Caisse to focus on three Quebec hotels after selling Toronto, Vancouver landmarks

MONTREAL - Quebec's pension fund manager is largely getting out of the hotel business, announcing Friday that it is selling all of its locations except for three luxury hotels in its home province.

Landmark Fairmont hotels Royal York in Toronto and Hotel Vancouver will go on the block Monday and join five other locations destined for sale. They are Fairmont hotels in Victoria, Barbados, Seattle and Washington, D.C., along with the Hilton Downtown Atlanta.

The Caisse de depot said its hotel holdings will be whittled down to Montreal's Queen Elizabeth Hotel which will be renovated, the refurbished Chateau Frontenac in Quebec City and the W Montreal adjacent to its headquarters.

Real estate subsidiary Ivanhoe Cambridge has been selling its portfolio of 70 hotels in Europe, the U.S., Canada, Barbados and India for about two years to concentrate on retail, office and residential multi-family units that generate more stable returns.

Among the hotels already sold are Ottawa's Chateau Laurier.

"It's hard to be an expert in everything everywhere and we now want to refocus and concentrate on these three asset classes," executive vice-president Sylvain Fortier said in an interview.

He said hotels are too cyclical, seasonal and volatile for most institutional investors like the Caisse.

"We feel that we're not hotel experts and we want to leave that to those who are."

When the sales are completed, hotels will account for about $400 million, or nearly one per cent, of Ivanhoe's $42-billion assets, down from eight to 10 per cent in recent years.

Fortier said the sale marks the culmination of a change in investment strategy for Ivanhoe Cambridge, which once relied on diversification by type of assets, geography and risk profile to protect itself from lower values. But the financial crisis of 2008 and subprime meltdown showed that these efforts don't work, pushing the Caisse subsidiary to concentrate on fewer markets, products and partners.

In the past four years, its returns have exceeded 13 per cent, which is in line with its 10-year returns.

"We think we're maintaining returns but we've cut our risk," he said.

The Caisse and partners Westmont Hospitality Group and InnVest Real Estate Investment Trust spent $2.5 billion in 2007 to buy 25 luxury Fairmont and Delta hotels across Canada. The Caisse obtained 14 of the properties.

Ivanhoe Cambridge has received higher returns on the sale of European hotels purchased in 2006 than it expects from the sale of the Fairmont hotels acquired in 2007. However, it still anticipates earning a profit this year on the sales because it has been reducing the value of the hotels on its books every year to reflect lower market values.

"The overall hotel portfolio will have done an OK return when you put them as one big portfolio," he said, adding that hotel values in large "gateway cities" are back to where they were six to seven years ago.

Fortier said likely interested buyers of the Canadian hotels are Asian, European and American investors.

The flagship Chateau Frontenac has been undergoing a $70-million upgrade that will be completed in July. Renovations to the 1,000-room Quebec Elizabeth Hotel are expected to be announced this fall, mostly to upgrade the first floors of the downtown business hotel.

Fortier described the hotel overlooking the St. Lawrence River in the provincial capital as its "postcard asset" that it has always wanted to keep. The Montreal hotels are linked via underground passages to several large office complexes the Caisse owns, including Place Ville Marie and the Eaton Centre.

Former senior Caisse executive Michel Nadeau said the decision to largely exit the hotel sector has pros and cons but it's a segment of the tourism industry that is becoming more affected by the Internet and the push to lower prices.

"It's difficult to make money as a hotel operator or owner," he said. "They decided to keep the landmark locations because they have more revenue security than the other hotels."

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