A flood of new capital has opened up development activity in the region; here’s a look at the trends that have emerged from that.
Over the past four years, a flood of new, prominent capital providers have entered the Mexican and the Caribbean and Latin American (CALA) hotel markets. The impact? Exciting investment and development activity and significant deals in the region.
Below is a timely overview of noteworthy capital sources, important trends and takeaways, as well as insights into the next wave of investment activity. Specifically, three key forms of institutional capital and their impacts are explored:
- FIBRA (Mexican REITs) and CKD (Mexican hybrid public/private equity funds) models, which introduced significant liquidity and enabled investments and developments in hotels and real estate in Mexico;
- hotel companies that have gone public, resulting in several institutional investors being bullish on the sector; and
- private equity firms, which have poured billions of dollars into hotel and resort enterprises and trophy mixed-use projects.
Challenges do exist in the region for these savvy investors; however, major deals executed over the past several years, as well as those announced recently, further demonstrate the solid and promising prospects for this sector.
FIBRAs and CKDs introduced significant liquidity in Mexico
Since the emergence of the Mexican hotel-focused REIT model in late 2012, Mexico has seen substantial investment and development in hotels and real estate, and in fact has become the largest and most liquid and institutionalized market in the region.
Today, there are 10 listed FIBRAs in Mexico focused on hotel, industrial, retail, office, mortgage and diversified real estate asset classes with a combined market capitalization of about $12 billion. And, the liquidity and growth potential that the FIBRA model has provided Mexican real estate and hotels prove significant. For instance, FibraHotel has grown from 17 hotels with 2,321 rooms in 12 states at the time of its IPO to 86 hotels with 12,060 rooms in 26 states today. Currently, various other FIBRAs are in the process of listing on the Mexican Stock Exchange, including Fibra Resorts—the first specialized resort vehicle.
Both listed hotel-focused FIBRAs (FibraHotel and Fibra Inn) have invested in a disciplined manner, maintained open architecture to work with different brands and operators, and remained specialized in business hotels. As these lodging FIBRAs move from their investment to stabilization phases, they are concentrating on ramping up and stabilizing assets, as well as revenue managing to foster organic growth and increase their dividend yields. Although their share prices have decreased since their IPOs, they remain undervalued and have significant embedded growth within their portfolios. They should benefit from tighter asset management and greater contribution from their full-service and operating hotels.
Various CKDs, like Artha Capital, and other private funds, such as Thor Urbana, in Mexico are also well-capitalized and investing in several higher-end resort and urban hotel development projects, leveraging their development expertise and capital deployment capabilities.
Nevertheless, several external factors present near-term challenges, such as the Trump Administration’s potential protectionary policies towards trade and immigration, the Mexican peso exchange-rate impact, the Mexican interest-rate hike and higher expected inflation in 2017, all of which affect cap rates, lodging FIBRA and other publicly traded hotel companies’ share prices.
Public companies have also benefited
Other key players capitalizing on this wave of liquidity are hotel enterprises that have gone public. In particular, newer Mexican publicly traded lodging companies like City Express Hotels and Santa Fe Hotel Group are more domestic-oriented and have relevant brands with local and regional consumers, efficient operations and solid management teams with experience working through numerous Mexican economic cycles. Although the public market sentiment for business hotels has slowed—especially in secondary and tertiary markets, presenting short-term setbacks—the medium- to long-term prospects for business hotels remain favorable.
Another prime example is RLH Properties, which went public on the Mexican Stock Exchange in late 2015 to focus on the acquisition, development and asset management of high-end city and beach hotel assets in Mexico. RLH made recent headlines by acquiring the majority interests in the Mayakoba master-planned project in the Riviera Maya.
Most recently, the 2013 vintage deal, Playa Hotels & Resorts, was in the process of filing its IPO directly on the Nasdaq Stock Market, when it was subsequently purchased in late 2016 by Pace Holdings Corporation, a special-purpose acquisition company sponsored by leading private equity firm TPG. The TPG transaction combines Pace with Playa on the Nasdaq and provides public company access to capital for accelerated long-term growth. As Playa has demonstrated solid prospects and terrific execution to date on positioning Hyatt’s Ziva and Zilara all-inclusive brands in the region, this next chapter in its evolution should see similar success.
With several notable companies continuing to access the public markets, it appears that institutional investors are bullish on the region’s lodging sector and long-term potential.
Private equity investors remain active
The third key form of institutional capital in the region is private equity. Since 2013, private equity investors have poured billions of dollars into top-tier all-inclusive resorts platforms. Most notably, Bain Capital acquired the Apple Leisure Group (ALG) in early 2013 and just sold it now in late 2016—a well-timed, four-year hold. Bain’s involvement coupled with the ALG management team’s expertise resulted in a top performer with considerable scale and significance in the marketplace. The recent ALG transaction is the latest hospitality partnership between investment firm KKR and KSL, a private-equity firm specializing in the resort and leisure sectors.
Interestingly, KSL also recently acquired Hawaii’s Outrigger Hotels & Resorts, creating possible strategic integration and crossover opportunities with the ALG, especially with expansion potential into other key destinations like Hawaii and Asia/Pacific.
Although the resort sector remains very hot, the region’s urban hotel space has also attracted significant capital from prominent global investors, like billionaire George Soros. In late 2014, Soros Fund Management, in a joint venture, acquired Brazil’s Atlantica Hotels. Also, in late 2015, Soros invested in Argentina’s Fen Hotels, which it sold a year later to the Wyndham Hotel Group.
Other private financial and real estate investment firms have made, not enterprise-level transactions, but large asset-level investments in the Caribbean and Central America, including:
- Paulson & Co.’s multiple hotel deals in Puerto Rico;
- Third Point’s purchase of Playa Grande in the Dominican Republic;
- CTFE’s procurement of Baha Mar in the Bahamas; and
- Gencom’s acquisition of Peninsula Papagayo in Costa Rica.
The common denominator and success factors for these value-add and opportunistic investors are timing, execution, barriers to entry and, above all, skillful navigation.
The next wave? Private family-owned companies
Undoubtedly, over the past decades, and especially within the last four years, substantial capital has been put to work, funding new developments, creating jobs and fueling tourism in Mexico and the CALA. Although various trophy assets are being marketed for sale in several popular locations, many local and regional private family-controlled investment and operating companies continue to hold and grow their assets and platforms, carefully, quietly and successfully in the region. And, as these institutional-grade niche players, in both the urban and resort spaces, continue to emerge—and capital remains available—they will likely join a next wave of IPOs and strategic future sales. Meanwhile, capital providers and all key players in the region must deftly surf the waves and keep their balance amid the rise and fall of the global tides.
Jonathan Kracer is Managing Principal of Sion Capital LLC, a hospitality and real estate consulting and investment firm focused on the North American, Latin American, and Caribbean regions. He is a recognized expert on the hospitality sectors of South Florida, Latin America, and Mexico. His columns primarily cover hotel asset-related subjects, with a specific emphasis on cross-border topics related to the U.S. and Latin America. He has been a columnist with HNN since 2012 and can be reached via email at email@example.com. More information about Sion Capital LLC can be found at www.sioncapitalco.com.
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