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Pension Funds: Canada's New Retail Landlords

Enterprising developers have built strings of flourishing regional shopping centers across Canada over the past 50 years. Toronto and Montreal-based pension funds have needed only about five years to buy out developers' interests in the largest, best malls with the most pizzazz.

The surprisingly short run-up to institutional investor domination peaked in March, when Ontario Teachers' Pension Plan Board, already an investor in publicly-traded Cadillac Fairview Corp. - superstar of Canada's shopping center industry - bought 100% control for about C$2.3 billion.

This was a mating of giants: Teachers has assets of over C$60 billion, about 4% of it invested in properties across North America and overseas, and CF owns interests in or manages 102 properties encompassing 51 million sq. ft. in Canada and the United States, including three urban malls: Toronto Eaton Centre, Pacific Centre in Vancouver and Montreal Eaton Centre.

Little more than a year earlier, the powerful, with C$100 billion in pension fund assets, Quebec government agency Caisse de depot et placement took over Cambridge Shopping Centres Ltd. and its 35 million sq. ft. of leasable space by increasing its stake from 43% to 73%.

A few years before that the Ontario Municipal Employees Retirement System doubled its 50% interest in Yorkdale Shopping Centre and Scarborough Town Centre in the Greater Toronto Area.

The number crunchers thus eased out the builder-visionaries, some of whose vision vanished with their bankruptcies during and after the real estate meltdown in the early 1990s.

Does that radical shift in ownership to a bottom-line mentality mean anything operationally?

Does the obligation of protecting the pensions of hundreds of thousands of retired people, rather than banks' balance sheets, mean pinching pennies?

Does it alter the way shopping centers will be developed (or, much more realistically, redeveloped, given the lag in that sector) and marketed to perform to a higher investor expectation of performance?

The short answer is no to all of the above.

Claude Lamoureux, Teachers president and CEO, announced in December the bid to take over Cadillac Fairview. He said that if it succeeds, "it will be business as usual at the company." He added that Teachers wouldn't interfere and that the change in ownership for employees and tenants would be"seamless." It was, except for Bruce Duncan, CF chairman, president and CEO, who announced his resignation afterward.

"[The acquisition] hasn't made much made difference in our management style," says Lorne Braithwaite, president and CEO of Cambridge. "The Caisse has enough confidence to leave us alone to effectively manage the corporation."

No, then, it doesn't make a difference. But in another way, yes, it does make a difference, a positive one. "The fact that the Caisse is the largest pension fund in Canada makes it easier when organizing financing for different projects," says Braithwaite. "It gives other capital providers a great deal of comfort that a major shareholder of that size is backing the corporation."

Their attitude also is different. Fernand Perrault, the Caisse senior vice president who presides over the fund's $C14 billion real estate portfolio, puts an investor - not a developer - spin on the subject. "We wanted to invest, through Ivanhoe Inc. [a Montreal-based subsidiary with more than 20 million sq. ft. of leasable space in Canadian and U.S. portfolios] in one company rather than buying centers one by one. Our portfolios were quite complementary because Cambridge had few centers in Quebec."

The Caisse has a 96% interest in Ivanhoe, and four other small Canadian pension funds account for the rest. Ivanhoe has an interest in or manages 60 shopping centers in Quebec and Ontario - 19 of them are in the United States through partnerships with General Growth Properties Inc., Wilmorite Group Inc., The Rouse Co. Inc. and Connecticut General Life Insurance Co.

Rene Tremblay, Ivanhoe's president and CEO, says the scale and speed of pension fund investment in shopping centers in Canada is larger and moving faster than similar initiatives in the United States.

Moving faster in Canada While there is no way to compare that development with events in the industry in the United States, Ivanhoe spotlighted ownership in Canada through an internal survey of the role of institutional investors. The survey, completed in November, focused on the four largest pension funds and Morguard Investments, representing smaller pension funds and found that collectively the five of them own:

* 19% of the shoppjng centers in Canada of more than 50,000 sq. ft.;

* 83% of Canada's regional malls, 15% of the country's community centers and 2% of the neighborhood malls;

* 53% of Canada's malls larger than 800,000 sq. ft.

Pension funds will become even more important key players in coming years because of greater opportunities to invest, Tremblay predicts, because "the basics are sound and there is less competition than there was a few years ago, when REITs and public companies were willing to pay higher prices than institutional investors."

Shopping centers and big-box projects make sense as investments for pension funds because they produce stable revenues that are much less vulnerable to swings in the economy.

But pension funds tend to be more cautious than most shopping center developers, such as First Professional Management Inc., which is feverishly building Wal-Mart department stores across Canada.

Tremblay recalls that about six years ago Ivanhoe passed up on serious investing in big-box centers because there were too many players and Ivanhoe wasn't sure which ones would survive, and because it would be difficult to recycle that space if they did go out of business. "We'd probably do it differently if we did it today," he admits.

Dale E. Richmond, president and CEO of Ontario Municipal Employees Retirement System, says the pension fund, with net assets of C$31.4 billion in 1998, only "dabbled" in real estate until the early 1990s.

"Before that, you almost had to shoehorn your way into the real estate market," Richmond commented. "All the big developers and big real estate companies were closely held. It was like a family compact; they only let certain people play in their sandbox."

Of OMERS' asset mix, 10% to 15% is in real estate worth about C$4 billion - with 9.9 million sq. ft. of net retail area in 18 properties and 7.6 million sq. ft. in 19 office properties. "Few pension plans in the United States and Canada have that kind of ratio," Richmond says.

OMERS, much like many of the pension funds, hedges its bets with partnerships. "Our strategy was always to co-invest, because we invest to pay pensions, for what owning bricks and mortar does for pensions. We have to create value, and two stabs at due diligence are better than one, and often better than just deep pockets," Richmond says.

R. Michael Latimer, managing director of OMERS Realty Corp., speaking like a prudent manager of civil servants' pensions, says their investment in shopping centers "is part of a bigger strategy, not acquisition for the sake of acquisition."

Taking that strategy further, again at odds with a development mindset of build rather than buy, Latimer notes that at one stroke OMERS acquired five shopping centers in Ontario, most notably Square One in Mississauga, on the western flank of Toronto when it bought Hammerson Canada in late 1998.

Creating value and keeping competitive Pension fund managements are conservative by nature, but they are also every bit as demographics-driven and promotion-minded as developers' marketing vice presidents and property managers.

Also, they are as likely to invest huge sums in keeping their malls fresh with the latest traffic-building attractions. Most of the hundreds of multiplex cinemas, many with interactive game arcades and some with theme restaurants, are popping up across Canada in their shopping centers, rather than on freestanding sites.

That isn't going to change with a new pension fund regime. OMERS, for example, is redeveloping Square One into a 1.5 million sq. ft. superregional mall. It spent more than C$150 million redeveloping Yorkdale Shopping Centre and Scarborough Town Centre in Toronto. Teachers is finishing off the second phase of a C$200 million redevelopment at its aging Chinook Centre in Calgary. Cambridge has embarked on a C$150 million upgrading of some of its centers.

Richmond sums up the pension funds' role: "It takes entrepreneurs to assemble the properties, develop the centers and move on, which is where pension funds come in. We don't have the same attachments to bricks and mortar or marble and fountains that developers have representing their own name. We come in and make sure the centers have all the competitive features, but we put more discipline into creating more value day in and out.

"At the end of the day, this is about investment return."

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