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Oxford Capital Group's John Rutledge: Hotel Repositioner And Heliskier Extraordinaire

Oxford Capital Group CEO John Rutledge is a man of many interests, including adventure travel and high-intensity sports, but nothing can quite match the elation of finding hotels in need of upgrades or renovations, putting together a team of specialists and seeing the project through to a profitable conclusion.

Oxford Capital Partners CEO John Rutledge

Chicago-based Oxford Capital has participated in more than $3B of commercial real estate projects, with a primary focus on hospitality. So far its projects have involved more than 13,000 hotel rooms. It has done hospitality-anchored mixed-use projects and is now expanding into other property types, such as senior housing.

In its home market, Oxford’s value-add hotel projects have included the Hotel Essex, Essex on the Park luxury apartments, the Langham, LondonHouse, the Godfrey, Hotel Julian, Claridge House, Hotel Felix, Hyatt Magnificent Mile (formerly the Wyndham Chicago), Hotel Cass and the Renaissance North Shore. 

Its redevelopments in other markets include the National Conference Center in Northern Virginia, Hotel Lexington NYC, Metropolitan Hotel NYC and the Godfrey Hotels Boston, Tampa and Hollywood. 

Now the company has bet on San Francisco in a big way. Last month, Oxford Capital acquired four Downtown properties — Hotel Vertigo, Good Hotel, Americania Hotel and Carriage Inn — with plans to renovate and reposition them. 

Bisnow sat down with Rutledge to discuss Oxford's value-add approach, his take on the health of the hotel market, how he got into the business — and a trip he took to the North Pole.

Bisnow: Why San Francisco? Why now?

Rutledge: San Francisco is a high-barrier-to-entry market, but that's not the only reason we like it. In recent years, the supply of rooms there has grown only about a third as much as the rate of growth in the economy. 

At the same time, demand for rooms has been growing in Downtown San Francisco, partly because of the dynamism of Silicon Valley, which is a first-rate economic engine.

The Silicon Valley ecosystem has made the whole region vibrant and attracts international travelers, making for a strong demand profile. We also love the citywide conventional calendar and the fact that the Moscone Center has been expanded. 

London House Hotel, Chicago, one of Oxford's redevelopment projects.

Bisnow: Is your strategy in that market similar as in other markets you've done value-add deals?

Rutledge: Yes. We're not core investors. We usually do a comprehensive repositioning and in some cases a complete renovation. We buy good properties at less than replacement cost, and make them a little nicer — improved rooms, common areas, and upgraded food and beverage. That's our plan for the San Francisco properties.

Bisnow: You're not worried about the health of the economy in the near future? After all, it's been a long expansion.

Rutledge: It has. But we're still in a robust recovery. Lodging demand is strongly correlated to GDP and job growth. Extra innings were added by the tax cuts, and none of the country's major hotel markets are oversupplied. So I don't expect any immediate meltdowns. 

That said, some markets are slowing. In the hotel sector, that means that revenue per available room is going to flatten out. It's already slowing. But I think of it as a soft landing. After new supply is absorbed, RevPAR will start growing again in a year or two, unless there's some kind of shock to the economy.

Our focus is on the top 10 to 20 markets in the country. The highest barrier to entry markets are San Francisco, Boston and Hawaii, though of course there are high-barrier locations in other markets, such as North Michigan Avenue in Chicago, and we aim for those submarkets whenever we can.

Bisnow: You've been through more than one cycle.

Rutledge: We started buying properties back in the days of the Resolution Trust Corp. in the early '90s. That's how long it's been. Broadly speaking, three cycles.

Bisnow: What in your early background pointed you to real estate? Family in the industry?

Rutledge: No. My mother and father were highly educated, and he was president of two companies. Growing up in Chicago's northern suburbs, I learned financial and intellectual sophistication, responsibility and leadership from my parents. But they didn't steer me into real estate. 

I studied economics at the University of Michigan, with a self-directed minor in real estate. I thought about going into law, but liked the multi-dimensionality of business and its open challenges — that was a better match for me.

My first job out of school was working for a consortium of European investors that bought 10 South LaSalle in Chicago, a high-rise office building. That's [where] I learned about leasing, operations and management of a commercial property. Later I was a founder of Oxford Realty Corp. Among other things, that company was the development manager for Harpo Studios. 

Lincoln Property acquired Oxford Realty. I could have stayed there, but I figured it was a good time to go to graduate school. First, though, I circumnavigated the world for four and a half months, visiting Australia and Africa and southeast Asia. I have a strong love of travel and cultural curiosity.

