When Michael Catford, vice president of real estate at the Healthcare of Ontario Pension Plan (HOOPP), reflects back on his 17 years at the Canadian pension system, the one word that comes to his mind is “fabulous.” Since joining in October 1996, Catford has remained in the same position, leading the real estate team through many a market cycle.
“If I haven’t had either the best or one of the best jobs in real estate in this country, then I don’t know who has,” Catford, who retires from his post at the end of April, told PERE. “It’s been a great run.”
Under Catford’s leadership, the C$51.6 billion pension plan’s real estate portfolio has grown more than tenfold, starting at a gross asset value of about C$650 million and now valued at more than C$8 billion. He noted that the portfolio’s accomplishments include not only its increase in size but also its profitability.
Indeed, HOOPP’s real estate investments produced a return of 14.01 percent in 2013, outperforming the 8.6 percent growth of the overall investment portfolio and continuing several years of strong absolute returns. Of this total, roughly 5 percent came from income and 9 percent from capital appreciation during the year. The overall number represents an outperformance of 341 basis points relative to the Canadian Investment Property Databank benchmark.
Catford sees that kind of growth as a sign of a job well done. “As I always remind my colleagues and the people with whom we do business, we’re in real estate for one reason and one reason only, and that is to make money,” he said.
The growth and impressive returns of HOOPP’s real estate investments are due in large part to the way Catford and the real estate team have adapted their strategy over the years. In Catford’s early days, HOOPP’s smaller portfolio primarily invested in joint ventures, and all of its assets were externally managed. He described HOOPP’s role then as that of a “passive investor,” investing with real estate advisors on a deal-by-deal basis.
As the pension began to grow, HOOPP began to take on more asset management duties in-house and developed a much more hands-on approach, and it now thrives on that tactic. “I think the best way to describe us today is to say that my colleagues and I run a real estate investment and development company,” explained Catford. “We just happen to be owned by a pension plan.”
Throughout Catford’s tenure, HOOPP devoted itself to anticipating market cycles and staying ahead of the curve. HOOPP was one of the earliest Canadian pensions to start its own development platform. Launched in 1999, the development business has grown to become a large part of its portfolio.
Just behind the largest Canadian pensions like Ontario Teachers’ Pension Plan and the Caisse de dépôt et placement du Québec, HOOPP also was an early mover when it came to investing internationally. “We’ve been willing to use a little bit more foresight and take a little bit more risk than most others,” Catford said. “In nine cases out of 10, it’s been very profitable for us.”
HOOPP’s current real estate portfolio is comprised of approximately 80 percent to 85 percent core investments, which primarily accounts for properties the pension has developed to core. The remaining 15 percent to 20 percent is split evenly between HOOPP’s development program and a series of nondomestic value-added and opportunistic funds.
Hits and misses
Catford did not have any difficulty choosing the best (and worst) investments that HOOPP has made under his leadership. He called the purchase of the one million-square-foot Telus Plaza in Edmonton the top investment made over the past 17 years. HOOPP acquired the property in early 2001, when Edmonton as a market was “still down in the dumps,” according to Catford. The pension bought the office complex for C$75 per square foot, and it is now worth approximately four times that amount.
“It was a case of having enough confidence that that market would recover, which it did,” Catford said. “In terms of internal rate of return and equity multiple, it was probably the best returning investment we’ve ever made.”
By Catford’s estimation, the second best investment HOOPP has made is its partnership with The Crown Estate, established in late 2010. Through the joint venture, HOOPP made its first-ever direct investment in the UK, acquiring a 50 percent stake in the £100 million St. James’s Gateway re-development project. The project, completed in June, delivered 57,000 square feet of office space, 21,000 square feet of retail space and 19,000 square feet of residential space.
Coincidentally, HOOPP’s least successful investment made during Catford’s tenure was also a UK venture. The pension made its first investment with an international fund manager in late 2005, committing to an unnamed UK-based fund. When the financial crisis hit in 2007, things went south.
“It wasn’t that our manager did stupid things, it’s just that when the IPD index falls by 42 percent, I don’t care how good you are, you’re going to get killed,” said Catford. “There was a lesson there for us going international for the first time, which was that you’ve got to be a little more careful about your market timing.”
HOOPP currently is in the process of searching for Catford’s replacement. The pension has hired BCGI American Real Estate Executive Search, which is considering candidates with institutional investment and port-folio management credentials at a plan sponsor, investment advisor or real estate investment trust. Catford predicted that whoever takes the helm likely will continue to grow the real estate portfolio using a strategy similar to his own.
When it comes to future fund investments, HOOPP is likely to look abroad. “Domestically, we’ve pretty much given up on commingled funds other than in a few specific cases,” Catford noted. He expects the pension will only invest in US or European funds with a very focused strategy, either on a geographic area or a specific property type. As a hands-on asset manager and developer, HOOPP is now more conscious of putting its money into more focused vehicles. The pension has invested in such funds in the past, including Meyer Bergman’s European Retail Partners II.
HOOPP’s future plans also include ramping up development projects, working with a new partner on another London venture to develop a 270,000-square-foot office for approximately £220 million. Additionally, the pension will be continuing its large-scale Canadian industrial development program, which is under way with projects in Calgary, Edmonton, Toronto and Vancouver. The pension has consistently favored the property type, which has a 23 percent weighting within its current real estate portfolio. “It’s not pretty and it’s not glamorous, but it can be very profitable if you get it right,” commented Catford.
On its home turf, the biggest project for HOOPP as an organization is the development of a new one million-square-foot office complex in Toronto, along with partners Menkus Developments and Sun Life Financial. The 35-story property at One York Street will become HOOPP’s new head office in two years’ time, and the pension is putting up a 55 percent equity stake in the C$500 million project.
As for Catford’s future, his goal is to “work less hard.” Although he will be retiring from HOOPP, he will not be retiring from the industry. He will continue to serve on the board of Canadian REIT Morguard and has been approached to sit on other industry boards and investment committees.
For now, though, Catford will be wrapping up his work on the real estate investment portfolio he helped to build. “The growth has been far more significant than I ever would have thought possible when I started,” he reflected. “If someone gives you the privilege of letting you run the show and create new avenues and opportunities of investment, you’re crazy if you don’t take it. I couldn’t have wished for a better role at a better time.”
Healthcare of Ontario Pension Plan
Total assets under management: C$51.6 billion
Real estate assets under management:C$8 billion
Current real estate allocation: 12.2 percent
Target real estate allocation:8 percent to 17 percent