An operational rebound is in full swing for Caribbean hotels, but obstacles remain for the region’s financing landscape to regain its pre-recession status, according to speakers last week at CHICOS.
PUNTA CANA, Dominican Republic—Hotels in the Caribbean region are at last seeing an operational renaissance, but the investment landscape in the area has a long way to go before recovering from the Great Recession.
Speakers said throughout last week’s HVS Caribbean Hotel Investment Conference & Operations Summit that the operational resurgence can be traced to the ability to increase average daily rate.
“The region has been on a terrific run,” said Kenneth Blatt, principal and COO of hospitality at Caribbean Property Group, during the “Hospitality leaders outlook” panel. “Everything is very encouraging from an operations perspective. From the investor perspective, it is still very challenging. We eventually have to see a money shift to the Caribbean.”
David Brillembourg, chairman and CEO of Brilla Group, said there’s still room to grow.
“We turned the corner now we need to continue the pace,” Brillembourg said. “We have to improve operations, rate and occupancy.”
“The recovery is happening, but it’s not happening at the pace we’d like to see it,” said Parris Jordan, managing director at HVS, during the “Global, Caribbean and economic overview” panel. “This year and next year you will see average rate increase. Increases in (revenue per available room) are now being driven by rate rather than occupancy.”
Carter Wilson, director at STR Analytics, said during the overview panel that based on 1,849 hotels (220,758 rooms) reporting data in the Caribbean, the region’s recovery began with an increase in ADR, and demand followed in 2012.
The Caribbean’s year-to-date occupancy is 68.8%, its rate is $187 and RevPAR is $128, according to STR, parent company of Hotel News Now.
Jordan said the region is approximately $25 away from reaching the peak ADR.
Citing numbers from the Caribbean Tourism Organization, Jordan said the Caribbean comprises 32 island nations that had more than 25 million visitors in 2012. The region’s hospitality and tourism industry generates more than $20 billion in revenue each year.
The Dominican Republic dominates in visitor arrivals, as 26% of all visitors to the region stay there, Jordan said. This year, that will be more than 4.8 million visitors. Cuba is second in the number of visitors and Jamaica is third.
Jordan said 43% of all visitors to the region come from the United States, while 20% come from Europe.
“The Caribbean has been competing very well for U.S. travelers,” said Adam Sacks, founder and president of Tourism Economics, during the overview session.
U.S. arrivals to the region have grown 3% in 2013, while arrivals from Europe and Canada have slightly declined, Sacks said.
Caribbean arrivals are expected to increase by 7.5 million visitors during the next 10 years, Sacks said.
“The Caribbean is showing competitiveness. … It is positioned for growth over the coming decade,” he said.
The emerging market for the region is South America, according to Jordan.
“We can see the trends are changing, so we need to adapt as new source markets come into the Caribbean,” Jordan said. “With South Americans, there is a comfort level with the language.”
Citing data from STR, Jordan said the Caribbean nations with the highest year-to-September RevPAR gains are the Cayman Islands (+11.8%), Puerto Rico (+9.9%), Jamaica (+7.9%) and Barbados (+7.4%).
“Jamaica is driven by occupancy, and Puerto Rico is just a very strong market,” Jordan said.
One property-level success story is CPG’s Reserve at Dorado Beach, which includes a Ritz-Carlton Hotel that opened on 12 December and has achieved a year-through-October ADR of more than $1,000, Blatt said. The plan is to build a 400-room hotel on a second site on the 1,400-acre grounds. The project also has a significant real-estate sale component and has been selling units at close to $1,300 per square foot.
Bill Sipple, executive managing director of HVS Capital Corporation, said during a panel called “The Caribbean as an asset class” that having a residential aspect remains the most important part of developing a high-end resort in the region.
“If you don’t have a residential component I don’t know you make it pencil,” Sipple said.
Finding the financing
Financing a project without a residential component remains difficult, speakers said.
“Finding investors stateside to come down has been difficult,” said Rich Cortese, senior VP of Caribbean operations & development for Aimbridge Hospitality, during the “Outlook” session. “In ’08 and ’09, a lot of banks and investors got burnt pretty good.”
“There have been a lot of failed projects in the Caribbean. … Investors in the states look at that,” Brillembourg said. “The most important thing you can do is prove you can make money and get the right (internal rate of return), and investors will be interested.”
David Larone, director at PKF and moderator of the “Outlook” panel, said that in 2009, 52 major projects crashed and burned in the Caribbean.
Cortese said he has seen a number of local investors in the region creating acquisition funds.
“The region is seeing the bargains here and taking advantage of it,” Cortese said, adding that Aimbridge has six deals in the works in the Caribbean and is also looking for additional big box hotels in the region to add to its portfolio. “There’s different ways I see money starting to churn in the Caribbean.”
The Caribbean’s pipeline has 26 hotels (6,691 rooms) under construction, and 16 hotels in the final planning and planning stages, according to Wilson.
“Including pre-planning, the total is 49 hotels with 11,010 rooms. That’s about a 5% growth in the supply,” he said.
“Banks are slowly, slowly looking at new deals again,” Jordan said. “It’s mainly 50% (loan to value), but they will consider 60% for the right project.”
Blatt said expanding in the region takes quite a bit of research.
“It’s just becoming so expensive in marquee markets; you have to find other places to put your capital,” Blatt said. “It’s all a matter of timing. Things are moving a lot, but we all have to be patient.”
Brillembourg said the investment criteria go beyond each market’s rate ceiling and cost floor.
“The third dimension is the niche,” Brillembourg said. “What can be exploited in that market that hasn’t been exploited? You’re always trying to boost that IRR somehow.”
Sipple said approximately 75% of the visitors to the Caribbean are aggregated into six or seven major markets because the cost of labor and airlift along with government intervention have created some barriers to entry.
“The challenge you have outside of those major markets is the risks go up,” Sipple said. “Capital is attracted to those primary markets. It really comes down to the risk-reward thing.”
Sipple said larger capital players prefer larger markets, while the smaller markets are served by local capital providers.
“Historically, there have not been a lot of private equity funds investing in this space,” said Mark Schwartz, VP at Och Ziff Real Estate, during the “Asset” panel. “Funds have just focused elsewhere. The Caribbean takes a while to get up to speed.”
Sipple and Schwartz said investors are still looking to invest in broken deals.
“I would be looking for existing operations that can be repurposed or renovated and reinvented,” Sipple said.