Photography by Laura Tillinghast
In North American real estate circles, ‘the Canadian model’ is often held up as a gold standard for institutional investment. The strategy holds that the well-capitalized pensions of the Great White North are better served by investing directly into real estate ventures and operating companies than by entrusting their money to third-party managers. Indeed, since the public sector pensions of Quebec and Ontario acquired Ivanhoé Cambridge and Oxford Properties, respectively, to handle their real estate platforms, each has become a dominant force in the asset class, amassing more than C$60 billion ($47 billion; €40 billion) of assets.
In 2016, the British Columbia Investment Management Corporation became the latest provincial pension investor to deploy this strategy by launching the QuadReal Property Group. In less than five years, it has become the third-largest real estate owner in Canada, surpassing the national Canada Pension Plan as well as Cadillac Fairview, which invests on behalf of the Ontario Teachers’ Pension Plan. The company is not done growing.
“We came into 2021 with a number of very large pipelines of projects and investment opportunities that could happen. So frankly this could be the largest year we’ve ever had in terms of investments,” Dennis Lopez, QuadReal’s chief executive, tells PERE.
The Vancouver-based group took advantage of the dislocation brought on by covid-19 on several fronts, Lopez says: it bought listed hotel platforms at steep discount; it expanded its debt portfolio to include higher-risk loans; it stepped in as an equity partner for groups that faced a daunting fundraising market; and it put its weight behind soaring alternative property types, such as data centers and life science facilities.
In early March, PERE caught up with Lopez to discuss how QuadReal managed to double its international portfolio during a global pandemic, why the group views niche property types as “long-term core holdings,” how it is navigating the dicey relationship between China and the West, and what’s next for the rising pension investor.
“One of the benefits to this approach is we’re not buying large portfolios that have locations and maybe properties that aren’t desirable,” he says. “Everything we do is where we want it and what we want.”
Lopez was hired as QuadReal’s first chief executive in May 2017. In accepting the role, he stepped away from the top investment position at Paris-based investor AXA Real Estate Investment Managers, where he had spent the previous eight years. His career began at JPMorgan in the late 1980s, eventually leading its European real estate investment banking division from London. Later, he served as global head of real estate for London-based Cambridge Place Investment Management and CEO of emerging market-specialist SUN Real Estate for two years each.
“One of the benefits to this approach is we’re not buying large portfolios that have locations and maybe properties that aren’t desirable. Everything we do is where we want it and what we want”
A California native, Lopez returned to North America’s Pacific Coast tasked with expanding QuadReal’s reach beyond Canada and reducing its reliance on stabilized core assets. At inception, the group’s C$24 billion portfolio was roughly 80 percent concentrated in Canada. Its C$4.8 billion of international holdings included investments in emerging markets such as Mexico, Brazil and India, Lopez says, some of which the group is still working to exit. Today, the company is focused on developed markets.
“Early on, we made a very conscious decision not to invest in funds and, frankly, to not even invest in club deals,” Lopez says. “Rather, we identified property sectors, partners and markets that we liked and did what we call programmatic partnerships.”
This strategy has led to near-exponential growth for QuadReal. It increased its AUM by 15 percent between December 2016 and December 2017, 17 percent the following year and 27 percent the year after. By the end of 2020, its holdings had grown 41 percent year-on-year, reaching C$58.4 billion. Much of this latest surge was executed outside Canada; its international portfolio nearly doubled, from C$16.6 billion to C$31.8 billion.
Meanwhile, uncertainties at the market and property levels dragged global transactions in 2020 down to their lowest volume in seven years, according to the research firm Real Capital Analytics. And, with travel curtailed by the pandemic, cross-border investments proved especially challenging. Canadian investors as a whole – typically among the biggest and most reliable pools of international capital to flow into the US each year – decreased acquisitions in the country by 10 percent year-on-year, per RCA.
QuadReal was able to avoid the paralysis of the sales market by focusing on build-to-core strategies. With construction work deemed essential in most countries, Lopez says the company’s various business plans were left relatively unscathed by lockdown measures. He also credits QuadReal’s established network of global partners with its ability to continue ramping up its international exposure.
“One of the first things we did at QuadReal, within three months of getting our strategic plan approved, was open up offices in Hong Kong, London and New York,” Lopez says. “Combined with the fact that our partners were around the world in those same markets, we didn’t really have a problem executing during covid.”
This approach, thus far, has resulted in outperformance relative to BCI’s benchmark. In 2019, QuadReal achieved a one-year internal rate of return of 8.46 percent, according to the group’s most recent activity report, beating its target of 6.67 percent. It also bested return benchmarks for domestic and international investments on both a one- and five-year basis.
