August 11, 2009 / 8:26 PM / 8 years ago

UPDATE 2-Caisse reports big first-half loss on real estate

* Investments fall C$5.7 bln in first-half 2009

* To reorganize property group to focus on core business

* To cease investments in mezzanine, subordinated loans (Adds details)

TORONTO, Aug 11 (Reuters) - Caisse de Depot et Placement du Quebec [CDPDA.UL] said on Tuesday it lost C$5.7 billion ($5.2 billion) in the first half of the year and will restructure its real estate group to get out of riskier loans.

Canada’s biggest pension fund manager said it will stop investing in the mezzanine and other subordinated loans sector to reduce the risk of more losses, and continue its efforts to focus on its core businesses.

The huge drop in the value of its investments follows multibillion-dollar losses announced earlier in the year and continues woes at Canada’s biggest pension fund manager, which manages investments for various public and private pension plans in the French-speaking province of Quebec.

The unrealized losses came mostly from its real estate investments, which dropped C$4.0 billion in value, while losses of other “less liquid investments” totaled C$1.7 billion. The Caisse said it made a 5 percent return on other investments during the period.

Caisse Chief Executive Michael Sabia said the Caisse’s less-liquid investments -- those in real estate, private equity and asset-backed commercial paper -- have dropped in value under “precarious economic and financial conditions” since the beginning of 2009.

The outlook was little better.

“We expect market conditions for less liquid investments to remain difficult in the mid-term, given the continuing weakness of the global economy,” Sabia said.

The Caisse, which managed C$120.1 billion in assets at the end of last year, shook up its management ranks in April, shortly after reporting C$39.8 billion in losses in 2008 amid global market turbulence that wreaked havoc on the portfolios of some of Canada’s chief pension funds.

Sabia said the Caisse would reposition its real estate group and get out of investments in the mezzanine and other subordinated loans sector.

A mezzanine loan is typically unsecured debt subordinated to other debt, and thus less likely to be repaid in the event of bankruptcy. But the loans are attractive to investors because they have a higher rate of return and a higher fee structure.

Sabia also announced Caisse would integrate its Cadim division, which invests in multi-residential properties and hotels, into its SITQ subsidiary, which focuses on office buildings and business parks, in a bid to streamline the real estate group.

“These changes were necessary to ensure the success of the real estate group in the context of a weakened global real estate market, especially in the United States,” Sabia said in a statement.

Until 2008, the Cadim division was responsible for investments in subordinated loans, including mezzanine loans, especially in the U.S. market, with an eye to investing in a sector Cadim expected to see marked growth.

“The investment model adopted by Cadim was aimed at seeking higher returns through increased risk,” Sabia said. “The financial crisis, however, eroded market conditions needed to underpin that strategy, namely in the United States.”

$1=$1.10 Canadian Reporting by Andrea Hopkins; editing by Peter Galloway

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