LatAm performance remains buoyant; development still requires patience

Editor’s note: This roundtable about development and M&A in the Caribbean and Latin America was sponsored by Sonesta International Hotels Corp. Sonesta participated in the curation of participants but had no influence on the final editorial content.

MIAMI – Latin America traditionally has been known as a hotel development landscape filled with fits and starts as political and economic winds tend to shift more dramatically and frequently than other regions. But as regional experts gathered in Miami in May during the CHRIS-HOLA conferences to discuss development and M&A dynamics, the tone was decidedly upbeat with a lot of positive conversation surrounding potential investment activity in the region.

Hotel Investment Today gathered six industry leaders in a private roundtable to discuss strategies and the state of affairs for both development and M&A in the region. Offering perspectives were Ilan Marcoschamer, senior vice president, Hospitality and CRE, Banco Sabadell, Miami; Elizabeth Lloyd, vice president of Asset Management, Ashford Inc., Dallas; Marie Dexter, principal, Resort Development Consulting, Boca Raton, Florida; Douglas Dick, CEO and chairman, Dick Construction & Management, Jefferson Hills, Pennsylvania; Ricardo Mader Rodrigues, managing director, JLL, Sao Paulo; and Marco Roca, representing Sonesta International Hotels Corp., Newton, Massachusetts.

Enjoying the rebound

With the exception of a dearth in M&A activity, the participants are enjoying the fruits of the post-COVID rebound and have their sights set on trying to anticipate what’s ahead.

Lloyd said Ashford has been having a record year at its properties in Latin America, which are predominantly resorts in the Caribbean under its Braemer Hotels & Resorts REIT. “We benefited from COVID in the Puerto Rican and St. Thomas markets. So, we’re trying to get our arms around what the next 36 months will look like for us,” she said. “We’re considering at what stabilization looks like at these hotels as they have been performing so much better than they did historically. Where does that take us next?”

Dexter pointed to recent performance successes in Puerto Rico and the U.S. Virgin Islands, both U.S. territories. “They had the fastest growth trends right after COVID because people felt comfortable going there and because the cruise ships were not yet operating,” she said. “They were the first beneficiaries of an onslaught of travel to the Caribbean. They also exposed the destinations to new visitors. So, that growth has really worked very well for them – and they’re still benefiting.”

The other operator in the room was Sonesta. Roca said this 19-brand family is focused on growth in the region and is currently "very active" in Brazil, Mexico, Costa Rica, Dominican Republic, Panama, and other Caribbean destinations. “We have about 40 deals working with a little over 6,000 rooms. So, there is a lot of activity, particularly in the Dominican Republic, Mexico and Brazil.”

While momentum for the region’s performance and opportunities for growth continues, Marcoschamer pointed to what he called a bit of a “schizophrenic situation.” Business in leisure markets is great, in his view, but capital is expensive, and lenders are increasingly cautious.

He said deals in Banco Sabadell’s portfolio are performing “spectacularly.” The bank has four deals totaling about 4,000 rooms under discussion, including in Jamaica where Sabadell has two or three deals – one that would have some 2,000 keys. He said equity is very keen on pursuing these projects and isn’t necessarily afraid of a recession because demand has shown great recuperative powers. On the other hand, the cost of cash has hit new heights and when the macroenvironment gets challenging, “the tap gets turned off.” “Deals are getting done. They’re just a lot harder to approve and they’re costly,” Marcoschamer said. “So, developers are having to either accept lower IRRs, and lower leverage, which means lower IRRs.”

State of dealmaking

On the M&A side, Marcoschamer said capital is really hungry for existing assets, but Mader said high interest rates are muting most aversion to real estate risk, including on the transaction side.

What Mader is seeing more of is mixed-use luxury development in markets like Sao Paulo and conversely fractional development in middle markets across Brazil. “They’re selling actual weeks, not months,” he said of the fractional activity. “People now realize that they want to take more vacations and there is a fever surrounding that type of fractional development. I don’t know where it is this going. But I don’t much like the model – it’s too fragmented for my taste. But it’s booming all over Brazil. The hotel companies are not so much involved, with the exception of Wyndham, as independents manage most of these fractional hotels,” he said.

Mader added that another component of the macro perspective, in South America especially, is politics. He said many countries recently elected left-leaning officials and that parties are still trying to figure out if they’re officially taking power. “It’s definitely not a good moment to be the president of any of these countries given their economic situations,” Mader said.

As a result, Mader added that many investors are waiting to see where these new governments are going, particularly in Brazil and Colombia. “Chile already is going back to historical stability, even though there’s a leftist president. So, it’s more the combination of the macroeconomic and politics that are holding up a little bit in capital,” he added.

That said, Mader sees ongoing interest in trophy assets, albeit with fewer bidders. “One [bidder] is enough, and assets are priced at a discount – at least 30% to 40% on an original price,” he said.

