Trouble in the Mountains

From humble beginnings in the mid-1970s, 
Joe Houssian built Intrawest into the top destination 
resort company in North America. Now, three years 
after selling out to New York hedge fund company 
Fortress Investment Group, his legacy is in shambles. 

What went wrong?

It was likely the low point

for Intrawest ULC, the Vancouver-based resort and real estate company. A January 20 story in the tabloid New York Post – quoting unnamed sources – said the company’s crown jewel of Whistler Blackcomb would be put on the auction block during the Olympics to satisfy a chunk of the company’s $1.4 billion in debt still outstanding and in default. Intrawest’s corporate owner since 2006, Fortress Investment Group LLC, of New York, was besieged by creditors looking for blood. The story went viral, despite the lack of attribution. 

Ken Melamed, Whistler’s mayor, was deep in the final planning stages for the Olympics when the story broke, and he still indicates a level of frustration with the attempt to embarrass his town and the ski resort it depends on.

“A distraction,” he says, two months after the athletes and visitors have left town. “Everyone was focused on the Games. Some members of the media tried to portray it as having an impact on the Games, and that simply wasn’t true. The timing of this was highly suspicious.”

Suspicious it may have been, but at the time it looked like the ultimate fall from grace for North America’s premier ski resort operator and real estate company, after several decades of growth and prosperity. There were visions of a sheriff putting a chain across the Olympic downhill course, denying Lindsey Vonn’s destiny and giving Whistler Blackcomb an international kick in the groin. None of that ever happened, of course, and most astute observers of the business tended to roll their eyes when asked about the contretemps. “Posturing,” says stock analyst Hayley Wolff; “Gamesmanship on both sides,” says UBC business professor James Brander.

By late April, Intrawest had solved its debt default problem by refinancing the entire amount through a deal that will last until 2014. Yet despite that reprieve, it is still unclear what Intrawest will look like in the future – or even if it will still exist as a single entity. Refinancing allows the firm to dodge the immediate bullet, but there’s still a very big debt to pay back. Because of that remaining uncertainty, Intrawest (through corporate communications director Ian Galbraith) declined requests for interviews on the debt questions and its ongoing relationship with Fortress. Fortress officials also did not respond to requests for an interview.

So why the dizzying fall? The answer is part demographics, part global economics – and, in some people’s opinions, part the Wild West Wall Street mentality embodied by Fortress. The economic collapse that hit in late 2008 brought the world’s economy to its knees, sparking numerous comparisons to the Great Depression of the 1930s. And while no one escaped unscathed, there were several key reasons why Intrawest suffered more than most.


The beginnings

were modest. Intrawest was founded in 1976 by young entrepreneur Joe Houssian as a private real estate company, focusing on both residential and commercial properties. For nearly 10 years, it built its reputation with operations in Vancouver, Calgary, Edmonton and Seattle. The portfolio included shopping centres and single-family and multi-family developments; North Vancouver’s Lonsdale Quay was also an Intrawest development. A chance meeting at a Young President’s Club meeting in 1984 between Houssian and Blackcomb Mountain ski resort president Hugh Smythe began a courtship that ended in 1986 with a marriage between Intrawest and Blackcomb. What Houssian and Smythe then developed, starting with Blackcomb and Whistler Village, was a unique business model that combined a successful ski resort operation (and a growing summer season through golf, biking, etc.) with an ever more lucrative real estate business.

Hayley Wolff, a senior equity analyst at Connecticut-based Rochdale Securities LLC, has been covering Intrawest since 1997 when Intrawest shares were first listed in the U.S. on the New York Stock Exchange (Intrawest went public in 1990 on the Toronto Stock Exchange). She believes that while other North American ski resorts had been successful at building condos at the base of the mountain, Intrawest was one of the first to institutionalize this model and tie it in with the creation of the resort village and all its additional amenities. Set up in 1975 as a dedicated resort municipality under brand new provincial legislation, Whistler was the first community in North America to take such a co-ordinated approach to resort development. The first piece of today’s pedestrian village was built on the old town’s garbage dump.

“It was predicated on the synergistic relationship between the resort village and the on-mountain offerings,” says Wolff of the Intrawest model. “Management had the view that when you invest in the on-mountain experience – snow making, better chair lifts, delivering a better guest experience – it starts this whole virtuous cycle of bringing visitation in. People come; they have a good experience; they want to come back. And that gives rise to a real estate opportunity. You create value in the real estate asset by investing in the mountain, then you can build the beds, and each bed at the base of the mountain is an annuity, with an associated revenue stream for that bed. That was the strategy.”

