Under the leadership of CEO Dennis Lopez, the Canadian investment manager is looking to build scale in Europe as part of plans to create a €40 bn global portfolio within five years.
One of the first things you notice meeting QuadReal Property Group CEO Dennis Lopez is his slow, west coast drawl. On one of his regular visits to the Canadian group’s London office he laughs and says: ‘Yes. I grew up in southern California and speak that foreign language called “American English”. So I apologise for that!”
That laid-back likeability will be familiar to plenty of European real estate people from Lopez’s time in senior roles based in Paris and London while working for eight years at AXA IMRA as CIO, and earlier for hedge fund Cambridge Place where he was head of real estate.
Anne Kavanagh, Patrizia’s CIO who worked with Lopez at both companies, says people are sometimes deceived by his laid back qualities. ‘In fact he is as sharp as a razor and his stamina is unique. He is very demanding but it is for the benefit of the business and he is also a consensus-builder and absolutely a team player.’
Lopez left Europe to return to the west coast of North America in June 2017. This time it was to Canada rather than California, to run QuadReal, the Vancouver-based real estate company which had not long been launched by the British Colombia Investment Corporation. BCI is the investment manager with CAD $153.4 bn assets under management which invests mainly on behalf of 11 BC public sector pension funds, and his role was to drive QuadReal on as a new and independent company with an increased international focus and improve real estate investment returns for BCI’s clients.
Not that those returns had been awful previously, in the days when BCI sub-contracted its real estate programme to multiple external managers. As at last year-end (31 March 2019) the international holdings, which then represented 28% of real estate assets under management, had underperformed their benchmark over 10 years, returning 6.9% against a 7.8% target. These investments have performed better over five years and one year, achieving 11.3% and 11.9% respectively as a result of increased asset valuations and refocusing in 2014 on buying in targeted cities.
Domestic real estate returned 6.4% over five years against a 5.6% benchmark. The returns from Canadian real estate are not just relatively lower than the international ones - in absolute terms they also continue to moderate, as BCI’s last annual report notes, due to the high level of competition in recent times in a relatively limited market.
Lopez stresses that QuadReal’s $20 bn (€13.7 bn) Canadian portfolio is of very high quality; it ranges from a substantial amount of core assets to one of the most ambitious development projects in North America, the ongoing $5.7 bn Oakridge Mall quarter in the company’s home city of Vancouver.
But he also notes that Canada represents only 4% of all global real estate. To counter the domestic slowdown and to access the broadest choice of potential risk/return strategies, QuadReal needed to diversify quickly and effectively.
One other argument for the change of approach to real estate investing was that BCI was out of step with its peers. Big Canadian pension funds like Ontario’s OMERS and Montreal’s Caisse de dépôt et placement du Québec had invested in the sector via external real estate operating companies Oxford Properties and Ivanhoé Cambridge for many years. Oxford and Ivanhoé Cambridge have used their in-house real estate expertise to become large and confident investors in international real estate, something BCI aspires to for QuadReal.
Controlling your own destiny
The switch from multiple external managers to one, directly-owned company streamlines decision-making. ‘There is a mentality in the Canadian pension fund community that controlling your own destiny is a good thing versus giving it away to third parties’, Lopez points out. ‘You make the decisions, you manage the decisions, you are heavily involved in creating value by your development, repositioning, refurbishment, leasing activity. You really understand what is going on in your portfolio and that’s a huge advantage.’
Some 700 employees from BCI’s former asset managers transferred to QuadReal, and Lopez’s early months involved a concentrated recruitment spree, taking on another 400 people. They included Rosemary Feenan, at JLL for many years, who moved from London to Vancouver to head research and strategy. Jay Kwan accepted an offer to run Europe and moved from Canada to a new London office. Two more offices were opened, in Hong Kong and New York and teams hired.
QuadReal’s seven-strong operating board has five independent directors, among them Tom Garbutt who used to run Teachers and oversaw its takeover of Henderson Real Estate which became Nuveen. Also Lorne Braithwaite, formerly of Ivanhoé Cambridge, and Lauralee Martin, who held senior corporate roles at JLL.