And because Latin ownership tends to be underleveraged, they are not in any rush to recycle assets – even during COVID when they had zero income, Marcoschamer added.

But in Brazil, Mader said leverage was more attractive during COVID, especially when it was offered through securitization of receivables. “Now with the interest rates at about 8%, there are a lot of owners trying to get out.”

Dick pointed to inbound visitors, especially Americans, are starting to return to Europe instead of Latin America as another concern. “Then people start to ask, ‘should we keep building or build selectively?’ So, how many people will read the same specs and say, ‘Oh, let’s do it?’ And then four years from now the region will be overcapacity again.”

Nonetheless, deals are the name of the game, and they are continuingly being chased in Latin America.

“Money follows a path of least resistance – like water, right?” opined Roca. “So, the money is going to look for deals that make sense and that have an economic return that is interesting. Everyone is looking for distress – except there is not much distress. Then developers say, ‘Maybe we self-finance until we all believe that interest rates are going come back down.’”

Like everyone on the panel, Roca believed there is the expectation that interest rates will wane with the current moment being the peak. “So, many people have opted to do a couple of things – begin new construction projects with self-funding and adding residential components so they can offset their cost with unit sales,” Roca added. “That attracts more luxury product. Where we’ve seen a lot of success within Sonesta is with Royal Sonesta and The James. Those two brands in Latin America for us are on fire.”

Marcoschamer pointed to a 500-room-plus deal he is working on in Jamaica where for the moment the owner is only considering using its private equity because of the high cost of debt. If it does finance, it will be at lower leverage with hopes of quickly refinancing at a more reasonable rate. He cites another deal where a developer has broken ground and will take expensive but flexible debt and hopefully pay it down with residential sales. “Given there is a lot of private ownership that is very well capitalized, they have the flexibility to maneuver this situation,” he added.

Dexter pointed to some jurisdictions with much better incentives for developers – again citing Puerto Rico, which she said offers significant tax incentives that offset the debt and become very attractive to the equity because the returns are higher, and she said it can lower product cost by 30%.

Marcoschamer quickly said those incentives can act as a double-edged sword where projects get funded because the residential component makes sense – the hotel, less so. “We’ve had situations in like Panama City, Bogota, and Sao Paolo, where the city is all of a sudden oversupplied because of this easier financing model. In cases, for example, like Panama City, I don’t think it has much of a much of a solution as it stays at 45% to 50% occupancy because of so much supply that was built under this model.”

Development outlook

Looking at markets ripe for development, Roca pointed to those that can support glamping, adventure tourism and ecotourism. “That niche really seems to be getting a lot of traction post-COVID,” he said. “People want to get back to the earth. So, a lot is happening in Costa Rica, with its particularly eco-friendly locations for whitewater rafting and adventure where you can take a family to enjoy safe ecotourism.”

Roca also pointed to the Dominican Republic and certain pockets within Mexico as opportunistic, while suggesting a market like Panama is struggling to rebound post-COVID due to oversupply. “Panama is doing great. It still has great airlift, but the Panamanian government has to do something to get more people that land in that airport to get them off the plane to see this beautiful country.”

Mader suggested that, in general, South America is overbuilt, but he does like the Caribbean part (COAST?) of Colombia such as Cartagana, as well as Argentina, especially the Mendoza area and its wine-related programming. He said Sao Paulo and Rio de Janeiro will see more development over the next three years, while Lima, Santiago and Bogota could struggle over the same timeframe.

On the construction side, Dick said inflation’s negative impact on the cost of goods as well as some supply chain issues are still realities. “Supply chain is getting better as windows aren’t forever now,” he said. “Lumber prices are coming down but overall, the costs are much higher than they were pre-COVID, and these increases are here to stay… I don’t think prices are going to come down.”

Investor makeup

The final discussion point turned to who is developing and how the makeup of the investor is evolving.

Dexter pointed out that developers of other asset classes such as hospitals are suddenly interested in hotels. “Developers of multi-family are looking at the hotel space much more so than ever in my past 39 years,” she added. “There’s money available and they understand development.”

Marcoschamer said the investor profile for Latin America is still predominantly private money. “But a lot of institutional money and some European institutional money that previously didn’t have hospitality on the radar are now very much interested,” he said. “I see it a lot in the all-inclusive space because it has gotten a lot of attention.”

The turning point for new money coming into Latin America was the Hyatt Hotels Corp. acquisition of Apple Leisure Group, according to Marcoschamer. “It kind of gave the sector a big seal of approval and has created a lot of interest on behalf of institutional investors,” he said. “Now you have groups like KSL, Starwood Capital and Blackstone that are dipping their toes in but not quite making a big move yet. But certainly, there’s interest.”