Driftwood Capital repositions San Juan property

MIAMI -- When Miami-based Driftwood Capital acquired the Sheraton Old San Hotel in 2021, it had a much bigger plan in mind to develop a larger, mixed-use complex in Puerto Rico that Driftwood now calls The Landing Old San Juan. Today, the Sheraton is being converted to a Tribute hotel – Hotel Rumbao – as part of the plan with renovations ongoing.

While Driftwood’s acquisition activity has tapered off quite a bit, they are seeing big demand for their mezz loans (in mid-February they provided $20 million for the refinancing of a portfolio of 12 limited-service hotels), and they are getting ready to break ground on the they Opportunity Zone and EB-5 syndication of the $195 million Riverside Wharf Project that includes a Dream hotel in Miami.

That said, Hotel Investment Today talked to Tanya Zapata, acquisition associate at Driftwood Capital, Miami, Florida, who is managing the San Juan property renovation, as well as Driftwood Hospitality Management’s Chief Operating Officer Mike Diaz to learn more about the story behind the acquisition and plans moving forward. The renovations are being led by Lang and Schwander, Miami, and local Puerto Rico architect Eugenio Ramirez Ballagas at ERB arquitectos PSC.

Hotel Investment Today: What was the rationale behind Driftwood Capital’s acquisition in 2021 of the 240-room Sheraton Old San Juan? What are some of the tourism drivers that factored into the plan?

Tanya Zapata: San Juan has historically been one of the most stable lodging markets in the U.S., but the pandemic pushed it into new territory. The main driver in early 2021, when we first started looking at the Sheraton Old San, was domestic travel – the island offers U.S. residents access to the Caribbean without a passport, and we saw leisure markets recovering faster than urban markets. To give you an idea of the market’s strength, in 2021 San Juan recorded a RevPAR of about $149 – about the same as Miami – and that’s without the full return of the cruise industry.

Tanya Zapata

Secondly, the hotel is extraordinarily well-located at the entrance to Old San Juan, just steps away from Pier Three and the Port of San Juan, the busiest cruise port in the Caribbean. It’s one of the first buildings that tourists encounter upon arrival to the city. So, we knew there would be tremendous upside once cruises came back. Lastly, the Puerto Rican government offers a lot of tax incentives for tourism development that further enhanced the investment rationale. Overall, we just thought it was a great investment.

HIT: Have you started raising capital (syndicating) from LP investors and if so, what has been the reception/appetite?

TZ: Yes, the Landing Old San Juan is nearly fully syndicated with a large commitment from an institutional player.

HIT: What are targeted returns for this property?

TZ: 20%-plus target IRR and 2x target equity multiple.

HIT: What are some of the tax/investment incentives in San Juan that enhance the value proposition?

TZ: The Tourism Industry Support Act of 2016 gives eligible investors tax credits worth up to 40% of the total project cost. Tourism and hospitality investors also enjoy a 90% exemption on property taxes as well as a 100% exemption on municipal construction, excise, and sales taxes.

The main driver in early 2021, when we first started looking at the Sheraton Old San, was domestic travel – the island offers U.S. residents access to the Caribbean without a passport, and we saw leisure markets recovering faster than urban markets.

Tanya Zapata

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HIT: Describe The Landing Old San Juan. What are the different components as far as retail, food and beverage, anything else?

TZ: We acquired the 240-room Sheraton Old San Juan in 2021 along with a two-story, 27,500-square foot retail complex called Isla Bonita, whose tenants include Walgreens, Senor Frogs, Harley Davidson. During our due diligence process, we discovered that the hotel didn’t have a parking garage. So, we acquired a building directly behind the hotel (Paseo Portuario) that had 839 parking spots along with an additional 40,000 square feet of retail.

That’s how Driftwood came to own an entire three blocks – including 70,000 square feet of retail – on the waterfront directly in front of the cruise port, and since this is where cruise passengers “land” upon arrival, it made sense to call it The Landing Old San Juan.

The renovation process, which has just begun, will completely transform the arrival experience for guests to better capture the romantic, old-world charm of the hotel’s surroundings, while also modernizing and upgrading all areas of the property to ensure a consistent, high-quality full-service lodging experience. In December of this year, the hotel will become the Hotel Rumbao, a Tribute Portfolio by Marriott property.