Focusing on development in hot property types, particularly industrial, has helped QuadReal avoid the “aggressive” pricing that has caused yields in the space to fall, Lopez says.
Graeme Torre, managing director for Dutch pension investor APG Asset Management, tells PERE a build-to-core approach is particularly useful in the logistics sector, in which investor expectations for long-term rent growth clash with historical rates of deterioration and obsolescence.
“Most office buildings these days are built so you can have a three-meter-clear ceiling height and that accommodates all sorts of different occupiers. Retail centers are built so you can reconfigure the interiors for different shop sizes and circulation areas,” he says.
“The logistics buildings have to be built to similarly be able to go through changes in their use over the period of their ownership or their existence, if they are going to be worth those low cap rates.”
The direct investment approach also proved advantageous from a capital market perspective during the pandemic, Lopez explains, because it positioned QuadReal to be a source of liquidity when it was suddenly hard to come by.
Though much has been made of the mountain of dry powder ready to be blasted at new private real estate opportunities, new capital formation was hampered by the pandemic. With $110 billion of closed commitments, according to PERE data, 2020 was the weakest year for private real estate fundraising in nearly a decade.
“Pre-covid, there was a lot of money being thrown to a lot of people,” Lopez says. “Post-covid, it got more complicated because people couldn’t travel, a lot of people didn’t have a global network so they couldn’t invest on a global basis. So, it was a real advantage for us.”
Early in the pandemic, QuadReal pressed on with a $400 million commitment to US-based apartment developer Mill Creek. It followed that up with a $250 million partnership with Los Angeles multifamily specialist LaTerra Development in June. And, in November, it committed more than €400 million in equity to a joint venture with pan-European logistics platform Valor Real Estate Partners.
Lopez says it is common for QuadReal to commit a few hundred million dollars to new partnerships, then add more if the venture proves successful. Eventually, these side-by-side commitments can turn into entity-level investments. “It’s been complicated to raise funds for some groups, so we would come in and replace the capital they were going to raise for a fund and just do it as partners,” he says. “And a lot of times in those relationships we’d said, ‘Why don’t we also look to buy an interest in the operating company?’”
In October, the group converted a $1.6 billion preferred debt investment in CA Student Living, Chicago-based CA Ventures’ $4 billion student housing platform, into a 50 percent ownership stake. QuadReal has invested alongside CA since 2017.
Last spring, after covid concerns caused US colleges to send students home to complete the semester remotely, it was unclear if student housing would follow multifamily down a path of pandemic resilience or face sustained disruption akin to the hospitality space.
Ultimately, CA was able to lease nearly all its portfolio ahead of the fall semester. Still, chief investment officer Nishant Bakaya credits QuadReal’s direct operating experience with its willingness to ride through the uncertainty.
“It definitely helped that we performed well during a difficult time period. But I do think QuadReal are good investors that can look through the noise,” Bakaya says. “They had the ability to see that the impact of covid-19 was episodic and not long-term.”
Another relationship that was elevated during the pandemic was the pension investor’s longstanding partnership with Toronto-based Realstar Group, which dates back to the global financial crisis. In January, QuadReal took an ownership stake in the firm’s UK property management business, UNCLE. It also paid C$1 billion to acquire majority interests in eight purpose-built rental apartment buildings from Realstar, bringing its total holdings under the UNCLE umbrella to C$2.1 billion.
Ryan Prince, chief executive and founder of UNCLE, tells PERE his firm was looking to recapitalize the platform and bring all of Realstar’s UK build-to-rent assets under a common platform. QuadReal was a natural fit for this type of partnership, he says, not only because of the capital it could provide, but also because of its ability to execute a build-to-rent multifamily strategy.
“They’ve put together a team of world-class private equity real estate professionals,” Prince says. “They’re a partner that will ask valuable questions and have a point of view, but also understand the underlying strategy and back us and our judgment as a partner.”
Given its heavy focus on building to core, QuadReal’s portfolio is not easily divided into the typical risk-return buckets of core, value-add and opportunistic, Lopez explains. He views investments as either tactical or strategic.
Tactical opportunities are short-term investments benefiting from temporary pricing dislocation, such as hospitality, certain retail types and senior housing. This comprises about 20 percent of QuadReal’s current investment activity, Lopez says. Strategic investments, conversely, are where it plans to remain for the long term. “About 75 to 80 percent of what we’re doing right now is exactly that,” he says. “We’re going into those sectors for the foreseeable future. While we may sell some properties to optimize the portfolio, we will not go out of the sectors.”
