Zero carbon should be the new norm

Lisa Raitt: Thank you for tuning in to The Raitt Stuff. I’m your host, Lisa Raitt, and in this podcast, I’m going to share insights on current hot topics in the areas of public policy, politics and business with some guests along the way. Welcome back, everybody. Today I have a very special guest who has taken on an incredible endeavour that is not only good for the planet, but is good for business, too. I’m really happy to have with me today Jon Love, the Founder and Chief Executive Officer of KingSett Capital, which is a Canadian private equity real estate investment business, which creates and co-invests in real estate investment solutions to deliver sustainable premium risk weighted returns. He’s also on the board of directors of the Chief Executives Organization, a member of the Business Council of Canada and YPO. And first, I’d like to welcome you, of course, to the podcast and thank you very much for your time.

Jon Love: Lisa, it’s great to be here.

Lisa Raitt: I appreciate that. So one of the things that governments are striving to do around the world is to get to net zero. So you’ll see lots of expertise and lots of effort going into electrification. You’ll see it happening in transportation, trying to move to different kind of fuel cells. One of the biggest emitters for this country are buildings, and the government has recognized that you try to get to decarbonization of these buildings can be expensive, it can be difficult. But you’ve taken on quite the project in decarbonization at the Royal York Hotel. Can you bring me a little bit through your early thinking about why this project made sense to you from a business point of view?

Jon Love: So Lisa, again, it’s a pleasure to speak to you this morning. I’d start with saying that, you know, sustainability always starts with having a sustainable business model because in the absence of that, you never get anywhere. In Royal York’s case specifically, we’ve invested heavily over the last seven or eight years to really curate and present a contemporary product in what is a national icon. As we move further ahead, we challenged the team and said, can we now go to the next level, which would be a real focus on other elements of sustainability. So one of which is zero carbon. Now, zero carbon to us is a baseline in our commercial strategy. Scotia Plaza is zero carbon certified two years ago on Earth Day after the COVID lockdown. Really imperfect. But anyway, and it’s in our thinking, in our plans with all of our projects. So with regards to Royal York, obviously that is a big initiative. It takes years to do the engineering and the planning and to sort it out. It starts with how can we reduce the energy consumption? Then with the energy consumption that’s left, how can we take the carbon out of it? And so that’s the project that we have in the Royal York. And of course it amounted to a capital cost some $50 million. That by itself, it really couldn’t proceed without the assistance of the Canadian Infrastructure Bank, where they’ve been very thoughtful and constructive in their approach. And so they’re helping us finance that project. And it’s because of the CIB, its strategy and its ability to help us finance it, that this is now a goal. It’ll take 12 months, it’ll be finished by the fall of 2023. And at that point we will be the only hotel in Canada certified zero carbon, which is an enormous step forward. As a result of all of this project investment, in addition to be zero carbon, there’s an enormous reduction in utilities which has obviously a bottom line impact on the hotel as well. So it’s a tremendous step forward. And I think it will be a very visible sign for others that this is doable and is increasingly important. And at the end of the day, we’re optimistic that our clients, many of whom have stated ambitious climate goals, that this will resonate with them and will drive business for the hotel.

Lisa Raitt: Were there any lessons learned out of the Scotiabank Building Scotia Plaza decarbonization that you were able to apply for the Royal York one?

Jon Love: I think the biggest lesson is it’s way more difficult than it looks. It takes more focus. You’ve got to have the internal people, the focus, the mission, the resources to do the engineering and effectively, at the end of the day, the CEO commitment that this is actually mission critical. So I mean, Scotia took us five years and basically it was replacing everything in Scotia that touched fossil fuels and electrifying all of that and then tying into the grid, etc., etc.. It sounds relatively simple, but when I talk to our sustainability people who are actually doing it, they to some degree talk a different language. It is complicated. We’ve got an army of consultants and engineers, etc. So but it is a baseline and I think as we look forward, this is a view of what’s next, not of what was.

Lisa Raitt: Yeah. So you mentioned the Canada Infrastructure Bank, which is a public policy construct of the federal government that is there to ensure that the outputs or the outcomes that are desired by public policy like decarbonization of buildings is achieved and where you can’t get normal lending that the CIB is there to come in. You mentioned that they’re really important. Do you think we’re going to get to a point where lending for decarbonization just makes sense and is the ordinary course of business.

Jon Love: Well, here’s the challenges. The hotel has an existing capital structure and first mortgage, expanding that first mortgage to accommodate this program. That capital is not readily available. Secondly, we’re on a pricing grid with CIB. So to the extent that we achieve our objectives, we get a very preferential interest rate and it’s a combination of the availability and the preferential interest rate that make an ambitious project viable. So it’ll be difficult for just a private lender on regular economics to perform the role that CIB is doing. And so that’s why they’re so vital to this project.

Lisa Raitt: Is this something you’re interested in replicating in the rest of your portfolio at KingSett?

