Caribbean hotel funding sources take temporary break
Caribbean hotel funding sources take temporary break
30 NOVEMBER 2016 9:26 AM

As the hotel industry’s performance metrics subside, lenders have pulled back financing options throughout the Caribbean. But regional experts said they don’t expect financiers to stay on the sidelines for long.

SAN JUAN, Puerto Rico—Funding for hotel development and acquisitions in the Caribbean region has slowed as the industry’s performance metrics have leveled—but speakers at the recent Caribbean Hotel Investment Conference & Operations Summit said they believe it’s a temporary deceleration.

“The market’s taking a little bit of a pause … we’re not in that sprint anymore,” said Andrew Dickey, senior VP for JLL, during the “Navigating Development Opportunities in the Caribbean” general session panel. “It’s healthy for the assets and the ownership in the long term. They’re being structured the right way.”

Nicholas Hecker, senior principal for Och-Ziff Capital Management, said during the “Financier’s Outlook” panel that it’s more important than ever to explore all options when considering investing in the Caribbean hotel industry.

“In a market like the Caribbean, for a fund of our size it’s important to look at equity, debt and everything in the middle to make sure there’s enough deal flow, there’s enough opportunity to justify to spend the time and resources looking at the market,” Hecker said. “Being able to look across the capital structure is critically important to us.”

The type of capital available in the region is as varied as the shifting sands on one of its many beaches, speakers said.

Andrew Miele, director of development, Americas for Four Seasons Hotels and Resorts, said during the “Luxury in the Caribbean” general session that developers of his company’s projects in the region have used financing vehicles such as local banks, EB-5 and 100% equity.

“The emergence of the family office wanting to be in the Caribbean has become stronger and stronger,” added Paul Weimer, VP of CBRE Group, during the “Navigating Development” general session. “That particular buyer portfolio is interested in holding onto assets for an undetermined duration. It’s patient money. That kind of money wants to go after assets that are storied, maybe long in the tooth, and turn (them) around.”

One traditional source, Canadian banks, pulled back from the market during the Great Recession, and industry observers have doubts about that source’s long-term commitment to the region.

“I don’t think the Canadian banks are coming back,” said David Kosoy, chairman and CEO of Sterling Global Financial Limited, during the “Financiers” panel. “It’s too small of a market for them and a distraction (from) what they do best.”

Cash is king when it comes to deals in the Caribbean luxury hotel sector, said Ronald Sutherland (center) of Hemisphere Group during the “Navigating Development Opportunities in the Caribbean” general session panel at the Caribbean Hotel Investment Conference & Operations Summit. Other panelists included Stan Kozlowski (left) of HVS Capital and Paul Weimer of CBRE. (Photo: Jeff Higley)

Meanwhile, U.S. funding sources aren’t as interested in investing in the region as they were two years ago, speakers said.

“Traditional U.S. investment banks are busy with mainland projects right now,” said Todd Ruff, VP of development, the Americas for Mandarin Oriental Hotel Group, during the “Luxury” general session.

“If the option is a bit of a less risk profile in the United States versus being a bit more adventurous and coming to the Caribbean … they might lean toward the safe route,” added Erik Eveleigh, senior manager-luxury development, North America & Caribbean for Hilton Worldwide Holdings, during the “Luxury” discussion.

But that doesn’t mean other foreign capital sources—most notably those from China—are steering clear of the region.

“You’re seeing a little bit more foreign lenders coming in, and you’re also seeing a substantial amount of foreign investors that are credible,” Kosoy said. “Historically, you’d see a lot of guys coming in dreaming of doing a deal with no money. You’re now seeing people come in with some equity.”

“The target list for luxury boutique has become more focused and the requirement for cash to complete a deal has become a lot more prevalent,” said Ronald Sutherland, president & CEO of Hemisphere Group, during the “Navigating Development” session.

Hecker said there’s some marginal interest from mortgage funds to invest in the Caribbean and some markets have strong local banks.

“The more interesting thing is the absence of the traditional U.S. lenders—banks, CMBS and life insurance companies,” Hecker said.

Much like in the U.S., the CMBS market has faded away in the Caribbean, according to speakers.

“CMBS made a big difference in this market at the last peak and it’s not here (now),” Hecker said. “They won’t be back.”

“The capital stack has changed in the last 12 to 24 months,” added Stan Kozlowski, director for HVS Capital Corporation, during the “Navigating Development” session. “You have to get more creative. CMBS (lending) is pretty much gone. That changes how you look at your capital stack.”

Residential is not a cure-all component
One way developers have historically tried to fund hotel projects in the Caribbean is through residential components. While that vehicle remains intact, speakers cautioned developers to use it wisely.

“It obviously plays a role in the overall return of the project,” said Four Seasons’ Miele. “The capitalization of those projects, the hotel, the infrastructure, the golf if there is that, is independent of real estate sales. It obviously helps but in most cases it’s not at all predicated on real estate sales.”

Miele said the hotel component is a stand-alone business that must have its own pro forma that pans out.

Mandarin Oriental’s Ruff said developers must have realistic expectations for the performances of mixed-use projects.

“I recommend a smaller residential key count,” he said. “I take the stance if we can build more let the demand dictate and built more.”

Roberto Stipa, VP of development for Hotelco International Acquirements, said during the “Luxury” session that while the two components can complement one another, it’s important to look at them as separate components.

“Because we want to have the hotel work, we see residential as the cherry on the top,” Stipa said. “If you’re starting a project based only on mainly selling residential units, that’s a flag that you’re not going to care about the hotel the operations of the hotel. We see them as separate things.”

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