CORAL GABLES, Florida — The Caribbean and Latin America region is seeing increased interest from investors both domestic and international, and they each have preferred countries to work in.
During the "Investments Insights" panel at the Americas Lodging Investment Summit Caribbean and Latin America conference, executives from hospitality and real estate investment companies shared their respective approaches to the region.
Driftwood Capital owns a portfolio of 45 hotels and operates 90, and all properties, except for one, are in the U.S., said Alinio Azevedo, managing director of luxury and lifestyle investments. They range in type from limited service to lifestyle resort properties. The company has a narrow focus on the CALA region, with one property in Puerto Rico and the other hotel in Costa Rica, he said.
“We are looking to do more, and that's why we're spending a lot of time looking at opportunities to grow outside of the country,” he said. “We're seeing similar patterns (as in the U.S.). I think the sources of capital are somewhat similar, and we at Driftwood Capital continue to truly focus and like the upper end of the market."
There are merits to having a more diversified portfolio by having properties in certain key locations outside of the U.S., Azevedo said. Any expansion will be done carefully, and the team is looking at which countries they are most comfortable with in terms of risk and stability as well as those where cultural and business connections would allow for better navigation of systems.
Beyond that, they’ve looked into places they believe will continue to serve U.S. clients as this segment pays the most from an airlift and demand perspective, he said. Driftwood also considers those with lower labor costs when compared to most North American and European countries. As a starting point, they’re looking at Mexico, Costa Rico and Dominican Republic as well as expanding in Puerto Rico.
The risk premium for Puerto Rico is tighter than the rest of CALA, said Andro Nodarse-León, founder and CEO of LionGrove, which owns and operates three properties on the island. It’s becoming more of an institutional market, and conditions there have improved. The island is in better shape now than the day before Hurricane Maria arrived in 2017 as it has received approval for tens of billions of dollars in recovery capital, even though not all of it has been deployed.
“There are millions of dollars have gone into the island, so the power grid is in a better place, utilities in general are in a better place,” he said. “Roads are in a better place than they were before Hurricane Maria.”
When looking at some of the programs of the island office, like its tax credit programs, it’s a recognition of some of the shortcomings compared to places such as south Florida or Arizona, he said. Even so, Puerto Rico today is in a much better place than where it was, and it’s a deeper institutional market than it ever has been.
“It reminds me a lot of Miami, I would say, in the late ’90s, early 2000s,” he said. “Some of the patterns that I see there are similar to what I saw growing up here during that time.”
San Juan, its surrounding areas and the island overall are performing incredibly well, Nodarse-León said. Last year was a record year for arrivals to the island, and the prior four years were each record years on their own.
Between the metro area and the areas outside, occupancy is usually high 70s or low 80s, he said. Outside this area, it’s more like low 70s but still strong. At resorts outside of the metro area, the capture rate on ancillary spend is high because guests stay longer, compensating for a lower occupancy.
The Dominican Republic was doing relatively well in terms of infrastructure, and there was a period of several years in which there was a concentrated effort to improve the transportation infrastructure, said Simón Suárez, vice president of institutional relations and projects of Grupo Puntacana. The energy infrastructure didn’t see the same investment, so the tourism sector assumed a more private capital-based infrastructure for energy that is efficient.
The country is building an expanded highway to the Miches region as the area is developing quickly due in part to the fast deployment of private capital, he said. The city of Puerto Plata has lagged for some time, but there is now a private sector initiative to build a highway from Santiago to Puerto Plata that will cut the drive time down to 30 minutes, putting Puerto Plata well within the reach of two airports.
Pension funds becoming more active in hotel deals in the country are a logical result of the dynamic position of the tourism sector, Suárez said.
“These funds have found very little else to develop or to finance, especially because of the regulatory limitations on the levels of risk that they assume, and the tourism sector has proven to be a ... relatively low-risk proposition, and so the funds are very active,” he said.
Bigger banks have also been active and successful in their lending, following the opportunity opened by the local banks, he said. That has not been the case in many other destinations.
Founded in 2020, Alójica has acquired four hotels in Mexico, and it has three legacy properties in Costa Rica, said Eduardo Ahumada de Toledo, senior vice president. It hasn’t been easy reaching institutional capital as they are used to having certain areas of expertise and have more exposure to select-service hotels in urban areas through the FIBRAs, Mexico’s real estate investment trusts. They have some exposure to luxury, especially in Cabo, but practically none to all-inclusive resorts.
“So, for us, it wasn't easy,” he said. “It only took us the better part of three years to explain to them what is an all-inclusive hotel, why does it work and then walking with them on how that life cycle is.”
When they ask about transactions, it’s difficult to explain that there is a feasible exit strategy for these property types because there aren’t a lot of transactions to point to, he said, with Playa Hotels & Resorts being a notable exception.
Going through the value proposition, however, has been helpful because all-inclusive resorts are significantly more profitable on a per-key basis compared to European plan projects on an apple-to-apple basis, Ahumada de Toledo said.
“It’s becoming easier, but it’s still a challenge,” he said.
Alójica has one pension fund in its Fund 1, which has its two properties in Puerto Vallarta, he said. It is actively raising its second fund with institutional capital for two properties in Cancun that it already owns.
“It's obviously easier to raise money with identified assets and an identified business plan versus doing discretionary capital, but it hasn't been easy, so it's taking a lot of educational work with the components and other types of institutional capital to explain to them how the model works,” he said.