Sheppard Mullin Chicago managing partner Larry Eppley and Oxford Capital CEO John Rutledge when Rutledge was awarded the 2016 Arthur Rubloff Humanitarian Award by the Anti-Defamation League of Chicago.

Bisnow: What steered you into the hotel sector?

Rutledge: I went to to the University of Chicago for graduate school and worked at Wasserstein Perella & Co. in the early '90s. Around then, I wrote a business plan — a contrarian roll-up in the hotel sector. That is, acquiring assets in a fragmented industry. That's what a "roll-up" means in private equity. 

The real estate market was overbuilt and overleveraged at the time, including hotels, but the potential to profit from an improving economy was there, especially in value-add hotels. I didn't invent the idea, but was early in assembling capital to buy hotels, starting Oxford Capital Group as the vehicle to do so.

In our first deal, we bought the Sheraton Northshore in Northbrook, [Illinois,] which we turned around in a physical redevelopment and an operational repositioning. We drove more revenue and sold it in two years for a substantial profit, acquiring it for about $12.5M and selling it for about $33M. We went multiples on our equity. 

We started doing larger and more complex deals after that, mostly hotels in metro Chicago, but eventually in other parts of the country.

Bisnow: How did you avoid getting caught in the downturns since then? Some of them have temporarily crushed the hotel sector.

Rutledge: Good luck, but also paying attention to the economy. For instance, we bought, repositioned and sold most of our assets before the dot-com bubble burst. Roughly the same thing happened before 9/11, which caused a lot of dislocation in the hotel market.

By the 2000s, we were investing nationally — New York, northern Virginia, San Francisco, for instance — and we started harvesting profits in 2006 or so. We had acquisitions lined up in 2007, but we saw some deterioration in the performance of some of the properties in our pre-due diligence phase. So we pulled back on most of the deals. We didn't want to, but we couldn't justify the pricing. That turned out to be the right thing to do.

Bisnow: What do you look for in acquiring properties, besides location?

Rutledge: Location, location, location is such a simplistic idea. You don't have to be at the corner of Main and Main to make money. Some of our most successful projects have involved buying a B+ location, and making it into an A asset. Or even buying B or B- asset at a discount, and remaking it into an A asset. 

We've always been a value-add player, buying at good but not perfect locations. We're doing some ground-up projects, but mostly it has been redevelopments. I especially like making a classic building into a new hotel. If we can do that for, say, 65% to 70% of replacement cost, you have a meaningful price advantage over ground-up development.

Oxford Capital CEO John Rutledge at a Bisnow event in 2016

Bisnow: LondonHouse in Chicago is an example of that?

Rutledge: Yes. It's an iconic building, and people who stay in hotels like that authenticity. LondonHouse was one of our most gratifying projects. It was falling apart when we bought it, but a grande dame building dating from the 1920s, a Grace Kelly of a building, absolutely beautiful. 

It was an office building, but there were few tenants left when we bought it. The site had a particular advantage, since there was a surface lot to the west of the structure, and we realized we could add 90 or 100 rooms, and maybe a ballroom and other amenities by building new in that space.

We assembled a great team for the LondonHouse redevelopment — engineers and architects and contractors — to figure out solutions and come up with the best approach to value-optimizing the property. We did our research on its layout, building systems, financial structure. We knew the building as well as anyone could.

The rooftop space was particularly fun to do. The cupola on the roof had never been open, and we created a stairway to create access to it. Now people have parties there, they get engaged there — it's an authentic feature that helps make the building special. Before, it was just a dumpy roof with junk stored there. 

Bisnow: When you're not focused on real estate, what do you do?

Rutledge: I have a wide range of interests, including sports, such as skiing and tennis and sailing. I used to do triathlons. I don't do much sailing these days, but I do ski when I have the chance. Heli-skiing is one of the great natural highs. I also enjoy travel, and I weave sports into my travels. Mostly I do everything with my wife and two kids, who are in high school now.

Once I went to the North Pole, as part of a group that was affiliated with the Explorers Club of New York. We flew to Ellesmere Island in northern Canada, where we stayed at a weather station, and then on to the North Pole, where we broke out the school flags. Someone even brought a Santa Claus suit.

I've also scuba dived in the Great Barrier Reef, rode elephants in northern Thailand and Laos, and heli-skied in the Canadian Rockies. There really isn't much more exhilarating than that, and yet it offers a Zen-like calm at the same time.