Capital creates challenges in the Caribbean

MIAMI — Bill Stadler said that despite the growth in tourism in the Caribbean post-COVID, the capital markets are still very challenging, not just for interest rates but any capital, whether it’s debt or equity.

Stadler, senior managing director for Plano, Texas-based third-party management company Aimbridge, said a project the company has been involved with is the Grand Hyatt Grand Cayman, which kicked off in 2017. He said without the condo residences, the project wouldn’t have happened. “If it were not for the condo sales, which are about 95% sold already, that project would not have happened,” Stadler said. “That’s the bright spot in the Caribbean, that the residential components are selling well.”

He said the residential is selling for $1,700 per square foot and makes up about 45% of the project’s capital stack (with 35% equity coming from boutique private equity firms and the rest coming from debt). “It’s expensive debt, but we got the project done. That reflects the difficulties and the challenges in the Caribbean.”

Stadler was a panelist on the “Caribbean Capital: Active Equity Sources” panel at the Caribbean Hotel & Resort Investment Summit (CHRIS) Monday at the Loews Coral Gables Hotel in Coral Gables, Florida.

Other panelists were Katherine Button, vice president of asset management and investments for Newton Square, Pennsylvania-based Mullen Real Estate Capital and Nicolas Valle, vice president of development andinvestment, for Fairfax, Virginia-based Playa Hotels & Resorts. The moderator was Sanjay Amin, director of Grand Cayman-based BCQS International.

Looking for natural capital

Valle said the debt and equity markets in the Caribbean are very dynamic right now. “Most investors are not looking for long-term or not all that long-term… Most of the owners in our markets are family (offices) that are longer hold. They aren’t acquiring hotels, and they aren’t selling hotels,” he said.

But Valle said he sees some local equity open up in those markets. “That allows you to have the natural capital for it,” he said. “And then you have groups that seize the opportunity to be there for a long time… So, they’re not as concerned with risk as private equity would be.”

Button said a lot of education can be necessary in the Caribbean because investors will think of it as one market rather than many different markets. “It’s hard to bring investors in because they don’t necessarily understand the distinction from one market to the next, and all of us know that you can have very different dynamics from island to island,” she said. “From an equity perspective, for those seeking outside sources of equity, it’s helping them through the process… It’s certainly a bit different than traditional U.S. investing, particularly [private equity].”

Button said having a brand involved can help mitigate risk. “It is important to have a brand that helps drive the distribution... Having some brand oversight makes our lending partners much more comfortable because they feel that there’s someone else watching the operations,” she said. “But also having access to that distribution, primarily U.S. customers, typically luxury and upper upscale travelers, coming to that market. They have more confidence in where they’re staying and know what they’re going to get.”

Differing types of investments 

Valle said different types of investors have been investing in Playa Hotels & Resorts with several institutional funds, including some pension funds, making investments in the publicly traded company and its investments. That also opens up the opportunity for local Caribbean pension funds to make hospitality investments.

Private equity will still be one of the larger investors in the Caribbean. Family offices will continue — they become legacy assets for family offices.

Bill Stadler

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“Potentially local pension funds can invest — institutional, private equity, real estate funds… We’ll hopefully see more of that,” he said.

When asked who will be the biggest investment players in the Caribbean in the future, Stadler doesn’t anticipate a big change. “Private equity will still be one of the larger investors in the Caribbean,” he said. “Family offices will continue ֫— they become legacy assets for family offices.”

He said REITs will continue to provide capital to renovate and reposition on the luxury level. “Then there’s everything below luxury, which tends to be a more family office. [Private equity and family offices] will be the majority of where the equity originates from.”