Driftwood Capital targets key Caribbean, Latin American markets for strategic luxury growth

CORAL GABLES, Florida — A year since launching its Lifestyle & Luxury platform, Driftwood Capital is adding, expanding and breaking ground on new additions to its total portfolio.

Luxury hotels and hotels in different regions also are part of the plan, said Alinio Azevedo, managing director of luxury and lifestyle, in an interview at the Americas Lodging Investment Summit Caribbean and Latin America conference.

In recent months, the hospitality-focused real estate investment firm topped off its 500-room Westin Cocoa Beach project and opened a casino at its Hotel Rumbao Tribute Portfolio in Old San Juan in Puerto Rico. It also broke ground on a new development in Miami called the Riverside Wharf mixed-use project. In April, Gregory Maliassas joined the company from Playa Hotels & Resorts as CEO of its management arm, Driftwood Hospitality Management.

Azevedo and his team have been deliberate about growth — in class and in geography — in the year since Driftwood started the Lifestyle & Luxury platform. They've yet to add a true luxury hotel to the portfolio, but he said the team sees massive opportunity for them, since the luxury hotel segment has been over-performing, as the cohort of wealthy people who choose luxury hotel stays has grown as well.

“The idea is to create a group that allows us to invest on the upper end of the market and build and/or acquire, reposition hotels that could be positioned as lifestyle,” he said.

As part of this, Driftwood is looking at international expansion, scouting out markets outside the U.S. that fit best with the company’s vision, he said. There are a select few in the CALA region, specifically Mexico, Costa Rica — where it already has one hotel — and the Dominican Republic. It’s also looking at expanding in Puerto Rico, and Spain and Portugal are possibilities down the road.

“We're doing this slowly, and we're doing this methodically and trying to find really the right deal,” he said.

Every country is different, and while at the macro level conditions may be similar, the cost of capital will vary depending on the market, he said. In some countries, borrowers can get local debt financing because the industry is more mature and the financial markets trust hospitality companies. In other countries, there’s less trust.

“Therefore, that has an impact on the value, so there’s no one-size-fits-all,” he said.

Generally speaking, hotel investment is capital-intensive, and capital is expensive across the world, he said. Interest rates have gone up, and geopolitical concerns and inflation expectations play into this as well.

Driftwood spends a lot of time defining target markets because the macro market environment has significant influence on the outcome of its investments, Azevedo said. Finding the right market and the right deal in that market is the first threshold to cross to do a deal. Beyond that, it’s about finding the right balance between development deals and acquisitions and repositioning projects.

Historically, Driftwood has grown through a lot of adaptive reuse or enhanced value-add renovations, he said. It buys underperforming hotels, invests capital into them, changes the brand and management and then scales and stabilizes the property.

CoStar data shows Driftwood Capital owns 36 hotels operating or under development. The majority are branded properties, mostly a mix of Marriott International and Hilton flags. Since 2015, the company and its affiliates have transacted on over $5 billion in hospitality properties.

When filtering everything that comes through that, the first layer is markets and locations within the market, he said. After that, it’s looking at whether it’s an adaptive reuse project or development project that won’t be too long of a development cycle.

As for how many opportunities make it from the top of the funnel to acquisition, he said “probably less than 5%. We see a lot of things on a daily basis.”

There hasn’t been a lot of true distress in the market as seen after the Great Financial Crisis, Azevedo said. There are opportunities to acquire properties below replacement costs, but they aren’t necessarily in large degrees of distress. There are a lot of expectations over when interest rates will come down again, and the timing of that will be important to see whether distressed transactions actually unlock.

There's still a gap between sellers’ expectations and buyers’ willingness to buy, he said.

“We've seen sellers take assets to market, the market comes back with a much lower valuation that they were willing to take, and then they just keep the asset,” he said. “Well, for how much longer can they keep the asset?”

There’s a carry cost of a hotel from capital expenditures needs, he said. Some owners will defer the renovations because they’re not long-term holders.

“We don't have a crystal ball, but what we are doing is making sure that we're prepared internally with capabilities, with the right strategy to be able to execute on those deals once they start to happen,” he said.

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