Lack of exit allies reduces Caribbean projects
14 DECEMBER 2015 7:12 AM
A lack of financing at all levels keeps Caribbean development projects at bay—even as the hotel industry’s key performance indicators remain strong, according to speakers at CHICOS.
SAN JUAN, Puerto Rico—While breaking into the Caribbean market can be a long and arduous road for hotel developers, it’s getting out that stops many projects before they see the light of day.
Speakers at last month’s Caribbean Hotel Investment Conference and Operations Summit, hoteliers said the lack of a clear exit path is a major factor that that keeps many equity providers from investing in the region.
“There’s not that traditional pool of buyers available,” said Dave Johnson, president and CEO of Aimbridge Hospitality, while speaking on the “Hotel leaders outlook” panel.
Finding the right suitor at the right time is part skill and part luck, according to panelists.
“Exit is your best friend and worst enemy,” said Kenny Blatt, principal & COO for CPG Real Estate, while participating on the “Leaders” panel.
CPG has Caribbean assets on the block because the life of the fund used to acquire them is over and the exit for some of those assets is ongoing, according to Blatt.
Diego Lowenstein, CEO of Caribbean and Latin America for Lionstone Development, said the company hasn’t done much new development because of the challenges in how capital underwrites deals and the need to have a shorter exit window.
“The biggest risk someone has to underwrite is the exit,” said Bill Sipple, executive managing director for HVS Capital Corporation, while speaking on the “Active financiers of Caribbean hotel investments” panel. “You want to maximize the amount of return coming from cash flow and less from the exit. … You’ve got to find patient money. Wall Street money typically is not patient money.”
An investor should plan to hold a Caribbean asset for at least seven years because of the lack of investors who can accelerate the exit, according to Sipple.
“You do run the risk of having a longer-term investment period here,” he said.
Adam Rosenberg, global head of gaming and leisure for Fortress Investment Group’s Credit Funds, concurred.
“There will be long periods of time where there’s no liquidity and you have to wait it out,” he said during the “Financiers” panel. “It may mean you are in the investment longer than you expect to be.”
David Kosoy, chairman and CEO of Sterling Financial Group, said during the “Financiers” panel that his firm looks at cash-on-cash returns rather than focusing on exit strategies—but every deal needs to be considered carefully because of the potential for a hold period longer than originally anticipated.
“We would never lend on a property we wouldn’t want to own,” Kosoy said.
But the Caribbean doesn’t stand alone when it comes to exit strategies, according to Steve Crowe, principal for Och-Ziff Real Estate.
“In many ways it’s no different here than investing in a ski resort in Colorado or some other type of resort,” Crowe said during the “Financiers” panel.
The lack of partners to expedite and exit isn’t the only issue keeping developers on the sidelines in the Caribbean, speakers said. The lack of labor also hurts development because it slows the process to a snail’s pace at times.
Stan Hartling, CEO of the Hartling Group, said during the “Caribbean hotel developers” panel that a developer can’t automatically assume labor is going to be available in any given Caribbean market.
“Labor is really hard to find,” said Roberto Stipa, VP of development for Hotelco International, during the “Developers” panel. “Sometimes you think it’s easier to talk to the government and import some people. In other cases, that’s been a headache. You start to import labor, there’s a whole logistics issue with that.”
Where are the financiers?
Meanwhile, financing also remains somewhat of an enigma in the region, speakers said. Funding can be found for the right projects, but it’s not easy—despite the fact that the key hotel performance indicators in the region are strong.
“(Debt) is scarce; it’s expensive,” said Alex Zozaya, CEO of Apple Leisure Group, during the “Leaders” panel. “There particularly aren’t many American players and that’s what makes (getting) the debt a little more difficult.”
Aimbridge’s Johnson agreed.
“Stateside you can do two (financing) traunches and lever up to 75(%) or 80%,” he said. “You’re never going to ever do it here.”
Blatt said creating interest from stateside investors who are getting priced out of the aggressive transactions market there is the key to long-term success for the Caribbean.
Johnson said equity in the Caribbean tends to be high net-worth individuals and families—most of which are based outside of the United States.
“These guys couldn’t care less about financing because they’re going to get a 20 IRR and get their equity back in four years,” Johnson said.
Kosoy said there aren’t a lot of equity players in the market and noticeably absent is one source of financing that has invested in the region for decades.
“The Canadian banks are virtually out of the market—I haven’t seen them do any substantial deal in a long time,” Kosoy said. “Most of the Canadian banks have changed the CEOs. … They’re changing the people; they’re changing the business plan.”
“Canadian banks got burned (during the last downturn),” Sipple said. “I don’t believe they’re really here.”
Sipple was quick to point out that it’s not just the Caribbean that Canadian banks are ignoring.
“They’re not doing very much in Canada on the hotel side, either,” Sipple said.
Robert Garrow, managing partner for CrossHarbor Capital Partners, said during the “Financiers” panel that the tide could be turning in regard to Canadian banks investing in the Caribbean.
“There may be some grass sprouts coming out of these Canadian banks slowly,” he said. “At some point … they have to deploy capital. They have so much institutional knowledge of the region, if anyone can fill the gap it’s those guys.”
The need for capital goes beyond money, according to Kosoy. Intellectual capital is as important as monetary capital in the Caribbean because local knowledge often is the difference between success and failure.
“It’s better to have a partner rather than simply a capital provider,” he said.