JRK sees growth opportunity with foray into Puerto Rico

LOS ANGELES — JRK Property Holdings recent foray into Puerto Rico with the acquisition of a mini-portfolio of Hyatt-branded hotels in San Juan from family-owned PRISA Group may just become the catalyst for further expansion in the United States territory this year for the real estate investment firm.

“We would like to grow but will be measured and opportunistic. Each deal has to make sense on a standalone basis,” said Shaan Bhatia, JRK’s head of Hotel Investments in Los Angeles.

The PRISA deal in January did just that. Backed by its $350 million JRK Hospitality Fund I, the firm snagged the 126-room Hyatt House San Juan and the 149-room Hyatt Place San Juan, both recently renovated.

Bhatia did not disclose the acquisition price; however, he noted, “When compared with mainland U.S. opportunities, this presented significantly more attractive risk-adjusted reward with cash-on-cash north of 20% for very high-quality, renovated, well-located hotels with balanced demand (leisure, corporate, group) and favorable supply dynamics.”

The properties sit proximate to one of the island’s most trafficked locales: the Puerto Rico Convention Center and also near the visitor-magnet entertainment and lifestyle complex, Distrito T-Mobile (aka El Distrito, which was developed by PRISA Group, and whose Aloft San Juan serves as one of the complex’s anchors).

JRK President Danny Lippman agreed the premium select-service Hyatts were a good fit for the fund. “We were attracted to the properties by their durable cash flow in place with room to reposition operationally and physically. The opportunity to make more than two times the cash-on-cash we could generate mainland was very compelling,” he said.

Increased appetite

While the San Juan deal is new, JRK’s interest in the commonwealth is not. “We have been tracking Puerto Rico since 2018,” said Bhatia, adding the pair of Hyatts came on its radar in early 2022.

Although JRK doesn’t do any development, its appetite for acquisitions in Puerto Rico as 2024 moves ahead remains keen, albeit measured.

“We will be patient on growth,” Bhatia said. “We want to learn the market and operating intricacies intimately before placing more chips. We think in a few months we will explore additional opportunities; we’ve positioned ourselves as a preferred buyer.”

Lippman added that Puerto Rico is far exceeding their underwriting so far and pacing well.

The same could be said of the island’s hotel fundamentals. At the end of January, key metrics for Puerto Rico showed increases over 2023, according to CoStar data. Occupancy inched up to 73% from 72.6% last year, while ADR was stronger at $320.13 against $291.83 in January 2023 and RevPAR advanced to $233.56 from $211.98 in the year-ago period. In San Juan, occupancy was at 75.7% against last year’s 76.6%, ADR was $298.56 against 2023’s $275.61 and RevPAR came in at $226.15 compared to $211.22 last year.

In terms of locations and segments JRK would consider, Bhatia indicated other areas of San Juan as well as high-demand beach settings would be of interest. “We like the select-service segment, but if given the opportunity to acquire high-quality, full-service [hotels], we certainly would consider them.”

Currently, there are 19 hotel projects across a range of segments in various stages—six in construction— slated for the island between now and 2027, according to CoStar data, with almost half of them scheduled to open in San Juan. Other areas include Arecibo, Boqueron, Ceiba, Dorado, Fajardo, Isabela, Ponce, Rio Grande and Salinas. Completion of these projects would add 2,477 rooms.

Bhatia acknowledged the market is not without its challenges. “Hurricanes continue to be a major risk,” he said, but cited the island’s political and fiscal troubles (i.e., its debt crisis) as the biggest risk contributors. That said, the executive felt “the government now seems to have [it] under control.”

That status quo itself will face challenges next year when the Puerto Rico Status Act (H.R. 2757) provides for a plebiscite to be conducted on November 2, 2025, in which eligible voters can cast their ballot for statehood, independence or sovereignty in free association with the U.S. If a majority vote is not achieved by one of the options, a run-off between the top two would be held March 8, 2026.

What impact this would have on the market in terms of overall hotel investment/development remains to be seen.

JRK's portfolio

Lippman said Hospitality Fund 1, established in 2018, also would look beyond Puerto Rico for acquisition opportunities this year. “We are spending a fair amount of time on cash-flowing, full-service opportunities with repositioning upside. This fits the fund’s strategy of buying well-located, cash-flowing assets that can be repositioned operationally and physically to drive long-term capital appreciation,” he said.

Right now, JRK has eight owned assets in its hotel-fund portfolio. These include the San Juan Hyatts as well as a five-pack of Marriott brands—Courtyard, Fairfield Inn and Suites, Marriott, Residence Inn and SpringHill Suites—it acquired from an affiliate of hotel REIT RLJ Lodging Trust for $65 million in South Austin, Texas, in 2020. Also acquired via the fund is the 179-key Ace Hotel and Swim Club resort in Palm Springs, California, which it acquired at an undisclosed price from New York-based GFI Capital in Q4 2022.

“The portfolio is performing well,” said Lippman, noting the quintet of South Austin hotels is “cash-flowing heavily” and won the Marriott Renovation Excellence Award following a reported $40,000-plus per key investment on strategic capital improvements within the combined 602-room group of hotels.

Now, said Lippman, “Our Palm Springs hotel is about to undergo renovation, which will unlock embedded value.”

In the months ahead, select- and full-service hotels in the U.S.’ top 25 markets will continue to be a focus for JRK’s hospitality fund, which can pursue deals up to $3 billion for a portfolio. There are no dispositions slated in the near term, Bhatia said.

“We anticipate first-half 2024 to be slow, barring the ‘cat-and-mouse’ between Choice/Wyndham, but expect capital markets to facilitate some larger-scale M&A in second-half 2024 [and] into 2025,” Bhatia added. “On single assets, we anticipate a similar dynamic, with first-half 2024 sales fairly limited to motivated sellers.”