assets.
Most of the skyscrapers across the country are already owned by pension funds, which have done quite well with their real estate investments over the past few years. Mr. Weisdorf said he is not worried about being late to the market and expects there eventually will be some movement as owners rebalance their holdings.
"We are a patient buyer. Some values in real estate are beginning to decline, rents are softening," he said. "This may provide opportunities for us."
If the opportunities are not there, Mr. Weisdorf said the board may look to the United States and Western Europe or concentrate on other areas such as infrastructure.
Initially, he said, the board will be interested in office, retail, industry and residential rental properties, but retirement and nursing homes, hotels, development and landbanking are all future possibilities.
Unlike most other pension funds in the country, Mr. MacNaughton pointed out that the board is in a unique position because it is a young fund. Income from its assets will not be needed to pay pensions for about 20 years, allowing it to have an extremely long-term outlook.