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Global Investor 50: QuadReal goes global

QuadReal is undertaking an ambitious international growth plan after being launched by bcIMC, one of Canada’s largest institutional investment managers, in 2016. Investors Jonathan Dubois-Phillips of QuadReal and Eric Wurtzebach of Macquarie Capital discuss the challenges and opportunities of going global in today’s marketplace.

Global property markets are awash with capital as investors seek to enhance returns in a low growth environment. QuadReal, a real estate investment, development and management company with a $24.5 billion portfolio, is no exception. It is owned by bcIMC, one of Canada’s largest institutional investors. QuadReal had close to 90 percent of real estate holdings in Canada at inception in 2016. This year it has been pushing further into international markets.

PERE listens in as Jonathan Dubois-Phillips, president, international real estate, at QuadReal, and Eric Wurtzebach, senior managing director, real estate, at Macquarie Capital, discuss QuadReal’s genesis and the opportunities and challenges it faces as it continues on its international investing journey.

Creating a global footprint

Eric Wurtzebach: QuadReal is a relatively new company, resulting from bcIMC’s decision to follow the Canadian model and internalize real estate asset management. How did that come about?

Jonathan Dubois-Phillips: Over time, bcIMC had built a real estate portfolio of roughly $20 billion through an external manager model. That model worked well to a certain point, but then you get to a stage where it makes more sense to look at internalized management. We have all our strategy in one platform so we can carry out a truly global plan. It enables a singular focus on managing and growing these assets globally, providing greater opportunity, operational efficiencies and a path to a more cost-effective approach.

Moving to one consolidated company solely focused on the real estate portfolio also allows streamlined decision-making and improved governance. For example, our board includes six business and real estate leaders who bring broad networks and deep global expertise through their long experience in private and public-sector organizations. This depth of experience enables the board to fulfill its fiduciary oversight responsibilities and provide valuable insight as we manage and diversify our investments in the real estate space.

Eric Wurtzebach

EW: There are different structural models that pension funds use in order to invest globally: one approach is having boots on the ground and an office in every major geography; the other is having all staff centrally located in the corporate headquarters. Where do you fall on that spectrum?

JDP: Part of the ethos of QuadReal is being close to the assets. We generally believe in boots on the ground. We have seven offices across Canada to manage our domestic portfolio.

Internationally, we focus on 20 top global cities where GDP growth outstrips the country’s GDP, like London or New York. These cities are deep liquid markets, economically resilient, and bounce back out of recessions faster than other areas.

Jonathan Dubois Phillips

We are building up an international team with people with capabilities in those cities. We recently hired Dennis Lopez as CEO, and he comes from being CIO at a $90 billion business with investments all over the world, and Lucy Fletcher as global portfolio manager. She has deep experience in Asia and the US. Varinder Grewal, VP international real estate, has been with us since inception. QuadReal’s international investment team has nine different nationalities in a team of 20 people, so we are diverse. I, for instance, have spent years living in Hong Kong and other cities across Asia, as well as time in Europe. So tackling these cities is not quite as daunting as it appears.

The most important thing is having the flexibility to pursue prudent growth. That’s where we can really improve long-term performance.

Growing an international portfolio

EW: You talk about diversification happening through international investing. How are you approaching that step?

JDP: At the time of forming QuadReal the portfolio was heavily weighted to Canada, which represents just 4 percent of investable real estate in the world. Our job is to balance the portfolio in coming years by looking outside of the country while also increasing our Canadian presence. Clearly, this represents a meaningful opportunity.

“The most important thing is having the flexibility to pursue prudent growth. That’s where we can really improve long-term performance”

– Jonathan Dubois-Phillips

We plan to grow by direct investment in our target markets with local partners. We seek like-minded partners that have proven track records and offer the potential for truly scalable, long-term relationships. We look to our partners to help us unlock opportunity and value by sharing their local knowledge and value-creation expertise.

In exchange, QuadReal commits to bring to these partners the strength of a respected global real estate leader and the experience of its international investment team. We also have transparent, clearly defined approval processes that enable us to be nimble and act quickly on opportunity.

QuadReal’s goal is to provide strong investment returns and prudent growth whenever we make an investment. We use a wide variety of investment strategies internationally to achieve this goal. We are working primarily on programmatic joint venture structures, where we invest directly alongside local or sector experts where we are the majority owner. Our other focus is club deals where we partner with other like-minded, deep-pocketed, long-term investors.

For example, we have already invested US$600 million into a programmatic joint venture to acquire, develop and manage student housing at select universities in the US. These are high-quality, income producing properties, and reflect our desire to invest in long-term assets that provide an ongoing, dependable revenue stream through all business cycles.

London’s Bishopsgate, a 1.4 million-square-foot office building in London’s financial district, reflects our approach to club deals – four quality partners with a long-term outlook. We are looking at specific sectors that our research shows are recession-resilient, including residential, industrial and logistics.

Capital partners

EW: Many US operators would prefer discretionary capital as opposed to joint venture capital because they don’t want to get approval. How do the partnership dynamics work for QuadReal?

JDP: I think we bring a lot to the table. If you negotiate discretion you have to add value. That’s why I’m so focused on building a team of qualified people which, when combined with approval processes that reinforce nimble and informed decision-making, allow us to go in and decide whether we should do the deal or not. We also bring opportunities to our partners that they otherwise might not see.

EW: Given where we are in the cycle and how much capital is available how much are you courting investment partners, and how much are potential partners courting you?

“It’s not always easy for institutional investors to deploy capital with a partner strategy as there are far fewer qualified and really good investment vertically integrated sponsors than people think”

– Eric Wurtzebach

JDP: I think it’s a mix. If people are looking for a capital partner that brings institutional discipline, is truly nimble and is scalable they’ll come and talk to us. We are long-term investors.

EW: Usually, sponsors try to market their transactions to strong global institutional investors, try to get them as close to the ask on terms and conditions, and then out of the interested group pick the best overall long-term partner. That final decision is not usually made based on economic terms.

It’s not always easy for institutional investors to deploy capital with a partner strategy as there are far fewer qualified and really good investment vertically integrated sponsors than people think. For more niche strategies, there are even fewer partners. As a result, for quality investment sponsors in good markets I think capital is chasing them more right now.

However, I’d qualify that a bit by saying that US sponsors have historically not had to raise much foreign capital. US sponsors had an easy time raising capital in the US market but that changed dramatically after the global financial crisis. For sponsors, having long-term investment partners like QuadReal, who can shift strategy when the markets change, is very beneficial. The sponsors are really starting to understand the importance of that for their business long term. As a result, QuadReal is well positioned.

If you looked 12 months ago there was quite a lot of capital that claimed to be long term, but as it turned out it wasn’t long term. Whether that was because of local capital controls, political issues, local scandals, or changes in the price of oil. Unforeseen events happen, and as a result it is important for sponsors to diversify capital sources and have multiple partners to grow with.