 After the Intrawest-Blackcomb marriage and its listing on the TSX, Intrawest’s next big move came in 1991 with the acquisition of Mont Tremblant in Quebec. Wolff sees that as a particularly shrewd move because at the time Mont Tremblant was in bankruptcy, allowing Intrawest to pick up what was described as a non-performing asset for a good price. The acquisition was the first move outside B.C., and in 1993 another B.C. acquisition, Panorama Mountain in the Kootenays, put Intrawest into position as the number-one ski operator in Canada. The model was working, and nowhere was that more evident than with the crown jewel of Whistler Blackcomb (Intrawest didn’t acquire the Whistler resort until 1996), which was rapidly becoming North America’s number-one ski resort. Around this time, Intrawest decided to abandon its urban residential-commercial real estate division to focus entirely on the resort and real estate business.

Over the past decade, Wolff says, Intrawest was pulling in about one-third of its EBITDA (earnings before interest, taxes, depreciation and amortization) from real estate development and two-thirds from the resort operations. That split would ultimately sow the seeds for Intrawest’s downfall, as a major recession started to bite. But in those boom years, Intrawest was racking up steadily growing earnings. In 1999 revenues climbed by 53 per cent and EBITDA was up by 41 per cent. In 2004 EBITDA climbed by 28 per cent and real estate sales pumped a whopping $878.2 million into the company. In 2005 Intrawest posted record revenues of $1.68 billion, although EBITDA declined by nine per cent. At the same time, Whistler Blackcomb was almost routinely being picked as North America’s best ski resort by ski magazines making annual assessments. And of course the stable of properties continued to expand.

Driving the company’s business was demographics, specifically baby boomers in their prime spending years. They had lots of money, they had growing families and they wanted to play. Cameron Muir is chief economist at the B.C. Real Estate Association, and he sees boomers as the foundation of success for all resort-based real estate.

“Baby boomers have been attracting marketers since the invention of the disposable diaper,” says Muir. “Boomers have done very well by real estate. They’ve amassed a great deal of equity in their personal homes, and they’ve chosen to take that equity and put it in secondary properties.”

Unlike the old concept of the little cottage on a lake in the woods – maybe it has electricity, maybe it doesn’t – the boomer’s idea of a cottage is a three-bedroom condo with a den, an exercise room, Jacuzzis in all the bathrooms and a big hot tub on the deck. It definitely has electricity. According to Muir, what has been driving the size and style of these recreational-property acquisitions over the past decade or more is the concept of retirement: “Once they take up golf or skiing full time, the plan is to live in these condos.”

With the model and its foundation in good health, Intrawest continued its expansion path throughout the ’90s with ever more ski resorts, a big move into the U.S. market, diversification into warm-weather venues and even an excursion into France. In 1994 Vermont’s Stratton Mountain came into the fold, followed by Snowshoe Mountain in West Virginia, a piece of California’s Mammoth Mountain, Colorado’s Copper Mountain and Mont Ste. Marie in Quebec. Around this time, the company launched Club Intrawest, a growing collection of club venues tied in to its major resorts and offering members access to facilities and services at all the company operations, complete with time-share opportunities.

Wolff suggests the club business didn’t work so well because time-share is very competitive. And she wonders if Intrawest miscalculated on a couple of acquisitions that didn’t really fit its business plan: Blue Mountain in Ontario, acquired in 1999, and Mountain Creek in New Jersey, bought in 1998. Neither of these places has mountains worthy of the name. 

Says Wolff: “They bought third-tier type of mountains that couldn’t give them the returns they needed. I think they thought the resort-based village was such an attractive piece that it would almost trump the quality of the ski resort in driving people to the mountain. At Mountain Creek, they tried to create this energetic village, bring people to the mountain and sell condos, but at the end of the day it’s still a place that people go to ski for a day. Blue Mountain is another example: it looked better on paper but can’t deliver the necessary value. They couldn’t create a Tremblant or Blackcomb.”


By the time

Intrawest became a takeover target in 2006, it had grown into the biggest destination resort and real estate company in North America. Its assets (all U.S. dollars) were valued at $2.7 billion, and its annual revenues were at $1.61 billion. Nearly 25,000 people worked for Intrawest, and its customers played on 6,900 hectares of mountain, beach and golf course territory, and dined out in a few of the 30,000 restaurant seats available. The company’s properties included the Sandestin golf and beach resort in Florida; the Honua Kai Condominum Resort on Maui; and ski properties in Flaine Montsoleil, France, and Verbier, Switzerland. The Club Intrawest segment was established in 10 locations, including Mexico, and along the way Intrawest picked up related business such as Canadian Mountain Holidays (and it’s B.C.-based heli-skiing business) and Abercrombie and Kent, a luxury adventure travel company.

