Oxford Properties and the new Canadian model

Photography by Laura Barisonzi

The view is impressive from the upper floors of 450 Park Avenue. Massive curvilinear windows offer a sweeping vista of Manhattan’s bustling Midtown East cityscape. The Chrysler Building, One Vanderbilt and the MetLife Building are among the towering icons in sight.

For Michael Turner, one structure stands out in the crowd: the Helmsley Building.

Turner, president of Oxford Properties, is in a vacant suite on the 28th floor of his company’s black-clad office building for a photoshoot. The photographer reminds him – repeatedly – to look at the camera. Yet Turner is drawn toward the 93-year-old Beaux-Arts tower. “It’s the Helmsley Building,” he insists with a grin.

Beyond its pink granite façade and its status as a pinnacle of Roaring 20s engineering and architectural ambition, the building harkens back to Oxford’s earliest investments in the US. Turner explains the property was part of a portfolio of performing loans scooped up at a discount after the global financial crisis. It stands as a marker for how much has changed during the past 12 years in the industry as well as the company.

“Things were becoming available to us because of the lack of capital in the marketplace, and it’s so much more exciting when that’s going on,” Turner tells PERE in an exclusive interview. That memory provides a stark contrast to today’s market, in which firms are attempting to siphon mountains of capital into a small pool of deals. “Right now, I find myself asking, ‘Just what else must I believe in to make this price sensible to me?’”

That is not to say Oxford, the real estate arm of the Ontario Municipal Employees’ Retirement System, has been lacking in beliefs or exciting opportunities as of late. In 2021 alone, the investor executed 89 transactions at an average value of $100 million. It acquired the pan-European logistics specialist M7 Real Estate, bought a $2.2 billion portfolio of last-mile distribution centers from KKR and deployed another $2 billion in biomedical research facilities. Overall, Oxford achieved a 15.9 percent net return in 2021 following a benchmark of 6.1 percent. The firm’s net income last year was $2.5 billion.

Oxford has executed this growth not only as an institutional investor and development-oriented owner-operator, but also as a manager of third-party capital. Of its C$80 billion ($63 billion; €57 billion) of assets under management, C$18 billion is managed directly by Oxford on behalf of other investors. The pension investor’s portfolio companies manage another C$17 billion.

As the various platforms in its portfolio scale, giving it in-house expertise across property types and around the globe, Turner expects them to grow too large for Oxford to support on its own. As a result, it plans to lean more heavily on its ability to attract outside investment to accelerate its growth.

“The intention is to be a great principal investor, to generate a return on our capital,” he says. “We happen to have a bias to direct drive, we tend to do it reasonably well, and a lot of institutions that we see around the world have a level of respect and comfort and trust, and they want to co-invest with us.”

Need to diversify

Turner joined Oxford in 2010 as senior vice-president of investments. He worked his way onto the management team three years later before shifting to the operational side of the firm as its head of Canada. In 2018, he was elevated to the company’s top post.

His tenure has coincided with Oxford’s expansion beyond its historical focus on Canadian offices and retail. This move was supported by OMERS, which saw its liabilities growing at rate that could not be served adequately by Canadian investments alone. “They said… it’s probably not appropriate for us to have any more eggs in one basket,” he recalls. “We need to diversify.”

At the end of 2010, Oxford had an 88 percent concentration in Canada, according to that year’s OMERS annual report, with offices and retail properties making up 74 percent of its portfolio. As of year-end 2021, the footprint is 70 percent international and touches nearly all property types.

Oxford is not alone in its effort to broaden its global reach through direct investment. In fact, the approach has become synonymous with Canadian pension investing. Groups such as CPP Investments, which manages capital for the national retirement scheme, British Columbia’s QuadReal and Quebec’s Ivanhoé Cambridge have each teamed up with sector specialists to expand their reach abroad, typically through joint ventures and club deals.

Collectively, this activity has transformed the Canadian investment landscape during the past decade. In 2012, only 40 percent of institutional investment in real estate went abroad, according to data provider Real Capital Analytics. By the end of last year, cross-border transactions accounted for more than 80 percent of the country’s deal volume.

Jim Costello, head of real estate economics at RCA, says this is noteworthy given that many investors tend to have biases toward their home markets, but not surprising because of the dynamics at play in Canada.

“The challenge that the Canadian investors have is they are in a relatively small country in terms of population. They’re wealthy, there are fewer assets and, sometimes, Toronto just feels like it is the same pension funds trading assets back and forth,” Costello says. “So, to the extent that they have a need for real estate to play a part in their portfolios, they have to look overseas.”

Third time’s the charm

Oxford’s first major foreign investment came in 2007 when it acquired a 50 percent stake in London’s Watermark Place office from UBS. But the globalization process kicked off in earnest in 2010, when the firm joined a pair of landmark development projects: the Leadenhall Building, another office in Central London, and Hudson Yards, the redevelopment project atop New York’s West Side Rail Yard.

