QUITO, Ecuador—An inflow of capital into the South American hotel sector has caught the eye of local lenders, making debt financing more readily available in many markets.
Hotel transaction volume is more than $1 billion year to date, already well above the $590 million recorded during the entirety of 2013, according to JLL data presented by Mark Wynne Smith last week during a panel titled “The capital stack: How are deals currently being financed?” at the South American Hotel & Tourism Investment Conference.
Institutional investors in the United States are helping to lead that charge, said panelist Brian Finerty, senior VP of Equity International, which co-invests with partners in high-growth opportunities outside the U.S.
As yields compress at home, the likes of Blackstone Group and Starwood Capital Group are dipping their toes in South America, where higher risks mean higher returns, he explained.
Target returns for one of Equity International’s recently closed private equity funds is between 15% and 20% net returns, after fees and promotion, Finerty said.
Wynne Smith, global CEO of JLL’s Hotels & Hospitality Group, said expectations can range as high as 30%.
Local investors are less demanding, said José Pérez-Barquero Flores, VP of Latin America Development for NH Hoteles Group. Profit is slightly less important than owning a high-profile asset in one’s backyard, he said.
For joint-venture partners, expectations range from two to three times equity, said Camilo Bolaños Dutriz, senior VP of real estate and development in Latin America for Hyatt Hotels Corporation. Approximately 70% of the group’s pipeline in the region is supported by local investors.
“For most of our projects in the region, we’re looking from the mid to high teens in the unlevered (internal rates of return) we’re seeing these days,” he said.
Underwriting varies country by country in South America, panelists said.
Government officials in Chile, for instance, have during the past few years worked to establish a stable legal and political framework that is attracting foreign investment and resulting in more favorable terms, Pérez-Barquero said.
Colombia and Peru are moving in that direction as well, he added.
Bolaños said loan-to-value ratios for a typical Hyatt Place in the region falls between 50% and 55%.
“Thankfully in terms of guarantees, for the most part Brazil aside, we’re seeing a lot of non-recourse, which is great,” he added. “I think we have much more of a challenge with banks on the non-disturbance agreement and those types of agreements.
“Terms are very reasonable in terms of schedule, very competitive interest rates in places such as Peru, Colombia and Mexico,” Bolaños said.
A key piece of the underwriting puzzle is sponsorship, Finerty said.
“Sponsorship matters in Latin America in particular,” he said. “If you’re working with a strong sponsor such as Hyatt or NH, I think the lenders in Latin America look more to the sponsorship versus the asset, whereas in the U.S. it’s the opposite.”
Stacking capital
Debt financing is also a country-by-country proposition, panelists agreed.
“Countries such as Mexico, Colombia Peru (and Chile), I think in those markets there’s an availability of debt with very competitive global terms,” Bolaños said.
Banks in Paraguay and Uruguay also are getting into the hotel-lending game, particularly as foreign capital begins flowing into those markets, he added.
Orestes Fintiklis, acquisitions director at private equity firm Dolphin Capital Partners, said his firm relies on two sources of debt. The first is from local banks, which are gradually coming back to the resort sector. But unfortunately the loan-to-values they provide are even below 50% because most of them were burned from the luxury resort sector.
The second is mezzanine debt—a first in the region as a result of U.S.-based private debt funds raising so much capital and looking for avenues to put it to work, he said.
A typical deal for Dolphin comprises 40% equity, 40% debt from a local bank and 20% mezzanine financing, Fintiklis said.
The cost of debt in the region is between 10% and 15%, which is lower than the 20-to-25% range expected a few years ago, he added.
Bolaños offered an alternative take, explaining that debt still can be difficult to come by. That’s why Hyatt is putting its balance sheet to work to establish a presence in key markets with high barriers to entry.
“It’s not the cheapest way to do it,” he said, “but it’s the fastest way to do it.”