On this episode of REALtalk, Marco Ding, Director, Real Estate at CPP Investments, joins REALPAC CEO Michael Brooks for a discussion about the evolution of the real estate portfolio and portfolio strategy in CPPIB, the impact of disruptive events such as the global financial crisis of 2006-2007, and the way forward for one of Canada’s largest real estate investors.

The episode covers:

• The evolution of the real estate group at CPPIB
  
• Building a portfolio of high-quality real estate assets
  
• A focused approach to international growth
  
• Managing direct deals and joint ventures
  
• The way forward for the CPPIB portfolio
  

Marco currently leads the team responsible for executing CPP Investments’ real estate program in Canada, which comprises over 23 million square feet of office, retail, industrial and multifamily assets across major markets. As a founding member of CPPIB’s real estate investment team in 2005, Marco participated in over $10 billion in real estate transactions globally, including the organization’s first real estate investments in the UK, Asia, Australia, Brazil and the U.S. Prior to joining CPPIB, Marco spent several years with a major investment bank focused on IPO and M&A mandates in the Canadian real estate sector.

Michael Brooks (REALPAC): Hello, everyone, thanks for listening and welcome to REALtalk, the show that brings you unique insights from leaders in Canadian and international commercial real estate. I’m Michael Brooks, CEO of REALPAC. I’m pleased to be joined by Marco Ding, who is Director of Real Estate at the Canada Pension Plan Investment Board – CPPIB for short, and he’s responsible for the Canadian portfolio at CPPIB. CPPIB is a $475billion fund with amazingly a 10.8% annualized return over the last 10 years. And of course, all of that’s due to Marco’s hard work there. Just kidding. Welcome, Marco.

Marco Ding (CPPIB): Thank you, Michael, for having me.

Michael Brooks (REALPAC): All right. So, Marco, tell us about your early career and how you ended up at CPPIB and the roles you’ve had in the fund.

Marco Ding (CPPIB): Sure. I’ve been with CPPIB now for over 15 years and just thinking about how I got started. The business started when I graduated out of business school right during the dotcom bust. Obviously, we were in a recession at the time, so not a lot of jobs available for new grads like me. Luckily, I was able to to land at TD Securities and in the investment banking group, first as a summer student and as a full time analyst. After my work term was completed, I had very little formal training in real estate at school. They were just no courses on it. My first so my first real exposure to real estate was on the job when I joined the real estate group in one of my industry rotations in investment banking at TD. And really from there I fell in love with the business. It was tangible, intuitive, practical, simple, seemingly simple at first, but can also become very complex. And I always thought investment banking was a good way for me to learn the ropes of deal making. But it wasn’t a career that I wanted to pursue long term. And so after a few years, I started to look around for business opportunities and a colleague of mine who had left me a few years back was working at CPP Investments, and they told me that they were hiring. So I applied for a position. And actually, at the time the real estate group at CPP Investments didn’t really even exist. And so I applied to their private investments group and someone in H.R. saw my resume and said, hey, you got some real estate experience. We’re actually spinning off a real estate group. Would you be interested? I said, of course.

Marco Ding (CPPIB): So I went in for a series of interviews, got the job. And in the summer of 2005, I was I joined the real estate team as their fourth investment professional. And as you can appreciate, when I joined the real estate group back then, in many ways it was like working for a billion-dollar start-up. We basically started from a blank canvas and our only mandate was to build a portfolio of high-quality real estate assets with durable returns over the long term. And we started our business in our own backyard, initially focused on building our domestic book. And one of the first deals I worked on was the privatization of O&Y REIT and O&Y Properties with our partners, Brookfield and AIMCO. From there, I also worked on our first JV with Oxford, where we acquired a 50 percent interest in most of the Vancouver and Toronto office portfolios. And that relationship would become one of our largest and longest partnerships to date. And with the O&Y and Oxford deals, it gave us immediate scale in Canada. And so from there we then turned our sights to growing the business internationally. And I was part of the team that built the foundations of our global real estate business. Today, I was tasked with identifying markets that were scalable and attractive from a return perspective, build an investment strategy, source local partners, and execute on transactions until we reach some reasonable scale. And from there, we then would hire local team and establish local office and rinse and repeat. And so I had the opportunity to build that program in many markets globally, including Europe, Asia, Australia and Brazil in the US.

Michael Brooks (REALPAC): Let me jump in there. The rinse and repeat part is interesting. Many in the business will remember Graeme Eadie, who probably was the boss of those four people back in the early days, will remember him fondly. But what were those early strategies other than acquiring large existing portfolios? How would be evolved and how have they changed over time?