Jon Love: You know, we’ve got a program on every asset. Every asset presents unique challenges and opportunity. You’ve got end of life or non-end of life equipment. I mean, it’s a complicated process, but we’ve reduced our carbon footprint by 40% over the last seven years. We’re going to have our Toronto office all carbon zero within another five years and we continue to work through the piece of the puzzle. But it always starts with how do we just reduce consumption? I mean, that’s the source code, how do we reduce consumption? And then with the consumption we have left, how do you electrify it?

Lisa Raitt: That makes sense. 1300 rooms at the Royal York thereabout. And you’re saying that the thought is that clients are going to be looking at the Royal York because the value proposition that they’re going to be coming into a place with net zero carbon. Do you have any data in terms of how clients feel that way? Do you do surveys? Do you have a good understanding of that, this is something important? I know that to be important to me, but I don’t know if I’m the average client for Royal York.

Jon Love: So there is no readily available data. But here’s how we see this going is our economics are not based on increased revenue because we don’t know how to judge that. That’s a mug’s game. Our economics are based on the CIB financing, savings and utilities and so on and so forth, and we can make this work. But you have to think that if you’re coming to Toronto and you’ve got a sustainability conference and you’re at the Westin and I ask you, why are you at the Westin, not the Royal York? And if you say it’s because my room rates $10 less and you kind of declare what your priorities are. So, I mean, I think we don’t know how much pricing power there is. I was a founding shareholder at Bullfrog Power and I was always amazed that there were some people that Bullfrog was all about sustainable power and there were many people who were happy to sign up and there was others who talked a big story. But then when you explain them, it would be another $12 a month, they backed away. But the world is different today and it’s not as much about today as where we’re going. And I think ultimately zero carbon will be a baseline and the buildings are a major contributor, including homes, offices, hotels, everything else. And we have to show some leadership here and to make it work and make it scalable, it has to have a financial underpinning that can work because in the absence of financial underpinning, you know, you can confuse it for philanthropy. And that is not a scalable strategy. That’s why CIB is so important. And how they’ve structured their investment is pretty strategic. With my taxpayer hat on, I’m pretty impressed with the work they’re doing.

Lisa Raitt: Yeah, well, as I said, it’s about outcomes for them. It’s not just about whether or not there’s an ROI on the investment. That’s important too. But they’re going to measure you on you decarbonizing the way you said that you’re going to decarbonize, which is an interesting, as I said, it’s a neat construct that we have here in Canada that I think is exportable to the rest of the world.

Jon Love: I agree. And I think they will move the needle. I think it’s quite important.

Lisa Raitt: So you’ve just gone through a pretty beautiful renovation for the space, the new lounge in the middle of the foyer and the new restaurant and everything looks wonderful. Will the decarbonization have an impact on people’s enjoyment of the Royal York? Is it something that you see or is it something that’s pretty much unseen behind the scenes?

Jon Love: So, you know, I mean, hopefully it will improve it. It won’t change the customer experience, but you know, we’re not just doing carbon zero. We’re also going to no plastic, which is all the way from how you get your water will be in the different kind of containers to where installing it will be done in the next just number of weeks, keyless entry to your hotel room. So when you booked your room, you’ll get an email saying, Hey, Lisa, welcome and your room is 403 and it’s available, you press accept and you don’t go to the front desk. You go right to your room and just put the app up against the FOB and it opens the door. If you can imagine how many card keys don’t get used. It is a stunning number. We’re rolling out different soap and so on dispensers in the shower. So instead of throwing out a million of those little bottles every year, instead we’ll have large containers that will be the uber nice kind of condiments, not condiments, but shampoo and conditioner, etc., that we want and in a sustainable fashion. So this is a lot broader narrative than just carbon zero. And we’re into waste reduction, food reduction, you know, growing things on site, the bees on the roof, like there’s all sorts of things that we’re doing because we think it just makes great long term business.

Lisa Raitt: Yeah, it does. And I guess my last question, because we’re out of time today and I really appreciate all the time you’ve given us. I’m wondering Tourism Toronto must be very interested in highlighting the fact that you’re going to be such a sustainable hotel in their packages when they send out to places that they’d like to attract conventions. Conventions are a big business for the city of Toronto, so you must be playing a big part in terms of attracting those kinds of important international gatherings.

Jon Love: Well, in fact, you know, the general manager of the hotel is the president or the chair of the Toronto Association that represents everybody. So it’s all well known. I think the project’s under construction. It does take a year to build because you have to go through a heating season and a cooling season. And so it may be a little bit premature to start doing it now. But trust me, next fall will be loud and proud. And we’re optimistic that this will be something that will resonate with our customers and that the city can be proud of.

Lisa Raitt: Well, great, Jon, really appreciate your time. Thanks to you at KingSett Capital and the Royal York. And thanks to the Canadian Infrastructure Bank. We have something that we’re going to be really proud of here in Toronto that will be loud and proud about next fall. Thanks a lot for being here.

Jon Love: It’s my pleasure. Thank you. Lisa.

Lisa Raitt: Thanks so much for tuning in. Now, if you have any questions or comments or even requests on topics to discuss, drop me a line at lisa.raitt@cibc.com. Your interactions actually will make this better. I’m your host, Lisa Raitt, and this has been The Raitt Stuff. I’ll talk to you next week.

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