SÃO PAULO—Paul Sistare isn’t thrilled the Brazilian hotel industry is experiencing a lull between hosting soccer’s World Cup in 2014 and the 2016 Olympic Games. But the president and CEO of Atlantica Hotels International Limited does see an opportunity for his 14-year-old hotel management company to build on its foundation of 85 hotels.
“2015 could be a complicated year for the hospitality industry as a whole,” Sistare said during a phone interview from his office in São Paulo. “It’s not only due to the absorption of oversupply in markets, but also staring down the barrel of the worst drought we’ve had in 80 years, especially in the south.”
The drought is negatively affecting electrical power generation, which could cause power reductions at hotels, according to Sistare.
“What also concerns us is that the forecast for inflation this year is 6(%) to 6.5%,” he said. “That makes you nervous because that makes the cost of goods you’re using to supply the hotel more expensive.”
But there is an upside if that forecast is accurate.
“Inflation has always been hoteliers’ best friend because you can raise rates,” Sistare said. “But we’re looking at increasing (average daily rate) less than the rate of inflation.”
The industry’s performance has been affected by the economic climate. January data from STR Global, a sister company to Hotel News Now, showed the country’s year-over-year performance dropped in all three major performance metrics: -1.6% in occupancy, -6.8% in ADR and -8.3% in revenue per available room in U.S. dollar terms.
Sistare said some of the World Cup host cities are experiencing negative after-effects from the event.
“Some hotel product was built solely for the 64 days of the World Cup instead of looking for the future,” he said. “In those cities, we’re feeling the brunt of the excess of inventory, mainly through the only way unsophisticated operators can compete—by lowering the rate.”
Management services in demand
But that’s where opportunity knocks, he said.
“As typical in any cyclical industry, once occupancy hits a certain standpoint everyone starts building again, and for guys like us with brands and management companies, we benefit,” said Sistare, whose company is represented in 44 cities in Brazil and employs 5,000 people.
“As a management company, it works somewhat in our favor. It’s just like when you don’t go to the doctor when you’re healthy,” he said. “The last five or six years, Brazil’s hotel scene has been a darling, so when you’re running with that type of volume it’s easy to hide the issues. In this kind of environment, owners seek out a management company.”
One example is a hotel the company assumed management for that was family-owned-and-operated for five years.
“They’ve come to the conclusion that they need professional help …. (to compete with other brands) that has complicated their ability to build the bottom line,” Sistare said.
Recapitalization provides backing
Atlantica’s expected growth comes on the heels of an October 2014 announcement that a recapitalization was completed with equity capital from Quantum Strategic Partners Limited, a private investment fund managed by Soros Fund Management, Tao Invest, a private investment fund managed by Tao Capital Partners, and management. Quantum is the majority owner.
As part of the recapitalization transaction, global hotel industry veteran Doug Geoga joined the investor group as chairman. Geoga via emails referred all questions about the deal and the company to Sistare.
Sistare said the deal involved the outright purchase of the existing shares of the former owners, which included an undisclosed local owner and Franklin Templeton Investments.
“They were at the end of their fund cycle, and the company was quietly on the market,” Sistare said.
“From the standpoint of vision, direction, everywhere we’re going, nothing’s really changed,” Sistare said. “We still have our sights on growing the company.
“What interested Quantum and Toa the most was the opportunity Brazil presents,” he added. “2015 will be a bump in the road … inflation rate and contraction of (gross domestic product) … the water shortage as a result of the drought … political scandals. Once we get past that, Brazil is still underdeveloped in terms of hotel industry.”
Buying into an established company has many benefits, the executive said.
“They see the potential for an embryonic industry that’s developing very rapidly and the platform that we built,” Sistare said. “If you want to repeat it, it would cost a significant amount of financial capital and human capital.
“The third leg was the human capital,” he said. “If you have 250,000 rooms here in Brazil, the question is where do find personnel with experience.”
Personnel turnover at Atlantica’s corporate level has been 4% over the past 10 years, according to Sistare.
All of this spells growth for Atlantica, which has 60 hotels in the pipeline.
“We intend to continue to penetrate the country and re-penetrate the areas we are already in,” he said.
A blast from the past
Sistare said Brazil’s hotel climate reminds him of the U.S. in the late 1970s and early ’80s.
“Brand proliferation here is nonexistent,” Sistare said.
The country has 50 cities with populations of more than 1 million—including São Paulo at 23 million and Rio de Janeiro at 17 million, Sistare said. Atlantica has 17 properties in the São Paulo market.
“You just don’t come down here and say, ‘I’m going to build a hotel, leverage it at 70% or 90%,” Sistare said. “There is money for development. It’s expensive, and the leverage is high on the ownership side. It’s difficult to make money if you have leverage out 50% of the money.”
The complication for foreign investors in Brazil comes with the condo-hotel financing model, which is how most deals get done, Sistare said. He pointed to the 500-room, co-branded (Radisson and Comfort Suites brands) property near the company’s offices.
“It has 400 different owners but no debt on it,” Sistare said. “It has a rental pool. The accounting for doing that is burdensome; the management of that is burdensome. Everybody looks at it as that’s really tough to do. My philosophy is if it’s tough to do, it has more upside.
“The biggest advantage is that during difficult times I can run it at 25(%)-30% (occupancy) and still make money because I don’t owe the bank,” Sistare said.
He said Atlantica is the largest privately held hotel company in Latin America, but its focus is Brazil. Atlantica is a pure management company that has partnerships with Choice Hotels International and The Carlson Rezidor Hotel Group.
“Campinas, a city of 5.7 million that has the same GDP as Chile, and we only have four hotels there,” Sistare said. “There’s so much opportunity in Brazil.”