Marco Ding (CPPIB): Well, I think, you know, for those of you who know Graeme, he’s one of the most pragmatic and methodical investors in the business. He’s a man of few words and he likes to maintain a low profile, but he’s laser focus on the job at hand. And I think those qualities of pragmatism, modesty and sticking to one’s principles really helped us grow the program quietly but effectively. In many ways, it’s the Canadian ethos. Keep your head down, focus on the task at hand, and don’t chase headlines for its own sake. And, you know, I think. Through that approach, it’s kept us well placed to grow our portfolio carefully and methodically over the past 15 years, particular, for example, sticking to our principles has worked well for us. We, for example, we had we knew that we had a lot of capital to deploy, but the intention was never to empire built. And we only focused on markets that made sense from a risk return perspective. And so as we were growing internationally in the mid 2000s, for example, we intentionally underweight the US as a real estate market because we didn’t feel like the risk reward proposition was overly attractive. And as we all know, history’s proven that it served us well. As you know, during the GFC, we exited that that crisis relatively unscathed. You know, we’re also a firm believer that we’re investors first and we’re not operators. And so on the equity side, we’ve generally not focused on sectors that were more management intensive, like hotels and retirement homes. And again, I think that’s serving as well as we speak into this crisis. You know, I think we also owe a lot of our success to a healthy dose of pragmatism.

Marco Ding (CPPIB): And so, for example, we knew that we wanted to create a direct investment program, but with a small team, like you said in the early years, we knew that that would not be a practical approach from the outset. So one of the ways we grew our portfolio initially was to invest in funds. They were more expensive and more passive than we prefer, but they also provided a window into the market and provided us with a lot of valuable market intelligence. And so as we learn more about those markets and built a local team, we then pivoted towards direct deals and joint ventures, which now form over 95% of our business. And I think finally, you know, while we are one of the largest investors globally, it’s always important to remember who we work for. It’s the 20 million beneficiaries and contributors into the plan and that keeps us grounded. So having a bit of modesty, humility is has been our approach. And I think it’s turned out also good for our business. Our approach has never been to throw our weight around for its own sake, because at the end of the day, our business revolves around building partnerships with local operators. So, you know, one may be able to steamroll your partner to get what you want when they’re in need of capital. But we don’t believe that’s how you build long lasting relationships. It’s a two way street. There are always puts and takes. It’s never just about one deal. And so with this approach, we’ve been able to build a number of very successful and enduring global relationships, many of which are over 10 years old.

Michael Brooks (REALPAC): It’s a terrific story. You’re describing moving to funds first and then to direct probably is the is the playbook for many small pension funds who are growing, who follow the same strategy and for the same reasons on the markets side of things you mentioned about not going into the US, but you’ve obviously got choices about which countries to go to and you’ve probably got choices about which asset classes are ignoring for the moment, hotels and retirement homes, which you’ve already said you don’t like because they’re more active, but you still got four others to choose from. You know, what’s the strategy been about which countries and which of the four main asset classes?

Marco Ding (CPPIB): Well, I think our approach into identifying markets and building an investment strategy in the markets that we like has has been laser focused on A. Partner quality and B. Scale. And so there might be very attractive markets and sectors in the world. But if we’re not comfortable with the partners in those markets or we feel that they’re not large enough to build scale, you know, we’re unable to to make investments because with a team of, you know, 80 or so people managing over 40 billion dollars, that’s a lot per person. And so we are laser focused on being efficient. And what we do, we don’t have an operating platform unlike some of our peers. And so we need to be very methodical in terms of how we deploy that capital to markets and partnerships in sectors that are highly scalable. So in many ways, our private business is dictated by the size of markets and the quality of partners that are available. And from there, once we can achieve those those two criteria, then we would look at, OK, is, you know, is is the actual real estate attractive? So from us, for our perspective, we focus on the market, the partner, and then from there and we identify the the actual specific real estate to invest.

Michael Brooks (REALPAC): That actually makes a lot of sense to me. I mean, if you get so much money pouring in the door that you got to put out, it makes sense for you to think about scale because you’d rather do one five hundred million dollar transaction than ten fifty. The million dollar transactions, I would think, and probably that those relative numbers grow over time as you get more and more money, money in the portfolio.