It was ‘a massive effort’, something on a scale Lopez hadn’t tackled before. ‘We were very concerned we’d drop the ball somewhere - and we didn’t,’ he remembers. ‘We had this opportunity to create this company. All of us have worked at companies all our lives and now there is a chance to take the things we liked, and do them, and the things we did not, and not do them. We are a blank sheet of paper and so we can.’
Putting together the team and enthusing them is just the start. Lopez is responsible for the principles informing QuadReal’s investment strategy going forward, designed to deliver 10% target returns, and outperformance over some of BCI’s other asset classes.
Lopez says the top line for the investment strategy is five ‘conviction’ themes. These are intended to account for approximately 75% of all investment and to be mainly applied in 30 cities around the world which are now QuadReal’s main focus. As well as European and Canadian cities they include Hong Kong, San Francisco, Singapore and cities in Japan, China and Australia. He describes the remaining 25% of deals as tactical investing, where the team can invest in - or outside - those 30 cities, where the right opportunities present themselves. One year into a five-year plan, the portfolio has grown from $24 bn to $32 bn, with approximately $20 bn domestic and close to $12 bn now international. He believes the whole portfolio could grow in value to $60 bn (€41 bn) in that period with almost all the growth overseas.
QuadReal has also begun a rebalancing exercise to reduce exposure to lower-yielding core in the existing domestic portfolio. ‘We like core. Core properties are a very important part of our portfolio. However, we are over-allocated to core and needed to rebalance the portfolio. The rebalancing led to the transaction with RBC Global Asset Management’, Lopez explains. The move, announced earlier this year, will see over 40 of BCI’s Canadian properties with a value of $7.5 bn split 50/50 between BCI and a new fund to be managed by RBC GAM on behalf of third-party institutional investor clients. The first tranche of $1.5 bn of assets going to RBC Canadian Core Real Estate Fund will be closed on 31 October.
‘Rebalancing is a way for us to release capital that we can then redeploy into developments in Canada and our international investments’, Lopez continues. ‘But we still retain a significant interest in the properties and we hold the responsibility for asset management and leasing activities.’ When 50% is sold down and by using leverage, $4 bn-$5 bn of capital will eventually be released.
Right now, the theme at the top of the list of five is industrial and logistics with QuadReal investing globally in a number of ways and markets. In Europe the places of most interest are the ‘golden triangle’ for logistics in the UK, the French North-South axis from Lille to Marseille, the Netherlands and multiple logistics hubs across major economic regions including in and around Madrid and Barcelona.
About $1 bn has been invested with GLP’s European company Gazeley in two funds with a build-to-core strategy to create $4 bn (gross) of assets. One called GLP Europe Development Partners I is focused on building logistics facilities in the UK, France and Germany and Oxford Properties is a co-investor. The other is GLP Continental Europe Development Partners I which will develop in Belgium, France, Germany, Italy, the Netherlands and Spain. Canada Pension Plan Investment Board is a co-investor. GLP retains a 13% stake across both funds and other investors include Korea Fire Officials Credit Union and Tesco Pension Investment.
The other four themes are: residential, because of a strong, research-driven view on the world’s urbanisation; information/technology; retail densification; and mixed-use CBD office.
PRS and retail densification
A priority is gaining scale in private rental housing (PRS) in new markets outside North America, something that is far from easy to execute in Europe. QuadReal is interested in the larger and most vibrant European cities balanced with predictable and moderate regulations and particularly likes the Randstad cities in the Netherlands, London, and opportunistically, Dublin.
The company’s largest European residential transaction so far is its one-third investment in the Cherry Park Partnership which in the summer began construction of 1,200 homes for rent, cheek by jowl with Stratford City shopping centre in London. This project, investing with another Canadian pension investor, Public Sector Pension Investment Board (PSP Investments) and led by Unibail-Rodamco-Westfield, is an example of retail densification as well as an opportunity to deploy a decent chunk of capital in the private rental sector.
It is no coincidence that QuadReal’s partners in these significant early deals are other large Canadian pension funds: ‘Clearly we know all those parties and have deep relationships with them; there is a similarity of approach so they are easy partners, Lopez acknowledges. ‘But we are not exclusively partnering with them and we like to invest with other people too.’
