MIAMI—All is not lost for the Caribbean hotel industry. Yes, the recession created a challenging operating environment, and development has stopped completely. Yet there is light at the end of the proverbial tunnel, according to hotel investors speaking during a general session Tuesday morning at the Caribbean Hotel & Resort Investment Summit.
Partially fueling the renewed—albeit limited—optimism is interest in high-end residential components at mixed-use projects.
“We’re seeing more interest in residential (components),” said Kenneth Blatt, principal and COO of Hospitality for Caribbean Property Group. “Slowly but surely people are coming back. But it’s a trickle. It’s been very encouraging the last 60 days.”
CPG is in the final stages of redeveloping the former Dorado Beach Resort in Puerto Rico into a Ritz-Carlton Reserve property that will have a 115-room hotel as well as two-, three- and four-bedroom residential villas that sell for up to $1,200 per square foot. The hotel is scheduled to open in December. Blatt said the high-end consumers of the residential market are recognizing now is the time to take advantage of the economic environment to invest as the hotel nears completion.
Dave Johnson, president & CEO of Aimbridge Hospitality, agreed with Blatt.
“It’s more onesies and twosies coming back, but the good news is it is coming back,” he said. “From 2007 to 2011 it was dead real estate sitting in the ground.”
There are other opportunities in the Caribbean as well. Aimbridge, primarily a management company that puts sliver equity in select deals, has four assets in the Caribbean. It has two deals in the near-term pipeline and other deals in various stages of discussions—one of which is repositioning an unsuccessful residential development into a resort.
Apprehensive lenders
Lenders are apprehensive about placing money into the Caribbean, which presents a challenge for the region, according to panelists.
“You have to adapt to the times,” said David Brillembourg, chairman and CEO of Brilla Group. “It is a very difficult time to raise money from institutional investors in the U.S. and Europe.”
Johnson said Aimbridge is involved in conversations with U.S.-based hedge funds and is finding some reluctance on their part.
“They want to know who the buyer is (at the end of a 3-to-5-year hold),” he said. “There’s not a natural exit, and that still scares them.”
“There’s no exit, but that’s not bad,” Blatt said. “With the top line (revenue) going up, as long as you can manage line items like insurance and utilities, the property will be OK. You have to look at the cash performance of the asset as opposed to ‘what’s my stabilization, what’s the (capitalization) rate and what’s the exit.’”
Blatt said the Caribbean financing picture includes cap rates in the teens and loan-to-value ratios in to 50% to 60% range.
“As the hotel operator is making money and covering debt, there’s no reason for the banks to be cautious,” he said.
Brillembourg, whose company owns resorts in the region and also provides financing options for investors through the Caribbean and Latin America, is bullish. Brilla Group looked at 390 potential deals during the past 12 months, signed 70 non-disclosure agreements and conducted 30 to 40 pro formas—and closed on three deals. He said opportunities could come in the way of Spanish banks selling some of the distressed properties they now have on their balance sheets.
Brillembourg said ultra-luxury markets in the Caribbean, such as St. Bart’s, are performing well.
“The margins there, even though the cost of operations is very high, are blowing the numbers out,” he said.
But by and large, the development opportunities in the region are few and far between because of the lack of funding.
“The Caribbean is amazingly depressing for hedge funds and institutional investors,” Blatt said, adding that a bright spot could be the emergence of hotel brands as financial partners. “You are now finding the hotel brands with a balance sheet to help the developer or institutional partner.”
The other source of potential funding is governments. Blatt said his company couldn’t have embarked on the Dorado Beach Ritz-Carlton Reserve if Puerto Rico’s government hadn’t provided mezzanine and sliver equity, as well as other incentives.
Opportunities abound
“I still believe there are opportunities,” said Alex Zozaya, president of AMResorts, which has 29 properties with more than 11,000 rooms open. “Right now at this specific moment I would focus on turnaround existing properties. We have all these abandoned or underperforming properties that are fantastic.
“This is a great opportunity to refresh the Caribbean, bring new ideas to the Caribbean,” he said.
AMResorts, which specializes in all-inclusive properties flying the Zoëtry Wellness & Spa Resorts, Secrets Resorts & Spas, Dreams Resorts & Spas, Now Resorts & Spas and Sunscapes Resorts & Spas flags, will have 32 properties comprising 13,000 rooms by the end of 2012.
Zozaya said the all-inclusive resort market is a solid business model.
“The question is can the market work in areas where there is high payroll,” he said. “That’s a big factor. It’s all about getting value for your money.”
Zozaya is counting on more Americans visiting the Caribbean. He said 76% of his company’s guests are Americans, and 40% of those are taking their first trip outside of the country.
“The potential of the Caribbean is to double or triple the number of Americans who visit,” he said.
Brillembourg said U.S. banks, with the exception of J.P. Morgan for some deals, are not being aggressive in regards to lending money for projects in the region
“It’s still complex to get financing,” he said.
But local lenders are beginning to step to the forefront because they were left out during the peak years as they couldn’t compete with the terms large banks were offering, according to Zozaya.
“Local lending is becoming like a whole new industry,” he said, specifically citing Jamaica, Costa Rica and Mexico as prime examples. “All these local players are being a lot more active, taking an active role in financing projects, not just hotels. They are a reliable source of debt now.”
Looking ahead
The next three years will provide numerous chances for investors looking to get into the Caribbean region, the panelists said.
Blatt said he expects money from South America to migrate into the region. Plus, the addition of the Baha Mar Resort in the Bahamas—and the Chinese financiers that come with it—could open the Caribbean to more Chinese investors, he said.
In addition, CPG will look at more investment opportunities and plans to increase its portfolios during the next 18 months—provided the gap between the bid price and ask price narrows, according to Blatt.
Zozaya said he expects stronger participation of Spanish companies in Cuba, the Dominican Republic and Mexico.
“I see them acquiring, reflagging and even managing (the properties), which they don’t usually do,” he said. “I also see the large U.S. (brands) becoming more aggressive. They have a huge opportunity in Mexico and the Caribbean.”