Industrial and residential are the two biggest focuses for its strategic bucket, comprising 25 percent and 30 percent of its current portfolio, respectively. The third pillar of this approach is the alternatives category, which includes properties related to healthcare, data storage, life sciences, manufactured housing and land lease strategies. At just 8 percent of its current allocation, non-traditional real estate is a big focus for the group moving forward, Lopez says.
“We view many of the alternative sectors to be long-term core holdings for us,” he says. “We like those sectors because, generally, they tend to require a lot less capital expenditure. For property sectors that require a lot of capex, like hotels or office buildings, the cashflow is much more cyclical and therefore the stability is much more volatile.
“For those assets, you have to be very careful that you come in when prices are lower,” he adds, regarding office and hotels. “And then you have to be careful, too, when prices get high to sell.”
While the operational intensity of niche property types such as data centers, life science facilities, self-storage and even student housing – which QuadReal counts as residential – have kept other investors at bay, he considers that an advantage for groups that master those skill sets. Last year the firm made its first life sciences investment and continued to grow its presence in the data center space.
“In China, we are looking to participate in what will be the strong economic growth in a major country in the world and do it in a low-key sort of way”
In 2019, QuadReal formed a $2.5 billion joint venture with Atlanta-based T5 Data Centers to build, acquire and operate properties in the space. Lopez tells PERE the pension investor is currently seeking an opportunity to make an entity-level investment into an operating company in the space. Likewise, QuadReal is ramping up activity on the debt side of the emerging sector, having made its first development loan to a data center project this past year. He expects activity in the space to pick up as more capital is drawn to it.
“People are very aware of the opportunities in data centers,” he says. “Some of the best opportunities are in areas where data centers are less built out, like continental Europe and Asia. But there are still attractive opportunities in North America.”
QuadReal has tied its investment thesis to developed core markets and Lopez maintains that China’s gateway markets belong in that conversation.
“The one country that we consider developing that others might not is China,” he says. “We have deployed and will continue to deploy capital into China.”
Pointing to an e-commerce penetration rate nearing 30 percent of consumers in the country and a distribution network still lagging much of North America, Lopez says there is ample opportunity to build logistics properties in the country, which will be a top priority for the group’s Asia-Pacific team in Hong Kong. QuadReal has also been active in the Chinese office market, joining Hong Kong-based Gaw Capital Partners and other investors to acquire the Ocean Towers complex in Shanghai in 2018.
Lopez acknowledges that the relationship between China and the West has been “challenging” in recent years, particularly as trade disputes between China and the US led to fiery rhetoric on both sides. He is optimistic the dialogue between the two countries will be calmer, but he expects fundamental differences to persist.
“In China, we are looking to participate in what will be the strong economic growth in a major country in the world and do it in a low-key sort of way,” he says. “So, I think we’re going to keep a low profile and find ways to participate in their substantial economic growth.”
As Lopez looks to lead his young company to another banner year, he says more initiatives are on the horizon, including a pair of new internal platforms he hopes will be rolled out by 2022. In the meantime, he says the firm will continue honing its abilities in what he calls the “four quadrants of real estate,” those being debt and equity investments in both the public and private markets.
For the listed space, he says QuadReal will continue to look for property types and platforms that have been overly discounted because of the pandemic. Even after the volatility of the past year subsides, he expects public market expertise to be valuable to the platform in the long run.
“It’s a long-term capability that we want to have,” he says. “At any given point, the public markets and the private markets will agree or disagree on what they think about the real estate world. When differences occur, that creates opportunities.”
In the debt space, he hopes to build on the innovative ways QuadReal raised and issued debt capital in 2020. It expanded its lending platform and moved into higher-risk territory with its first senior stretch loan to a student housing development. Lopez says the group plans to double its roughly C$7 billion debt platform during the next four or five years, having opened new debt-focused offices in New York and Toronto.
Since activity in the listed markets as well as the lending space has had the added benefit of informing QuadReal’s private equity decisions, Lopez says: “Having all the capabilities necessary to invest in public and private debt and equity, and being active in all of them, we think, really makes us a better investor.”
The sample size is small but five years in, the so-called Canadian model has done exactly what BCI hoped it would. Under the guidance of Lopez, QuadReal has doubled in size and quadrupled its international holdings. It has evolved from an owner of staid offices and malls to a dynamic global investor, developer and lender. And it has done it the Canadian way.