It is safe to say the real estate portfolio of OPTrust continues to outperform the plan in general.
“They were happy with us in 2017,” says Rob Douglas, managing director of real estate investments at OPTrust, which has net assets of more than $20 billion, manages one of Canada’s largest pension funds, and administers the more-than-92,000-member OPSEU Pension Plan.
Although financial results for 2018 have not yet been released, they are “still happy with us.”
In 2017, the real estate portfolio — valued at about $3 billion — generated a net return of 14.7 per cent compared to OPTrust’s overall 9.5 per cent net return.
“The very fact I maintain my desk here,” Douglas said, “tells you that they’re reasonably happy with what our team is doing as it relates to real estate investing.”
OPTrust’s 2018 results should be released by the end of the month.
At the end of 2018, OPTrust’s real estate portfolio was worth about $3 billion, a value it has maintained for more than a decade, says Douglas.
Last year, OPTrust was “quite active” in real estate with 10 new investments worth about $435 million, primarily in North America.
OPTrust buys into Dynamic Funds Tower
That activity continues this year. At the end of February, OPTrust acquired a 25 per cent stake in the $473-million purchase of the 650,000-square-foot Dynamic Funds Tower complex in downtown Toronto, in a joint venture with Great-West Life Real Estate Fund, London Life Real Estate Fund and I.G. Investment Management.
The property, previously owned by Oxford Properties Group and the Canada Pension Plan Investment Board, includes the 30-storey Dynamic Funds Tower at 1 Adelaide St. East, a nine-storey boutique office building at 20 Victoria St. and a three-storey retail building at 85 Yonge St.
Douglas says the acquisition made sense for several reasons, including the fact OPTrust has its corporate headquarters in the Dynamic Funds Tower. It occupies three floors, about 10 per cent of the building’s area.
It also made sense “given the strength of the downtown office market, the strong continued demand for high-quality office space, the fact this building is exceptionally well-located (it’s on top of the King subway station),” and the experience and track record of partner Great-West Life.
Longer-term improvements are planned to maintain the 28-year-old complex’s competitive position, but it’s premature to say what changes will be made, he says.
Other downtown Toronto investments
Also in downtown Toronto, OPTrust is participating with private equity firm Carttera Equities in the development of 65 King Street East, which broke ground in February. No tenants have been announced for the 19-storey, 400,000-square-foot office building.
Among other downtown Toronto properties, OPTrust has a 50 per cent interest in the 17-storey The Globe and Mail Centre at 351 King Street East in partnership with First Gulf Corporation. The 537,000-square-foot office building was completed in 2017 and is 100 per cent leased to tenants that include The Globe and Mail, Loyalty One and the Yellow Pages Group.
Real estate gives OPTrust “a great diversification benefit, is very effective as a hedge against inflation and generates attractive adjusted returns, Douglas says. “Commercial real estate is a great source of stable income and we require that stable income to pay the pension’s obligations.”
Douglas joined OPTrust in 2004 as its managing director of real estate investments and oversees a team of 11 focused on real estate investing. He was previously portfolio manager, real estate at the Health Care of Ontario Pension Plan (HOOPP).
“Home-town focus” on real estate
With satellite offices in London and in Sydney, Australia, OPTrust invests in real estate around the globe, but North America comprises 80 to 85 per cent of real estate holdings.
There is a “domestic bias, a home-town focus,” with Canadian properties representing about two-thirds of the real estate portfolio. Slightly more than half of the Canadian portfolio is in Ontario, while there is “decent” representation in Vancouver and Alberta and “modest” exposure in Quebec.
An apartment building is the sole asset in the Maritimes.
In terms of net asset value, the portfolio is weighted 29 per cent to office properties, 17 per cent multi-family (“reasonably high,” he says, because “we really like the defensive characteristics of owning apartment buildings”), 20 per cent industrial and 20 per cent retail, with the balance in mixed-use properties and properties under development.
Douglas says “the cycle for real estate investing is maturing and expected returns have moderated.” As a result, “we’re being very selective in engaging in new investments. We anticipate it will be a fairly challenging year to find new investments that work for OPTrust.”
Climate Change Action Plan
Last year, OPTrust issued its Climate Change Action Plan, of which real estate forms an integral part.
“We know that climate change is real,” Douglas says, so OPTrust is attempting to ensure its buildings have lighter environmental footprints.
The aim is “to locate our investments in markets that won’t be overwhelmed by long-term climate change. We have a full team that helps us focus on that and make sense of it because we know it’s important.”
Real estate holdings will likely be part of the investment portfolio for a long time “so we need to be looking ahead and understand those risks that climate may bring to bear on those.”
Part of the process involves investing in buildings that are BOMA or LEED certified or are either working to obtain those credentials or to improve environmental efficiencies.
“Sophisticated tenants today demand that of their space. They want to be in a building that’s efficiently run and operated and sensitive to the environment, so we’re doing our best to strive for that.”