Tuesday, November 2, 2010

Intrawest: The debt mountain in mid-collapse

For years, a hot real estate market made Intrawest's Whistler-Blackcomb resort a model for a booming industry. But that business model couldn't go on forever.
By Michael McCullough
October is the quietest month in Whistler. The summer hikers and mountain bikers have gone, the days are short and the peaks are typically obscured by clouds. This is when area businesses hold hiring fairs to staff up for the ski season. If those gathering clouds bless the mountains with early-season snow, the lifts will be running by Remembrance Day, American Thanksgiving at the latest.

But the preseason lull this year is accompanied by a sense of unease. For all its size and diversity, this is still a company town, and the company, Intrawest ULC, defaulted on its debt payments late last year, leading to worries that foreclosure would disrupt the Winter Olympics being held here in February. 

That didn't happen; creditors and parent company Fortress Investments LLC agreed to a restructuring plan in March on undisclosed terms. But they can't have been pleasant for Fortress. After buying North America's largest mountain resort chain for US$2.8 billion in 2006 (around half with debt), the hedge fund has seen its equity stake dwindle to almost nothing. Intrawest has shed smaller assets such as Panorama Resort in eastern British Columbia, Mountain Creek in New Jersey, Colorado's Copper Mountain and two properties in Europe to service the debt. Now there is talk of unloading its flagship, Whistler Blackcomb — to a Russian billionaire, no less.
Citing unnamed sources, the Wall Street Journal reported in June that Intrawest had approached Vladimir Potanin, a nickel-mining magnate building the ski resort in Sochi, in the Caucasus Mountains near the Black Sea, that will host the 2014 Olympics. However, in conversation with Canadian Business, Whistler-based resort planner Paul Mathews, who counts Potanin as a client, claims the Russian professed no knowledge of any such pitch. "I was in Switzerland. I phoned him right there in Moscow," Mathews says. "He said, ‘I've never heard of this.'"

In Whistler, though, the rumours continue to circulate, fuelled by the silence of Intrawest management. (CEO Bill Jensen declined a request for an interview for this story.) It's easy to see the tourism boomtown's uncertain future as another debt story, a New York-based hedge fund paying too much of somebody else's money for a real-estate-based asset at the top of the market, and of the world's non-western nouveau riche bailing out the fallen masters of the universe. But as Potanin or any other suitor is probably now finding, there may also be something wrong with Whistler itself. This jewel of mountain resorts, the largest in the Western Hemisphere, was based on a business model that is proving unsustainable. Worse still, it is a business model copied across the continent, such that the entire winter resort business now faces the same malaise. Whoever ends up owning Whistler Blackcomb will have to find new ways to make money at it, lest the resort gradually become, like the fictional Kodiak Valley of Hot Tub Time Machine, a faded monument to a bygone era.
Ski hills used to be discrete operations consisting of lifts and maybe a cafeteria. The owner, often a local family or a community group, sold lift tickets, burgers and lessons, and rented equipment. That's it.

Intrawest was a different kind of company. It was founded in 1976 by a young Prairie expat, Joe Houssian, as a developer of mixed-use commercial and residential projects in Vancouver, Calgary, Edmonton and Seattle. When it bought Blackcomb Mountain, then just six years old and suffering growing pains, from a subsidiary of Aspen Skiing in 1986, it wasn't looking at the then state-of-the-art lifts so much as the developable land around the base of the hill, which bordered on the new Whistler Village. Houssian recognized a brilliant synergy between building the attraction and building vacation homes. In a time of double-digit interest rates, you could use the proceeds of the cabin and condo sales to install the high-speed, detachable lifts and snow-making machines that were just coming out at the time, without borrowing too much money. Those very expensive lifts, which reduced a skier's time spent waiting in line, drew patrons away from the neighbouring Whistler Mountain with its rickety lifts from the 1960s and '70s. That in turn increased the value of slope-side accommodations at Blackcomb. As they say in real estate, you can't make more waterfront. But you can boost the value of a patch of forest at the base of a mountain by building a world-class ski slope there. Plus, the more units you sold, the bigger the captive customer base your ski hill had. It was a virtuous cycle.

It worked so well that, by the time it went public on the Toronto Stock Exchange in 1990, Intrawest had decided to become a dedicated resort company and divested its last urban properties. It began buying other resorts where it could replicate the model. Early acquisitions, like Quebec's Mont Tremblant — which like Whistler offered the best mountain terrain within a three-hour drive of a big city — worked well. Rival consolidators such as Vail Resorts, American Skiing Co. and Resorts of the Canadian Rockies caught on too. Intrawest would eventually package its resort-marketing formula into a subsidiary called Playground, which advises other resort developers on things like master-planning a village and creating an overriding theme for the development that will appeal to target buyers.

In Whistler itself, there began an arms race between Blackcomb and Whistler Mountain to build more new lifts and condos. But it was a lopsided contest. Lacking Intrawest's deep pockets or similarly good land to develop, privately held Whistler Mountain Ski Corp. got into financial trouble and sold out to Intrawest in 1996.

When Intrawest listed on the New York Stock Exchange the next year, it was the kind of company Warren Buffett could love. It now had a lock hold on both Whistler and Blackcomb mountains, together the largest ski resort by every measure — skier visits, resort beds, lifts, terrain and vertical drop — outside of the Alps. The mountains are physically so large, encompassing so many microclimates, they are almost immune to that bane of ski resorts, poor winters. They always have good snow somewhere.

Whistler was not just the preferred weekend retreat for Vancouverites, but also skiers and boarders from booming Seattle, who were willing to drive the five hours to take advantage of superlative skiing on a 60¢ to 70¢ Canadian dollar. Celebrities like Seal and Heidi Klum were buying places at Whistler, and sprawling log mansions were selling for eight figures.

This money-making machine's first serious breakdown came with terrorist attacks of Sept. 11, 2001. Waits at the border and at airports turned a weekend there into an ordeal for Americans — the resort's second-largest and highest-spending market. For a long time this single, unpredictable event eclipsed other growing problems such as the popping of the technology bubble that had been a huge job creator and wealth generator in the Pacific Northwest, and the gradual rise of the Canadian dollar to parity that made Whistler less of a bargain compared to Aspen or Vail. Skier visits peaked in 2003 at 2.3 million. Last winter — due in part to the Olympics — they were down to 1.8 million.

But the most worrisome trend for Intrawest ought to have been the approach of what locals call "build out." The Resort Municipality of Whistler's community plan calls for a maximum of 67,500 beds. Beyond that, the town would be forced to build a prohibitively expensive wastewater treatment facility, not to mention finally squelching the last vestiges of its quaint mountain-town ambience.

In effect, it was a non-negotiable cap to development, though one with a business case behind it. "These things can only get so big before they start to collapse on themselves," says resort planning consultant Brent Harley. "You can't have perpetual real estate growth and expect the quality of the experience to remain the same." Still, real estate agents and developers kept on feverishly going about their trade in anticipation of reaching the cap, without necessarily thinking of what came after.

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