Oxford Properties Group Inc. will invest up to $4-billion in the next five years in the United States and England as part of an aggressive strategy to diversify its real estate portfolio beyond its traditional Canadian base.
The plan would see the pension-fund owned real estate company buy retail and office space in New York, Boston and Washington, develop new towers in London and buy the debt of buildings it would like to own but doesn't want to bid on outright, in the hopes of a default.
Chief executive officer Blake Hutcheson will tour the country over the next week to sell the merits of the three-part plan to his staff, which would push the total value of the company's real estate holdings above $20-billion.
"Internally perhaps there has been a bit of a worry that too much growth is foreign and what about the cash cow that got us here in the first place," said Mr. Hutcheson, who took over as chief executive officer about a year ago. "But all growth is noble. The senior management team is agnostic on where it takes place - we just want to seize the right opportunities wherever they are."
Oxford - which owns stakes in about 44 million square feet of commercial space in Calgary, Edmonton, Toronto and Montreal - is in a position to spend because Canadian real estate held up better than many other markets through the recession and the company's ability to access credit is stronger than many of its global competitors.
That's not a situation that will last forever, Mr. Hutcheson said, as he underlined the need to move quickly in order to secure the best deals. Since taking over about a year ago, he's struck a deal to build a mixed-use project on the largest undeveloped parcel of land in New York at Hudson Yards and also partnered with British Land to build a 610,000-square-foot office tower in London.
The global shift is significant for the company, which is the real estate arm of the Ontario Municipal Employees Retirement System. Eighty-six per cent of its holdings are in Canada, with a scant 5 per cent in the U.S. and 8 per cent in Europe. Some of its more recognizable properties include the RBC Towers in Toronto and the seven hotels that make up the Fairmont chain (they are managed separately).
As of the end of November, its portfolio was funded by equal amounts of debt and equity, something Mr. Hutcheson said would continue as the company expands.
Mr. Hutcheson's target markets are among some of the most prestigious cities in the world, but also have faced some of the greatest difficulties through the recession as key financial tenants vacated prime downtown space and landlords were forced to make concessions on rents to keep the tenants who remained.
But because those markets fell so hard, he said, they offer greater returns to an investor willing to look past the shorter term volatility. And as a pension fund-owned company, Oxford has more patience than most.
"We have a unique opportunity to take advantage of our size and expertise to move quickly," he said. "The stars have aligned here, and I do believe that risk is to be rewarded."
It's no mistake that Oxford's international ambitions coincide with the installation of Mr. Hutcheson as CEO. After 14 years at CB Richard Ellis - when he left he was president of Canadian and Latin American operations for the global brokerage - Mr. Hutcheson left to work in New York's private equity sector.
The experience left him particularly interested in buying real estate loans from the banks, which are secured against buildings Oxford would like to own. Either the loan is paid on time and on schedule and Oxford realizes double-digit returns, or the borrower defaults and the building makes its way into the company's portfolio.
It's a strategy that has worked for other Canadian real estate firms. Most recently, Brookfield Asset Management Inc. bought upward of a billion dollars of unsecured General Growth bonds as the shopping centre giant struggled for survival. The bonds made Brookfield a sizable creditor, and was the wedge the firm used to eventually secure a 38-per-cent stake in General Growth.
"Because of the massive de-leveraging by American banks, there's a chance to buy some of these loans at a discount," Mr. Hutcheson said. "Of course, for once in-a-lifetime stuff we'll simply pay up."
The high Canadian dollar, coupled with the threat of inflation, makes it a good time to acquire foreign properties, said Queen's University real estate professor John Andrew. For instance, RioCan Real Estate Investment Trust has $600-million earmarked for U.S. acquisitions in 2011, the same amount it spent in 2010.
"Oxford is so large, but this would help it to achieve the geographic diversification that is always a challenge for a huge pension fund," Prof. Andrew said. "And the specific major urban real estate markets that Oxford is targeting are currently seen as good investment opportunities, especially given how beleaguered they were in the credit crisis."
Smaller companies are also wading into troubled U.S. markets, as they spend the capital they've managed to raise in public offerings and debt financings. Winnipeg-based Artis Real Estate Investment Trust recently purchased properties in Hartford, Conn., New York, Tampa and Phoenix. Chief executive officer Armin Martens said the company's ability to pull financing together made the purchases possible.
"The buildings are all well-located within their markets and boast new-generation design and construction," he said. "All three properties are 100-per-cent leased to strong credit-rated tenants on long-term leases with contractual rent escalations. This represents an excellent opportunity to acquire great assets at very reasonable prices."