Intrawest’s 2006 annual report, its last as a public company, showed clearly the effects of all the expansion in what to that point was still a booming market. And the company was still making money: earnings per share for 2006 hit $1.12, more than double the $0.50 per share recorded in 2005, while EBITDA jumped by 19 per cent over the previous year. That this remarkable performance was headed nowhere but up was reflected by Houssian’s bullish comments, cast in the light of the Fortress acquisition in the report’s management discussion and analysis:

“We are confident that Intrawest and Fortress will make a formidable team as we embark on a new era of significant growth and expansion for the company. We look forward to working together to enhance the long-term value of Intrawest’s irreplaceable real estate and world-class brands and to achieving our goal of becoming the trusted leader in global leisure travel.”

But what was missing in this rosy picture – and Houssian finally concedes this point in that last annual report – is shareholder value. (Houssian left Intrawest once the Fortress acquisition was complete. He, too, did not respond to requests for an interview.) For all of Intrawest’s success, the investment community was grousing that not enough of the value of the company was reflected in the share price. Says analyst Wolff: “There was always the view that it was undervalued by the investment community because of the real estate assets; Wall Street wouldn’t give them any credit for the real estate entitlements they had on their balance sheets.”

The board of directors of a publicly traded company in the U.S. and Canada is obligated to focus on shareholder value, and, with that in mind, in early 2006 Intrawest’s board started pursuing “strategic alternatives” – that’s code in the business world for “finding someone who will take us out and give our shareholders a premium in the process.” Enter Fortress Investment Group LLC, which offered to buy out Intrawest for an all-in price of US$2.8 billion, giving Intrawest shareholders $US35 per share, a 32 per cent premium over the close on Aug. 11, 2006, the day the deal was announced. It goes without saying that Intrawest’s board recommended acceptance, and the shareholders were happy to tender. One of those shareholders was Houssian, who made a cool US$126 million as he walked out the door.

The seeds of the downfall had now been sown – though failure was not considered even a remote possibility at the time. It was a highly leveraged buyout. To buy Intrawest, Fortress used $1.5 billion of borrowed money, and as the transaction was completed, that was rolled in with about $700 million of existing debt with Intrawest, now operating as a subsidiary holding of Fortress. 

And what was this new parent company? It was a multibillion-dollar hedge fund and equity holding company that made its money by managing other people’s money and buying profitable companies (such as Intrawest) to skim off their earnings potential. Founded as a private partnership in the late 1990s, Fortress went public in 2007 (after completing the Intrawest acquisition) and immediately made billions for the five principals when the share price climbed by $15 in one day. Getting instantly rich – a $10.7-billion paper profit – were Wesley Edens (Fortress’s CEO), Randal Nardone, Robert Kauffman, Peter Briger Jr. and Michael Novogratz, all young men with companies such as Lehman Brothers, Goldman Sachs and UBS on their resumés. Days later, that stock price plummeted.

Bethany McLean wrote a scathing piece called “Over the Hedge” about Fortress, and the hedge fund industry in general, in the April 2009 issue of Vanity Fair. It chronicles how the houses of cards were built, and how they collapsed. One of Fortress’s deals, McLean writes, was a $300-million investment in a spoof movie called Disaster Movie, prompting an investor to suggest that Fortress was also starring in the film.

The business model was fairly simple. An investor in a hedge fund was charged a percentage of the assets under control (two per cent) plus a percentage of the net profits (20 per cent). The system guarantees that the managers make a lot of money no matter what happens to the investments – until the investments drop so precipitously that there isn’t enough cash flow to service all the debt incurred to set them up in the first place.

For about 18 months after the Fortress purchase, Intrawest continued to expand and make capital investments in its facilities. Whistler Blackcomb’s Peak 2 Peak gondola was built, and the acquisition of Steamboat Ski and Resort Corp. was completed in 2007. But by spring of 2008, the wind had clearly shifted. Lehman Brothers, swamped by the growing subprime mortgage crisis, reported a second-quarter loss of nearly $3 billion and by September had declared bankruptcy. Fortress shares, which hit $35 when the company went public, were worth less than $2 by December 2008.

Many books have been written, and many more will likely be written, about the U.S.-spawned collapse of global financial markets beginning in the fall of 2008, comprising a collapse in real estate sales and prices tied to the subprime mortgage fiasco, the failure of banks and investment houses and the subsequent bailouts, the collapse of oil prices, and the sudden lack of funds – anywhere – available for new debt financing or refinancing existing debt.

For Intrawest and its new sugar daddy Fortress, the collapse couldn’t have come at a worse time. While the resort business suffered a downturn, real estate saw the bottom fall out. When one-third of a company’s revenue-generating capacity virtually disappears and the other two-thirds is faring poorly, paying interest on an extraordinarily high level of debt becomes problematic.

