MIAMI—Equity players with access to capital for projects in Latin America have various ways of securing financing but still find it difficult to find lenders willing to finance hotel deals.
Speaking during the Hotel Opportunities Latin America Investment Conference earlier this month, hotel executives said they are placing a lot of emphasis on assets in the region as they look to expand. But, like the rest of the world, the road is a little bumpy.
Homi Vazifdar, managing director for Canyon Equity, which owns and/or operates six luxury boutique hotels, said lenders don’t even want to look at most hotel opportunities.
“The institutional bucket and high net-worth bucket is where you go to raise money—even during the recession there was still liquidity in the market,” he said. “The problem folks like us faced is even if we raised the equity or deployed our own equity, then what? Bankers have run for the hills. The equity is burning a hole in people’s pockets. There are a lot of equity houses in the United States that can’t deploy (capital) because of the lack of debt.
“Today you look at a resort model, and if you (desire) a return of 15% to 20% you can find private equity,” he said. “The problem is debt, debt, debt.”
The collapse of the residential markets has played a major role in the lack of available debt, according to Eduardo Guemez, CEO for LaSalle Investment Management Mexico, and
Francis Muuls, VP of acquisitions and development for Meridia Capital.
“People are being more disciplined—if you have a residential project, you have to make it stand alone,” Guemez said. “You’re looking to develop a hotel by itself.”
He added that one of the biggest changes is the availability of capital from local equity investors.
“The fact that right now you can raise local capital is huge,” Guemez said. “Local institutional money is a huge mind shift.”
David Brillembourg, chairman and CEO for Brilla Group, said his company raises funds primarily through hedge funds in the U.S. and there is equity available—even though expectations have been tempered.
“The expectations for return of high equity funds have gone down,” he said, noting internal-rate-of-return expectations from the equity side are in the high teens.
The availability of the capital is a major foundation to build upon, Muuls said.
“What we value is the liquidity,” he said. “At the end of the day, institutional investors look at it and say, ‘I want to buy Brazil risk,’ or, ‘I want to by Mexico risk.’”
Regardless of where that liquidity comes from, the rule of the day is to buy existing assets in Latin America rather than investing in the development of hotels, panelists said. That’s where the lack of debt is clearly seen, according to Vazifdar.
The lack of debt “stopped 75% to 80% of developers,” he said. “There were 22 high-end projects (on the books) in Costa Rica in 2007. There are three today.”
Difficult to find inventory
Finding the right opportunity to acquire assets at discounted pricing is becoming more difficult, Brillembourg said.
“There is less and less distress right now,” he said. “We’re not finding many things you can buy for 20 cents on the dollar.”
Vazifdar agreed: “Most of the foreclosures had nothing to do with the quality of bricks and mortar—it had to do with the market cash flow. It’s cheaper to raise equity for existing structures, with one exception: There’s very little inventory in ultra luxury that went into foreclosure.”
The economic climate of the past few years led to a lot of opportunistic investors who were only waiting to make the deals for 20 cents on the dollar, Guemez said.
“The perception that there was a lot of that (distressed inventory) out there halted equity deployment,” he said.
He made it clear what his company’s mission is: “I don’t want to buy distressed assets; I want to buy from a distressed seller.”
Muuls said the opportunities to buy existing assets in capital cities in Latin America are virtually non-existent, and that’s where most investors want their money to be invested.
Brands mean business
The panelists agreed having a brand is important for any asset in Latin America.
“We are brand chasers,” Vazifdar said. “In the ultra luxury segment, if you take a long-term view, you deal with the demographics first then you deal with the brand. Branding gives you that power to build a resort in destinations others won’t because the brand very often creates demographics.”
“Brand is a key factor,” Guemez said. “You want to have brands that people know. A known concept, a known level of quality and reservation system brings a lot of value in the 3- and 4-star category.”
Muuls said brands buy liquidity for private investors but there are downsides as well—most notably the fact that most upper-end brands require themselves to be the hotel’s management company.
Brands “provide some confidence to the bank,” he said. “But it does have a negative side with management contracts ... banks that aren’t used to it and say, ‘It’s amazing for $100 million you’re handing over the keys to these guys.’”
The future for the hotel industry in Latin America is bright, the panelists said.
“2009 was absolute mayhem, 2010 had glimmers of hope, 2011 saw the operational markets return and 2012 is also awfully damn good—none of us expected it to be as fast and furious,” Vazifdar said. “What’s left to do in our business is the development end of it. You have markets that haven’t been built, and Latin America is a perfect example of that.
“Once the infrastructure and the level of expertise get up to the next level, it will be a power to be reckoned with.”
Muuls said Meridia Capital is specifically looking for urban hotels and will focus on Brazil, Chile and Mexico City. Eventually, the company wants to be in Argentina, Bolivia and Venezuela, as well.
Guemez said LaSalle is focused on Mexico, where it has a $600-million real-estate fund that includes money to acquire hotels, but is also looking at opportunities in Brazil and Colombia.
Brillembourg said Colombia is a big focus for Brilla, and he also sees opportunity in Mexico because a number of properties there are controlled by Spanish banks that are under severe stress. “We believe there is a big opportunity,” he said.
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