Caisse pulls out of risky real estate after $5 billion write-down

Canada’s largest pension fund manager, the C$120 billion ($108 billion) Caisse de depot et placement du Quebec, has restructured its real estate group and ceased investing in the mezzanine and subordinated loans sector after suffering more than $4.5 billion in losses on its real estate and private equity portfolio in the first half of the year.

The Caisse, which manages the assets of 25 provincial funds including the Quebec Pension Plan, said real estate accounted for 71 per cent of its losses this year and a $3.6 billion write-down.

Investments in illiquid investments such as private equity and infrastructure led to further losses of $1.1 billion, while
investments in asset-backed commercial paper (ABCP) cost the fund another $360 million.

President and chief executive Michael Sabia said the losses offset the 5 per cent return that the Caisse earned on other investments to June 30, producing “neutral” overall performance.

“Considering the scale of decreases in value we have accounted for, primarily in real estate, and the fact that the Caisse’s returns are of great importance to Quebecers, we felt it was the right time to take stock of the situation,” he said.

Sabia signalled a move away from risky commercial real estate loans with the decision to fold the Cadim division, which invests in multi-residential properties and hotels, into the SITQ subsidiary, which invests in the office buildings and business parks sector.

Cadim was responsible for investments in subordinated loans, including mezzanine loans, especially in the US market.

“The investment model adopted by Cadim was aimed at seeking higher returns through increased risk,” Sabia said.

“In the real estate financing sector, Cadim’s strategy was based on forecasts calling for marked growth of the subordinated loans market. The financial crisis, however, eroded market conditions needed to underpin that strategy, namely in the United States.”

In 2008, all of the real estate group’s investment activities in real estate debt, including those of Cadim, were assigned to a new subsidiary, Otera Capital.

The Caisse announced Tuesday that this subsidiary would now focus on its core business – first mortgage loans. As a
result, it will cease to invest in the mezzanine and other subordinated loans sector.

The restructure is expected to help the group succeed in a weakened global real estate market, particularly in the US, and is part of an action plan launched by the Caisse last April to concentrate on key operations and streamline its structure.

The pension fund manager has also appointed Rene Tremblay as executive vice-president, real estate, and president of the Caisse’s real estate group, Karen Laflamme as senior vice-president, real estate and Andre Charest as senior vice-president, risk management – real estate.

The Caisse’s writedowns are paper losses based on mark-to-market accounting rules, which require the value of the assets to be adjusted to what they would be worth if sold in the market today.

Unrealised decreases in value of less liquid investments

(At June 30, 2009) in $bn
Investments in real estate debt -2.2 39
Investments in real estate properties -1.8 32
Total real estate -4.0 71
Private equity and infrastructure
-1.3 23
ABCP -0.4 7
Total -5.7 100