Gencom capitalizes on the chop

Market choppiness is Gencom’s friend. Just ask Founder Karim Alibhai and his Miami-based development team, who seem to thrive on turmoil that today includes the rising costs of doing business and the highest interest rate environment seen in the past 15 years. At the end of the day for the nearly 40-year-old firm, its value-add execution strategy means success for a portfolio that stands at close to $7.5 billion in assets under management, ranging from multiple luxury mixed-use projects to a sizeable position in the Pyramid Global Hospitality management company.

“When markets are choppy like this, where it's difficult to pin down values and potential, that’s usually a good market for us to get into projects,” Alibhai told Hotel Investment Today. “We invest across capital cycles. So, we don’t panic.”

Cases in point: jumping into a complicated ground lease deal with Hyatt Hotels Corp. for a big project in Miami that just recently gained approval from the city; taking a senior position in a troubled Chicago project with Magellan Development Group for the newly opened St. Regis Chicago; acquiring the lifestyle Provenance portfolio, which has a predominance of its hotels in the tough Portland, Oregon, market; and acquiring the struggling Fairmont Southampton hotel in Bermuda with plans to invest north of $300 million.

“Our pipeline, between Costa Rica and Miami downtown, is almost $2.5 billion in development projects,” Alibhai said. “So, for the next three years, I see any new projects being more M&A.”

Looking further ahead, Alibhai said he has his eyes on Mexico luxury market with some deals in active negotiations, despite some of the crime and other issues facing the market. Gencom is also spending a fair amount of time in India, where it hopes to invest in real estate and take a position in a mid-market management platform. “All the dynamics there for infrastructure and growth [in India] are very conducive to some very strong years for hospitality,” Alibhai said.

But what about profiting and repatriating capital in India? Alibhai said things are changing. “Yes, India has been a headache, but we might be catching it at finally the right time where the Motrin is working,” he said. “What’s happened in this last five years with [Indian Prime Minister Narendra] Modi kicking down the barriers of bureaucracy, supporting huge infrastructure projects, is you see the big names like Brookfield, Blackstone and GIC investing in a significant way. While it’s still a long way from being as efficient as some western countries, it’s come a long way and is much more friendly.”

While Gencom sometimes underwrites for seven-year holds, Alibhai said he could hold longer in India and perhaps get into the luxury and residential side of the business once they get more entrenched in the market. “Right now, our interest there is really owning mid-market hotels and management companies. But we could see resorts and luxury having its day in the near future.”

As for its position in Pyramid Global Hospitality with some 70-plus independent hotels and resorts and close to 160 branded properties under management, Alibhai said opportunities to acquire smaller, bolt-on management companies in the U.S. and Europe continue to be under consideration. “We see that business as having a lot of legs to grow,” he said. “We will do some level of co-investing through the company or directly with the company to acquire certain assets. But it’s primarily a management services company.”

More growth specifics

Gencom’s luxury and residential business is up 40% in revenue versus 2019, according to Alibhai, as it continues to focus on developing its Papagayo parcel in Costa Rica that will see a Ritz-Carlton Reserve open next year. He said 95% of the residential there is sold, which naturally gives him peace of mind when construction cost increases continue to run rampant. In fact, costs were up 20% at that project, which he said equated to $40-50 million more than anticipated.

At the same time, Gencom is just getting underway on the redevelopment of the 600-room Fairmont in Bermuda, with almost half a million square feet of residential that is going to be commencing construction soon. “That one has been not so easy to execute on because the markets, construction costs, capital market costs, everything that could go wrong, has been going wrong. But we’re going to get it done,” Alibhai explained.

He added that Bermuda’s government and the unions are starting to make it much more attractive for them to come in, take the risk and execute. “Coupled with our skill sets, we were able to make a real home run out of the Rosewood Tucker’s Point investment, which led us to take on the second big one – the Fairmont repositioning,” he said. “It will make us the largest employer and owner of hotels in Bermuda, but most people would have shied away given the history.”

Gencom is basically taking the Fairmont down to its four walls, completely gutting the building and also remaking the beach club into a world-class facility, according to Alibhai.

Stay the course

Bigger picture, Alibhai is seeing markets “normalize” with rate increases and occupancies flattening out but remaining sticky at Gencom’s luxury resort portfolio

“Barring a big recession, which it looks like we may be avoiding, I think we’re in a very low growth scenario, which is what’s starting to bring inflation down,” he said of the bigger picture economy. “Based on the data we have, it looks stable.”

On the deal front, Alibhai sees continued challenges around the bid-ask spread but added that he is starting to see a lot more assets going back to lenders. “I also think in the next 12 months, there’ll be a lot more trading because people cannot hold on to these assets much longer.”

Alibhai said he expects interest rates to hold steady for the next 12 months. “Then I think there will be a very slow move down to a new floor, but I don’t think we will see the same rates we saw 15 years ago,” he added.

As a result, Alibhai also sees more new development deals getting scrapped. “Even in a hot market like Miami, we are starting to hear about a lot of projects getting suspended or not being able to get capitalized because it’s a double whammy of construction costs and interest rates. It’s definitely going to have an effect on supply.”

Even the upward trend in branded residential pricing may have its limits, Alibhai said. “Pricing actually may be down 10% to 20% and construction costs are a lot higher. So, I don’t see as many residential projects happening in this market.”

All that said, Alibhai’s message to investors is to stay the course, despite some of the near-term clouds. “One should not get dissuaded if you are truly in for a longer-term hold because the value markets still have a fair bit of growth in the cards,” he said.