Thanks to an astute strategy of prudent oversight and laser-beam focus, heavy-hitting global real-estate investor, developer and manager Oxford Properties Group Inc. is always poised for great opportunity. With distinguished portfolios in the office, retail, industrial, multi-family and hotel sectors, the company has a reputation for across-the-board excellence.
Established in 1960 in Edmonton, Oxford Properties Group Inc. enjoys significant presence in every major market in Canada, as well as in New York, Boston and London, England. The Oxford entity is divided into five real-estate areas: office and retail (comprising 75 per cent of its portfolio combined), industrial, residential and hotels. The company’s hotel component represents just nine per cent, or $1.5 billion of the close to $20 billion it spreads across its full complement of holdings, but its unique characteristics and stellar reputation make it meaningful.
Oxford entered the hotel market in 2006 when it acquired six Fairmont properties (all of which it still owns). In September 2011, it added the InterContinental Toronto in downtown Toronto to its holdings. Today, the organization’s hotel investment portfolio is comprised of seven superstars: The Fairmont Banff Springs, Fairmont Chateau Lake Louise, Fairmont Jasper Park Lodge, Fairmont Vancouver Airport, Fairmont Chateau Whistler, Fairmont Montebello and Fairmont Le Kenauk as well as the InterContinental Toronto Centre. All told, Oxford employs more than 1,300 people and oversees 3,700 rooms. In 2012, Oxford sold nearly 850,000 room nights, while spending nearly $25 million in capital reinvestment. Last year, its hotel portfolio generated $360 million in sales, a number corporate brass expects will climb to $375 million in 2013.
Oxford’s hotel assets are so powerful, so robust, says Steve Hodgson, director of Hotel Portfolio Management, that it drives tourism in Canada. “Our resort portfolio is arguably the top resort portfolio in North America,” he says. “The amount of traffic these properties bring to the Rockies and Whistler region, and the influence we have over those markets, is phenomenal.” He adds: “You talk to our international travellers and they recognize the picture of the Banff Springs as a castle in the Rockies — and that’s a place they aspire to visit [in] that region. Those assets are really a driver of that demand.”
Oxford considers big office and big retail as its equities, and its industrial and multi-family assets as its bonds, explains Blake Hutcheson, president and CEO. “But the hotel asset class is more opportunistic in terms of the return profiles and cash flows you get through timely ownership and reinvestment,” points out the man who became the company’s leader in January 2010, explaining these assets are consistent with the kinds of real estate his company likes to own. Oxford prefers best-of-class long-term holds that can’t be replicated.
Any healthy basket of diverse investments should include a tool that hedges against inflation, says Drew Coles, VP, Hotels. And, adds Coles that means hotels, which are marvelously distinct from other real-estate assets, because you look at them as either a real-estate business or an operating business. “It’s a transient operation in nature. You’re changing out rooms and guests on pretty much a daily basis whereas all four of the other Oxford asset classes have long-term leases associated with the space. It makes it more challenging. It makes it more volatile. But it’s more dynamic,” Coles explains.
Consider, he suggests, that where a 700,000-sq.-ft. office tower might have five or 10 lease renewals per year, a hotel like the Banff Springs will sell 200,000 “leases” the same year. “The benefit is we get to adjust our pricing almost every single day and create a quicker return when demand is hot,” he says.
THE OMERS PIECE
Oxford is sponsored by the Ontario Municipal Employees Retirement System (OMERS) pension fund, an important characteristic that significantly fuels how its assets are managed. “The idea of a pension fund is to have nice stable, steady investment,” says Coles. Its objective, according to corporate fact sheets, is “to make retirement better.” Seeing that through ties in with the company’s powerfully held philosophy of delivering the “pension promise.” That entails both maintaining a sustainable investment value through cash generation in the long run and returning cash to the fund each year so it can meet its distribution needs so the person collecting his pension cheque is treated with respect. “It’s kind of a greater purpose to say we’re trying to make a better life for people,” says Coles. “It’s a greater responsibility that keeps you up at night and gets you up in the morning.”
MITIGATING THE SLUMP
Like most of its peers, Oxford’s hotel assets have ridden the curves lately. From the end of 2007 through to 2011, a downward cycle dominated, primarily in terms of income generation. The ability to torque rates higher in good times, because all of Oxford’s holdings are in the luxury segment, extends equally to the downside. The company faced a number of challenges during those periods when group business was weak, when companies weren’t spending and the high Canadian dollar discouraged foreign visitors.