Marco Ding (CPPIB): Yeah, well, what we tend to think of scale, not by a deal by deal basis per say, but we tend to look at our relationships as programs. So, for example, we have a very large billion dollar plus program with Goodman in China, for example, where we’re the second largest industrial landlord now in that country. Now, we didn’t grow to that portfolio through a series of large transactions. It was a deal by deal, site by site development type of strategy. And so you might say, well, I’m approving smaller deals that come in on a on a deal by deal basis. But so long as we see that there is a path to building that program to scale over time, we’re OK with that. Right. Because it’s all about for us, it’s all about efficiency. So we’ve underwritten that sector. We’ve underwritten that partner. We’ve agreed to the JV terms. And so that makes for a much more efficient approval process. And so if you look at our JVs in multifamily or industrial, which, you know, by its very nature have very small lot sizes, especially when you’re talking about development. And so we’re OK with that, so long as we know that the partnership and the sector is scalable over time. So in office, you know, there are large ticket sizes. We get scale by doing a few of those deals. But with industrial multifamily, for example, we put we put parameters around a program. We call it a programmatic investment. And so in our in our internal approval process, we streamline we streamline that process such that when a deal comes in, we’re just looking at the returns. And we’re not asking about the partnership or the sector because we’ve already checked those boxes.

Michael Brooks (REALPAC): That makes a lot of sense to me and on the partner side of it, does that mean, you know, you try to keep the number of partners you’re interacting with globally down to a reasonable number? I have no idea what that number is, but would seem to me that further to your given experience in China, that you would want to be calling the herd from time to time.

Marco Ding (CPPIB): Yeah, undoubtedly over time there’s going to be some relationships that don’t grow as quickly as you pan out. And at the same time, we’re also now as the portfolio continues to grow, but it’s also reached a stage of of being more mature, you know, 15 years into the program that we’re focused on harvesting returns. And so, you know, while it’s the first 10 years of my career, it was very much focused on building local teams, putting out capital, building a portfolio. I think in the last five years, I’d say we’re becoming increasingly focused on harvesting returns, charting the portfolio, calling assets, exiting out of partnerships that are not going to to to achieve your point, making sure that we continue to operate very efficiently and have a very highly cost effective and scalable business. So I think asset management shirting assets has become an equally, if not more important part of our business as compared to doing new investments.

Michael Brooks (REALPAC): It makes great sense. So so what’s the way forward for CPPIB portfolio? Do you see any changes in this strategy on the horizon? And where do you find growth, if not durable returns in this market?

Marco Ding (CPPIB): Well, that’s the that’s the ninety thousand dollar question. I think with a portfolio of our size, admittedly, it becomes increasingly challenging to generate alpha – with a 40 billion dollar portfolio, you become the index that you’re benchmarked to in many ways. And so, you know, we’re we’re focusing to achieve sustainable alpha generation and really two ways. First is by focusing on the emerging markets. So for us, that’s China, India and Brazil. And the thesis being that, as you can see, the economies continue to thrive. So to build their demand for high quality real estate, which in many of these markets are few and far between, and so much of our program and those markets are development oriented. But these markets also have their own idiosyncrasies in terms of language, culture and business practices. So we are firm believers that having a local team and that presence helps to mitigate some of the risk associated with investing in emerging markets in general. The second approach is by expanding our mandate into the public markets through a reprogram. So we set up a reprogram a few years ago and that the focus of the reprogram is really to provide us with another avenue to access real estate, provide real estate exposure in areas that perhaps we’ve had less success in accessing on the private side. And the market, as you know, is much more liquid. And so it also allows us to deploy capital quickly when these markets are dislocated. So case in point is, you know, wind the tape back 12 months ago when the markets and the equity markets at large were in a massive sell off. We saw that, you know, those shares were trading at well below intrinsic value. And so we acted quickly and were able to to use the public markets, to build meaningful positions, to acquire positions in high quality names that we think are pretty attractive prices back then.

Michael Brooks (REALPAC): Great strategies. I’ve been joined today by Marco Ding, Director of Real Estate at the CPPIB, who is responsible for the Canadian portfolio at CPPIB. Marco, with you and your colleagues, we are in great hands. Thank you so much for being with us today.

Marco Ding (CPPIB): Thanks a lot, Michael. My pleasure.

Michael Brooks (REALPAC): Well, this is Michael Brooks and that’s it for this week’s episode of REALtalk. Be sure to visit us at Realpac.ca/REALtalk and subscribe wherever you get your favorite podcast. If you have an idea for a topic or a guest, please send me an email at podcast@realpac.ca. And if you like what you hear, give us a five-star rating. Thank you for listening and tune in next time.