“The real estate market rolled over and the secondary home market came to a grinding halt,” says Wolff. “About one-third of EBITDA dried up while they still had development projects to complete. The cash flow from the resort business was just not going to be enough to service the debt. They needed the real estate cash flow.”

To Cameron Muir, the picture was quite predictable: “It’s a double whammy. First, consumers are concerned about job security and household finance. At the same time, their personal assets, like the home, declined. Recreation is much more easily delayed; it’s more volatile. The principal residence is the last thing you’ll let go of; the recreation condo or the RV purchase or the Hawaii vacation – that’s all first in line.

“Now if you are a developer with a large amount of construction under way and the market changes sharply, that overhang in inventory is a drag on resources. Many developers in the last year have slashed prices to get inventory off their books. Well, in the recreation market it’s a little more difficult because on the demand side, when there’s clouds of uncertainty hanging over the economy, that’s the first to be delayed.”

But why did it seemingly hit Intrawest harder than anyone else? UBC’s James Brander points the finger squarely at the hedge fund industry, and Fortress in particular:

“What we observe, as the business cycle goes through its pattern, is that highly leveraged companies can do well when things are booming, but they can really get hammered when there’s a recession and it’s hard to get money. That’s what happened to Fortress: highly leveraged when the crisis hit, and money dried up. They couldn’t refinance their outstanding debt. This had very little to do with the recreation property business and everything to do with the crisis.”

As the debt issues weighed on Fortress, with defaults on major loans hitting in 2009, Intrawest began a process of shrinking – selling what it is now calling non-core assets. Copper Mountain in Colorado is gone, Panorama Mountain in B.C. is gone, as are the Village at Squaw Valley and Florida’s Sandestin Golf and Beach Resort. All proceeds were used to pay off debt, and expectations are that there will be more. While the new financing seems to have put off the next reckoning until 2014, it isn’t likely that the dollar value of that debt has gone down significantly.


So will there be

a Whistler Blackcomb auction after all? Not right away, says Wolff, especially given the recent refinancing. But she thinks Intrawest might have to sell more assets, including core ones, eventually: “If the details of the financing are accurate, they’re going to have to pay off that $400-million mezzanine piece because they can’t support 17 per cent interest. That will be done through asset sales; it won’t come from cash flow.” 

Those financing details have been few and far between, but Fortress CEO Wesley Edens did tell a group of stock analysts in early May that the company was moving toward implementing a restructuring with existing lenders when a third (unidentified) party offered to take it all over. “I think that the business actually has a pretty clear path toward success in front of it, and we feel great about it,” he said. 

That optimism is echoed by Intrawest’s Ian Galbraith, who, while he wouldn’t talk about Fortress and the outstanding debt issues, seemed happy to discuss the current state of resort operations. 

“Our businesses have actually been doing quite well,” says Galbraith. “We don’t give out hard revenue numbers, but we found Washington and B.C. day visits to Whistler Blackcomb exceeded expectations this year, and we’ve had the second-snowiest season in over 30 years up there. We’ve arguably got the best mountain resort in North America with the best snow conditions in the last 30 years. That’s comforting. Our resorts in Colorado did pretty well in a tough snow season. The East Coast did pretty well. We haven’t got our year-end numbers yet but have been pleasantly surprised with how our resorts are doing.”

UBC’s Brander, on the other hand, sees the hedge fund industry as the villain in this piece and is hopeful that financial reform and better oversight will prevent the kind of raiding that did so much damage to Intrawest. He believes that without the Fortress acquisition and the associated debt, Intrawest could have weathered the storm without the foreclosure threat.

“The problem with Fortress is they take risky positions and put other people’s businesses at risk,” he says. “I think [hedge funds] should be more closely regulated. They’re basically in the position of ‘heads I win, tails you lose.’ The worst thing to happen to a hedge fund? The firm goes bankrupt – no big deal, hedge fund executives still got the million they’ve made. If it’s successful, they make tens of millions – but other people are taking the risk. I think it’s a failure of the U.S. regulatory system.”

Brander is also critical of the hedge fund tendency to buy businesses they really know nothing about and simply run them for a quick cash turnaround. With that in mind, he’s hopeful that the plug is ultimately pulled on Fortress and that Intrawest’s principal assets, Whistler Blackcomb at the top of the list, will end up in more knowledgeable hands. Vail Resorts in Colorado has been rumoured for some time to be an interested suitor for Whistler Blackcomb, and Brander thinks that would be a good fit. Another possible contender is Nippon Cable of Japan, which already owns 23 per cent of the property and might want it all.

“Whistler Blackcomb won’t disappear, and there’s a good chance it might end up being better run,” he says. “I prefer the idea that senior management knows the business. I’m critical of the concentration of assets with a fund manager who doesn’t know the business. Their incentives are highly questionable.” n