QuadReal has made a first investment in PRS in Dublin with Round Hill Capital and expects this joint venture to yield more opportunities. And the company is backing Realstar, the Canadian firm which was one of the original asset managers for BCI, in developing three communities and close to 1,000 PRS flats in London.
For office, QuadReal is primarily focused on the two largest office markets in Europe, London and Paris. Its conviction in office, however, tracks the economic cycle and currently is not its highest conviction strategy. The company is, however, investing tactically in both cities in buildings that can be refurbished and sold.
‘In Paris we’ve set up a partnership with a group that invests in western Paris which we like - the Golden Triangle is too expensive for the returns we are seeking, he says. In London QuadReal has a partnership with Canadian-born Tyler Goodwin – who like Lopez, spent time in banking at JP Morgan and knows him well - via Goodwin’s company Seaforth Land.
QuadReal’s CEO’s view on London is positive despite, or maybe even because of, Brexit. As he sums it up: ‘Maybe there will be problems with Brexit, but we don’t think that they will have a long-term impact; in fact we think they will have a short-term impact. So depending on what happens, maybe there could be opportunities.’
Data centres and debt
In trying to understand information technology, Lopez says, ‘we looked at the storage and movement of information through the internet. We felt the demand for data centres, which drives these things, would be extremely strong’. In April QuadReal announced a partnership with T5 Data Centers, a US builder/operator of computing environments, and also invested in the operating company. The platform has been capitalised to develop and acquire $2.5 bn of facilities and will expand into Western Europe.
Rob Rackind, head of real estate at EQT and another former Lopez colleague, says T5 is ‘a real Dennis deal, in that it mixes operational and direct real estate investing.’ Such bold deals early in his role at QuadReal are on a par with some of the transactions AXA IMRA did while he was a part of the senior team there after the financial crisis, such as the acquisition of 22 Bishopsgate in London to develop a 130,000 m2 tower - entirely speculatively.
One more potential area of expansion in Europe is into debt investing. In April, QuadReal took over BCI’s $5.4 bn North American mortgage programme which is majority invested in construction and bridge/mezzanine loans.
‘We’ll be growing that business in the US first; then we will start thinking about expanding overseas,’ Lopez outlines.
As with the rest of the plan, the precise rate of expansion will be a function of the market. Those who know him say Lopez is ambitious, but also a realist. And he obviously relishes the possibilities, concluding the interview in this way: ‘ One thing everyone here has in mind is that QuadReal is a unique opportunity. You don’t see a $24 bn start-up that has the opportunity to grow to $60 bn in five years. We take this opportunity very seriously and are focused on making the most of it.’
Former colleagues say assuming the role of CEO of QuadReal Property Group in June 2017 was the culmination of everything Dennis Lopez has done in his career using the skills he learned. ‘It is a global remit and you need to really have great strategic vision to understand the flows of capital and its relation to real estate, juxtaposed with a great ability to lead and entrust in what is a globally diversified real estate team,’ says Rob Rackind.
Lopez spent 20 years in banking at JP Morgan before moving in 2005 to London to become head of real estate for hedge fund Cambridge Place Investment Management, kicking off a move into principal investing spanning Europe, Asia and America.
When the financial crisis hit he went to Sun Real Estate as CEO, investing in emerging markets before settling for eight years at AXA IMRA where he was CIO between 2009-2017.
His many sports interests have included spells playing baseball, football and mountain and rock climbing. Last month he joined 45 colleagues in a 122 km cycling race from Whistler to Vancouver.
QuadReal in Europe - transaction timeline
• Launch of two logistics funds GLP Continental Europe Development Partners 1 and GLP Europe IP 1with GLP (Gazeley) Oxford Properties and CPPIB to develop logistics facilities in Germany, France, Belgium, Netherlands, Italy, Spain and the UK.
• Behind Seaforth Land’s acquisition of CAA House, Covent Garden London, a redevelopment/repositioning deal
• Debut in Dublin residential via JV with Round Hill Capital. Forward purchase of a 216-bed, build-to-rent investment in Santry.
• Joins Cherry Park Partnership to develop and own a £670 mln private rented sector scheme with Unibail-Rodamco-Westfield at Stratford, London
• Backs T5 Data Centers which has announced its involvement in a 55,000 m2 project in Cork and has plans for another in Ireland, in Dublin.