The history of Oxford Properties

2001
-OMERS takes Oxford private

2008
-Opens London office

2010
-Opens New York office and partners with Related on Hudson Yards, its first investment in the city
-Invests in the development of The Leadenhall Building, also known as ‘The Cheesegrater,’ with UK REIT British Land

2017
First investment in Germany, acquires Sony Centre in Berlin for €1.1bn
First Life Science investment

2018
-Michael Turner appointed as President
-Opens Sydney and Singapore offices
-Acquires Investa Office Fund and takes private Australian Stock Exchange-listed REIT with a 19-asset office portfolio valued at A$4.5bn
-Invests in Get Living, a UK BTR platform

2019
Acquires IDI Logistics alongside Ivanhoe Cambridge
Cornerstone invests in the IPO of Hong Kong-based logistics manager ESR, becoming largest institutional shareholder

2020
-Invests in cold storage operator Lineage Logistics
-Becomes co-owner of Investa
-Makes first direct investment in European Logistics, a 15-acre site in London’s Heathrow, acquired alongside Logistics Capital Partners
-Raises £800m of co-investment capital for Get Living, bringing equity commitments to $1.2bn

2021
-Acquires M7 Real Estate platform
-Acquires $2.2bn, 149-asset US urban infill industrial portfolio from KKR
-Invests $2bn in life science acquisitions

Shortly thereafter, Oxford bought the loan portfolio that included the Helmsley Building, which, Turner notes, continued to perform through the duration of Oxford’s investment.

In each of those early investments, Turner says, Oxford had the advantage of having equity to invest at a time when liquidity was almost non-existent.

“In hindsight, it was a pretty forgiving time to learn a new neighborhood and build new relationships,” he says. “We didn’t have to be the smartest because [the markets] were way down in the trough and everybody wanted to talk to us because we had capital. A lot of people didn’t have any capital.”

That position proved especially beneficial in the case of Hudson Yards. Tishman Speyer was initially chosen by the city to lead the construction of the new neighborhood, but the firm had to withdraw after its partner, Morgan Stanley, pulled out in 2008 to address the fallout of the global financial crisis. The Related Companies and Goldman Sachs were the next in line, but the latter bowed out as well, creating an opening for Oxford.

“We weren’t the first call. We were probably the third, and third time’s the charm, right?” Turner says. “We were able to enter that opportunity and partnership at terms which are not normally available.”

Bolstered by its early commitments to New York and London, Oxford expanded in both markets over the following years while reaching into other US gateways, then France and Germany.

As this expansion progressed, the firm began looking outside its original core competencies of office and retail. Often this exploration would begin on the credit side, Turner says, giving Oxford the chance to cultivate knowledge of a sector with minimal risk. It did this in the life sciences space by helping finance Blackstone’s acquisition of BioMed Realty Trust and in last-mile logistics, lending to KKR as it built up a US platform. In both cases, Oxford would go on to buy assets on which it previously lent and is using them to seed new platforms of its own.

“If you look at real estate returns over a 40-, 50-year period, you see two pretty distinct patterns. It has cyclical elements, and it has real structural elements that drive identifiable periods of outperformance,” Turner tells PERE. “As an investor, we want to understand where we want to put our capital, considering these cyclical and secular themes. And the second piece of the pie, for us, is to build, buy and grow leading businesses in service of our capital priority.”

Oxford now has a presence in 14 countries and the ability to invest in eight broad sectoral themes either directly, through its portfolio companies or via its various joint venture partnerships. The firm estimates it has gone from being able to access 18 percent of the world’s $1 trillion-plus annual dealflow in 2017 to 48 percent today. That expansion enabled it to roughly double its AUM from C$41 billion in 2016 to C$80 billion last year.

Richard Croft, executive chairman of M7, tells PERE Oxford’s scale and diversification is part of what convinced him to sell to the firm last year.

“They have a much deeper breadth than I realized before becoming a part of them,” he says. “They might be thought of as a bit staid, as they are a proper institution. But they’re the most innovative institution that I have yet met, which is why I felt comfortable being a part of them.”

Triple M partners

Making new deployments in other countries was one leg of Oxford’s diversification strategy. The other was paring down its domestic exposure. Rather than simply offloading its homegrown assets, many of which were class A properties it developed from the ground up, Oxford opted to sell ownership stakes to other investors while retaining management duties.

Oxford has pursued this strategy since at least 2005, when it sold a 50 percent share in a collection of core office properties to CPP Investments. The portfolio spanned 8 million square feet in Canada’s top six cities. The transaction helped launch CPP’s direct investing program and established Oxford’s external management capabilities.