It was that scenario that forced Oxford’s customer mix to be revamped. The balance of international tour, group and transient customers that dominated the company’s sales in 2007 was disrupted when the cycle started to move south and income streams painfully slowed. In turn, management elected to reach out to guests who may not have shopped them in the past because its hotels were too expensive. Its adjusted supply-and-demand, economic model featured slashed prices to entice newcomers. It’s not that this development necessarily produced a lesser quality of income, but Coles says it meant a return to the operating model. “We had to be cognizant of how we were spending, getting back to the fixed versus variable costs.”
Oxford carefully examined the operation of its hotels, mired as it was in a structure designed to handle the high-demand peaks of 2006 and 2007. Adjusting those operating models for a new reality meant revisiting anything that wasn’t a fixed cost — including labour, food and capital reinvestment — and evaluating how much was actually needed in each case.
“We always hope for better financial returns,” states Coles, of the success of these efforts, “but given the cycle and what the industry went through, comparatively, we fared OK. You have to [be patient]. There’s a saying that you can’t save your way to prosperity. There’s a lot of truth to that,” he admits. “Now we’re moving upwards, and I’d say upwards at a greater pace than the industry at large.”
ON THE ASCENT
To wit, the company’s operating income climbed 16 per cent in 2012 over the previous year, and this was against an industry-wide-growth backdrop of just three or four per cent. Management credits that growth to being in the luxury space, where it could put greater focus on rates, remain highly sensitive to the guest mix at each property and build a uniquely collaborative strategy (its one-team policy differs from operations in which ownership and brand teams are distinct entities with, often, different agendas; a reality, Coles concedes, “that creates a little more tension — but it’s a healthy tension”).
Also on the books is the employment of a thoughtful approach to sales and marketing programs. For example, executives decided the Fairmont Banff Springs’ 768 rooms needed group business to drive growth, so a targeted appeal to the group customer — some Americans, mostly Canadians — was launched. It also sought to capitalize on the thriving Alberta economy by pursuing local business. From there, says Coles, “we instilled not just a revenue focus with the hotel teams, but an income focus. Once revenue was coming in, we had a very conscientious [aim] to turn it into profit.” That meant being thoughtful about scheduling labour, energy consumption, leveraging the most efficient food-and-beverage opportunities — such as promoting banquets over the more labour-intensive individual service situations — and encouraging spending in other profitable on-site departments (including spa and golf services). The Fairmont Banff Springs delivered 92,000 group-room nights last year — the most the hotel has ever experienced.
OXFORD’S NEXT MOVE
Looking to the future, Hutcheson says his company’s existing properties are long-term holds. The temptation to starve these slow bloomers for capital notwithstanding, he says Oxford is committed to continued reinvestment, “as prudent owners should.” He acknowledges achieving the balance is “a little bit art and a little bit science.” He would rather err on the side of over- rather than under-investing. “We feel over time these are some of the greatest hotel assets on the continent and, arguably, the world,” he says.
Whether the plan includes the development of a hyped-up casino on Toronto’s Front Street remains to be seen. Last fall, Oxford put forward an ambitious and exciting $3-billion proposal to develop a ribbon of downtown real estate next to the Rogers Centre — potentially seven-million sq. ft. The plan would include retail, a hotel, an expanded convention centre, and, possibly, a casino. The casino would make up less than 10 per cent of the project, and would be funded, built and operated by the casino operator selected by the provincial government.
The casino remains up in the air, as the City of Toronto hotly debates its merits. “If they choose not to have a casino, let’s move on with life,” Hutcheson told the Toronto Region Board of Trade in the spring. “It would make all of our lives a lot easier, frankly. There’s a lot of unsavoury behaviour that goes on here, and I hope you won’t see any of that from us. If this doesn’t happen, we’ll be OK.”
“We’re an organization that’s growing by $2 to $5 billion a year in terms of net growth in a global context. There are certain markets in which it makes sense to buy hotels cheap; there are certain times in the market when you want to sell hotels; and there are certain times when you want to develop hotels,” Hutcheson informs. “It’s hard to pinpoint which day and which city applies to each of those strategies, but we’ll be nimble as we look to the future. And [hotels] will be very much part of the organization’s go-forward strategy for the long term.”
photo by Doug Forster