Developers dig deep on public-private, patient capital and all-inclusive investors

LOS ANGELES — Putting together public-private partnerships in today’s capital market is an appealing option. But Mike Garcia, president of Dallas-based Matthews Southwest Hospitality, said it requires one thing above everything else — patience. 

“We have a lot of opportunities that are built on relationships. Having great relationships is important, as is being responsive to the client and their expectations," Garcia said last week during a panel at ALIS. “But it’s really patience.”

Garcia said typically, if the municipality is going to take on this type of project, they are excited about its direction. 

“But they still have procurement rules, and they still have design authorities and people who have to sign off on the design,” he said. “Those things all take time. We’re good about putting the time, effort, and patience to see those through.”

Garcia was part of the panel “Development — Asset valuation and capital stack implications,” which also featured Helene Okabe, vice president of feasibility for Raleigh, North Carolina-based Concord Hospitality, and Sergio Rascon, vice president of institutional investors for Hyatt Hotels Corp. It was moderated by John Berean, senior vice president for HVS.

Public-private partnerships

Garcia said Matthews Southwest Hospitality is pursuing several transactions with municipalities over the next 12 to 18 months, including a new 800-key hotel and 500,000 square feet convention center expansion in Broward County, Florida, and a 375-key luxury hotel on the campus of the U.S. Air Force Academy near Colorado Springs, Colorado.

It’s extremely important that if an asset doesn’t have that history of cash flow to make sure that you can prove it out through other examples and maybe comparable properties within that market.

Helene Okabe

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“With that, you got lower interest rates,” he said. “They are not where they were two or three years ago, but they’re certainly lower than a typical traditional investor would look for today. So that’s how we’ve been able to piece those together to keep going.”

Garcia said public-private deals have been more prevalent lately because of the capital market.

“When you go to a municipality, they can issue tax-exempt financing, which will take probably 200 to 300 basis points off an interest rate,” he said. “Their return requirements are much less than what you find in the traditional model.

“Because they are expanding the convention center, or they’re building a new one, and they need more rooms in the market, they’re willing to take that risk. Conversely, in the old days, when it was easier to do a transaction with the municipality, they would put subsidies in towards a deal, and you could get it financed. But because of the interest rates and construction costs, quite frankly, it makes it more difficult.”

Studying feasibility

Okabe was asked about the importance of her vice president of feasibility job title at Concord Hospitality, which recently had a large capital infusion to fuel its growth.

“It’s extremely important that if an asset doesn’t have that history of cash flow to make sure that you can prove it out through other examples and maybe comparable properties within that market.”

She said that involves looking at multiple demand generators to help mitigate Concord’s risk. “We typically underwrite for a five-year period. During that cycle, a lot can happen,” she said. “For example, for a convention hotel, business travel commercial demand is starting to come back, but there are some uncertainties. We’re seeing some traction with group… and leisure should remain steady. Hopefully, it’ll increase in certain markets with international. But international is not all the way there.

“So, we’ll look at a number of factors… In addition, it’s looking at demand generator by demand generator and what’s at risk. What can we forecast and then model it and see if it meets our current rates of return, based on the current interest rates, and with the end of our capital stack.”

Okabe said the hope is that interest rates will come down over the coming year, and there will be more opportunities and less of a bid-ask spread. She said Concord has an interest in distressed projects or other interesting opportunities.

“I feel like that would be a good opportunity for us. When you’re talking to some of our team members, they use the term ’patient capital’, and that’s being able to invest and being there to see the returns,” she said. “Other than distressed, I feel like there’d be a lot of different opportunities. And with capex being delayed during COVID and PIPs coming up, there may be more sellers looking to turn over assets.”

Attracting investors

Rascon said for Hyatt’s all-inclusive business, most of the opportunities are on conversions, with four out of five properties in that portfolio being converted into one of the brands.

“So that’s a big important source of transactions for us,” he said.

“We have powerful distribution capabilities from the U.S. luxury traveler to our properties. So that’s a great advantage for us because whenever we see that a property is underperforming, we know it, and we see it coming, and we do our best to get our properties in our hands and operate them. We also have substantial capabilities on the ground — local companies that make lives simpler for our guests.”

Once we have investors in our portfolio, they tend to repeat. Three out of five of our owners owned two or more properties in the all-inclusive sector. The challenge is the first one, but once they’re there, it tends to be less complicated.

Sergio Rascon

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Rascon said a big part of his job is educating investors on how business models vary in different countries.

“In our case, these properties ranged anywhere from an average of 400 to 500 rooms. So, they’re very large properties,” he said. “Part of my role is to attract institutional capital and help them understand how the business model works in jurisdictions like Mexico, the Dominican Republic and Costa Rica. That’s a big challenge.”

Rascon said connecting U.S. investors to foreign markets can be difficult at first, but there’s usually a big payoff. 

“The second thing is to connect U.S. investors to foreign investors and local capital, lenders and operators,” he said. “Bringing a new investor into our world takes some time… But once we have investors in our portfolio, they tend to repeat. Three out of five of our owners owned two or more properties in the all-inclusive sector. The challenge is the first one, but once they’re there, it tends to be less complicated.”