“We happen to have a bias to direct drive, we tend to do it reasonably well, and a lot of institutions that we see around the world have a level of respect and comfort and trust, and they want to co-invest with us”

Such recapitalizations have helped Oxford meaningfully trim its direct exposure to less favorable property types in recent years. In 2016, offices made up 53 percent of Oxford’s total portfolio and 44 percent of its own equity commitments; by the end of 2021, it had reduced its overall office exposure to 42 percent while its direct investment dropped to 27 percent. It made similar reductions to its retail exposure. Greater shares of its equity are now in industrial and residential properties.

Oxford has also used other investor capital for expansion strategies, too. When it acquired St John’s Terminal – a former freight warehouse that has since been repositioned as high-end office space – for $700 million in 2018, CPP was its 47.5 percent co-investor. Oxford and CPP sold the property to Google for $2 billion last year.

The two pension investors are frequent collaborators, Peter Ballon, head of global real estate at CPP, tells PERE. “They’re one of our largest partners,” he says. “We invest primarily through joint ventures, and we seek partners like Oxford who are best in class in their sectors.”

While CPP shares discretion over purchases and sales and has a say over capital expenditures, Oxford has full control over sourcing opportunities, underwriting and managing assets. For those services, it charges a management fee that is comparable with typical market rates, PERE understands.

Oxford has similar relationships with more than 80 other investors, Turner says, although he notes that the goal is to do more with fewer partners. Ultimately, he expects 80 percent of outside capital to come from roughly 25 institutions. He describes those relationships to fall under the “triple M” classification, those being: multi-market, multi-sector and multi-billion.

“We will have a bias, in general, to do more with institutions that we see in multiple jurisdictions around the world, who recognize our branding capability in multiple places around the world, and who want to do more with us,” he says.

Asset heavy

Since Turner took the reins in 2018, Oxford has acquired stakes in three asset managers. In addition to buying M7 outright, it has a 50 percent stake in Sydney-based Investa Property Group, which it took private in 2018, and it is a leading shareholder in Hong Kong-based logistics firm ESR, which it helped take public in 2019.

Its portfolio also includes shares of specialty property groups such as Atlanta-based warehouse owner IDI Logistics, global cold-storage operator Lineage Logistics, and British rental housing platform Get Living. For sectors it could not buy into, it has set up platforms of its own, such as Indi, an Australian multifamily brand managed by Investa.

Oxford will use its full skill set to help grow each of its platforms. For M7, which plans to launch its first fund under Oxford ownership later this year, the pension investor will be an anchor investor. For Get Living, Oxford has raised £800 million ($1 billion; €965 million) of co-investor capital.

Turner points to life sciences as an area for which outside capital will be particularly helpful. Since the beginning of last year, Oxford has deployed about $2.5 billion into acquiring and developing research-oriented properties ahead of a platform launch later this year. Turner says the firm is likely to invest another $4 billion but he expects the platform to grow upwards of $15 billion in total value over time.

“That’s too big for our balance sheet. We might want to have a couple of billion dollars of exposure, but we don’t want to own the entire capital stack in what will be a top player in the space,” he says. “That’s a perfect example of an opportunity where we can invite other co-investors along.”

“[Canada Dry, for example]… tastes different. But everyone knows what it is. For investors that want to come along with us, that’s what we represent. Something different”

Oxford will generate fee revenue from these co-investments, and it stands to earn a share of general partner profits from funds managed by its portfolio companies – the split with M7, for instance, is 50-50, PERE understands – but Turner says the firm has built an “asset heavy” business, referring to its own ownership in the assets under its management. This stands in contrast to the asset-light model championed by most asset managers.

“The intent was not to design and build an assets under management aggregation strategy,” he says. Instead, because Oxford leads with its own capital, the proceeds from its own investments will far outweigh those from fees.

Canada Dry

Turner says there is no specific goal for how much co-investor capital Oxford will take on in the years ahead. The amount will depend on his firm’s capital needs and demand from other investors.

As Oxford continues to extend its reach globally and across property types, Ballon says CPP is open to broadening the scope of their collaboration beyond offices and retail.

“We generally want to grow with our best partners,” he says. “We have a lot of capital, and we need to be very efficient in how we allocate it, and having fewer great partners is the best way to do that. Oxford is high on our list of groups to expand with, and we look forward to growing together.”

For Oxford, as it grows this part of its business, it finds itself somewhere between being an institutional investor and manager, at least in the traditional sense. Turner is comfortable occupying that space.

“Coca-Cola and Pepsi have a ton of market share, and there are some massive players in the real estate world now, most of them are in New York, and they are consolidating the industry. But given the size of the addressable market, there’s a huge room for us to be different,” he says.

“I have a particular preference to drink Canada Dry. It tastes different. It doesn’t sit at the top of the lead tables in market share of beverages. But everybody knows what it is. It’s quite unique. It’s quite different. And for investors that want to come along with us, that’s what we represent. Something different.”