As part of the repositioning, we’re unveiling a new concept for the hotel’s second-floor restaurant, which overlooks Old San Juan Harbor, as well as creating a new food and beverage concept in the ground floor retail space which will better cater to passengers arriving via cruise ships.

We’re relocating the hotel lobby from the ground floor, up a grand staircase to the second floor, creating a truly impressive arrival experience. We’re relocating some back-of-house offices and a fitness room with waterfront views and building four new guest rooms in their place.

Finally, we’re enhancing the properties’ exteriors to tie the three buildings together visually, and create a more welcoming, charming approach to the historic center of town. This includes re-imagining a set of outdoor stairs leading to the Old City. They will be painted the colors of the Puerto Rican flag, creating that perfect Instagram moment upon arrival.

HIT: Why was Tribute/Marriott a good fit for this property?

TZ: Tribute is a Marriott soft brand that gives us a lot of flexibility in the design concept – and inclusion in the Bonvoy loyalty program will help attract travelers focused on creative spaces that connect people and places. Our goal with Hotel Rumbao is to effectively embrace and reflect the culture and history of San Juan and convey the passion and pride of the Puerto Rican people. We’re introducing several design elements and activations that bring Old San Juan into the hotel, as well as engaging with the local community and small businesses.

Hotel Rumbao guestroom rendering

HIT: Discuss the budget versus the cost of the repositioning. How did inflation, supply chain impact the project and projected ROI? What did you successfully do to manage costs?

TZ: We’re seeing Inflation and supply chain issues across the board. Fortunately, Driftwood Capital and our management arm, Driftwood Hospitality Management, do a lot of renovations nationally, and economies of scale help us control costs. We’re also in direct contact with supply houses. Performance has also outpaced inflation at this hotel as well.  We had a 21% RevPAR increase at this hotel between 2021 and 2022.

HIT: What have been the biggest surprises and challenges with this project?

TZ: One of the biggest challenges is timing the renovations to enable continued performance. We were initially going to renovate immediately upon acquisition but decided to hold off and increase the scope because the hotel was outperforming expectations.

We saw an 8% increase in occupancy between 2021 and 2022, and an almost 13% increase in rate. The other challenge is simply learning to do business in a new market that operates differently, but the government has been great to work with.

HIT: Have there been any pivots in the development once underway, perhaps in response to market intel or evolving macros?

TZ: Even without the full return of the international traveler, Puerto Rico’s recovery has been incredibly strong. Discover Puerto Rico reported back-to-back record years of visitation, spending and tourism jobs, with more than 5.1 million passengers arriving at the Luis Muñoz Marín International Airport last year.

Hurricane Fiona in September 2021 put a temporary damper on travel, but even still, according to the island’s marketing agency, lodging demand was higher in the last three months of the year than it was before the pandemic.

Last year, the governor of Puerto Rico announced a $425 million plan to revamp and modernize the island’s aging cruise ship docks, which will also be transformative.

Another new driver of hotel/retail demand will be Bahia Urbana Park, a $118 million project to redevelop the waterfront in front of the port by creating a new waterfront promenade, an urban eco-adventure park, and a unique “Beach on the Bay.” That will be transformative to the area and is estimated to open in 2024.

HIT: How is the management company weaving in the local history/culture to create a unique and memorable guest experience at Hotel Rumbao?

Mike Diaz: Driftwood Hospitality Management’s Lifestyle Team carefully curated everything at the Hotel Rumbao –the name, the color palette, the food and drink, and the activations inside and outside the property – is carefully curated to showcase what makes Puerto Rico special: the generations of history and folklore, music and dance, triumphs and heartbreak, and most of all, the island’s welcoming approach to hospitality.

The Hotel Rumbao sits at the harbor, overlooking the cruise port, making it the unofficial gateway to San Juan. So, we have a special responsibility to represent Puerto Rican culture and pride. Planned activations include original murals on the Calle Brumbaugh wall (the street that leads to the old town). Inside the hotel, we will have Flor de Magas, the national flower of Puerto Rico, local art and even a narrative surrounding the story of Taroo, a character from a Puerto Rican legend. The color of the local cobblestone (called adoquine) will weave through both exterior and interior design elements. There will also be rumba, bomba and plena dance lessons every Friday and Saturday night, local rum and coffee tastings weekly, and a local San Juan artist rotating program on a regular basis.