Baha Mar’s setbacks point to larger issues
 
Baha Mar’s setbacks point to larger issues
28 AUGUST 2014 7:56 AM
The highly-anticipated Bahamas mega-resort has faced a series of challenges over the past five months, which raises key issues for the future of the destination.
GLOBAL REPORT—The $3.5-billion Baha Mar resort complex in the Bahamas, touted since its inception as the largest single-phase project in the history of the Caribbean and originally scheduled to open in December, has run into a series of significant challenges, including a recently-announced delay in its much-anticipated debut. 
 
Set on 1,000 acres along 3,000 feet of Cable Beach in Nassau, the ambitious project was primarily financed by a $2.5-billion loan from the Import-Export Bank of China, with $850 million in equity funding led by its developers, the Swiss-Bahamian Izmirlian family. It will include a 1,000-room casino hotel with a 100,000-square-foot Las Vegas-style casino, a 700-room Grand Hyatt, a 200-room Rosewood and a 300-room SLS LUX. The resort also will feature 200,000 square feet of convention facilities, a Jack Nicklaus Signature golf course, an ESPA spa, and 40 restaurants, bars and clubs.
 
China State Construction Engineering Corporation, which is building the project, holds $150 million in preferred equity.
 
In April, Morgans Hotel Group, which had signed a 20-year management deal to operate a 300-room Mondrian hotel, terminated its agreement because Baha Mar failed to deliver a nondisturbance agreement that was part of its terms. An NDA, issued by lenders, assures an operator it cannot be ejected from a project even if the project goes bankrupt, as long as the protected operator is current in its own financial obligations. 
 
The legal battle that ensued when Baha Mar attempted to draw on a $10-million letter of credit provided by Morgans as key money reached the New York State Supreme Court, which ruled in favor of Morgans and denied Baha Mar the right to collect the money.
 
Both Morgans and Baha Mar declined to comment on whether the legal wrangling has been entirely resolved.
 
The SLS LUX property was recruited to replace the departed Mondrian.
 
In July, approximately 60 disgruntled Chinese workers, part of the enormous, primarily Chinese 4,000-person labor force assembled and imported by China State Construction Engineering, marched on the Chinese Embassy in Nassau to protest working conditions and claims they had not been paid in six months. On 8 August, Bahamas director of labor Robert Farquharson announced the dispute had been resolved “internally” between China State Construction and the workers.
 
“The labor issue was a matter between China State Construction and its workers,” according to a written statement from Baha Mar to Hotel News Now on 26 August. “Baha Mar is committed to fair and equitable treatment of all workers associated with the project.”
 
China State Construction did not respond to multiple requests for comment.
 
Delayed debut
Earlier this month, Baha Mar announced the delay in its opening to late spring 2015, which could mean as late as 19 June.  Last July, CFO Doug Ludwig told Hotel News Now that “the involvement of China State Construction clearly improved (Import-Export Bank of China's) confidence that the project would be completed on time and on budget.” 
 
Baha Mar executives declined requests this week for comment on the reasons for the delay.
 
“Somebody is going to have to be responsible for this delay and everything that implies, whether that is the developer, the contractor, the lender or the government,” said Jonathan Kracer, a Hotel News Now columnist and managing principal of Sion Capital, a Miami-based hospitality, real estate, and advisory and investment firm. “If there was an agreement on a schedule and that wasn't met, somebody is going to be accountable for that. But that will also be a hot potato, where everybody points at one another and says it's their fault.”  
 
The obvious reason for planning an early December opening, Kracer said, was to exploit the maximized cash flow of the winter high season in the Caribbean. “Now they will miss that and that could have financial implications for the project and the investors. 
 
“But while that's bad for the development from a financial perspective, it's operationally more manageable for them to do a soft opening and start when things are slower to get ready for the following (winter season). And in the long run, the delay might help them be successful by having the time to get things right.”
 
High-stakes poker
Despite Baha Mar's recent setbacks, the larger issue in the long term is whether it can deliver on its goal of generating enough new demand, especially from China and the rest of Asia, to fill 2,200 hotel rooms.
 
A related question is whether enough new airlift can be created to accommodate such growth. 
 
Last December, Standard & Poor's issued a report on the Commonwealth of the Bahamas that cited concerns about the tourism sector and prospects for growth. "Securing airlift ... is an ongoing priority,” the S&P report said.
 
“The real question for Baha Mar is whether the additional number of rooms is supported by a comparable increase in the number of airline seats to the Bahamas,” said Jan Freitag, senior VP of strategic development at STR, parent company of Hotel News Now. For example, he said, large-scale success likely will require new nonstop charter flights from China and other Asian feeder markets.  
 
In its statement, Baha Mar said, “The government and private industry have been focused on expanding global airlift,” noting that a $409-million expansion of Lynden Pindling International Airport in Nassau was completed last year, which Baha Mar said “increased airlift by 50(%) to more than 5 million passengers annually.”
 
If Baha Mar does not induce enough new demand, there are concerns that a rate war could ensue between Baha Mar and nearby Atlantis Paradise Island that would be detrimental to both properties. 
 
S&P issued an additional report earlier this month on a $1-billion Atlantis debt refinancing deal that said because of direct competition from Baha Mar, the “long-term sustainable value” of Atlantis will be 54% less than that projected by its appraisers and that its future cash flow also will be significantly below what Atlantis and its appraisers projected as part of the refinancing deal.
 
As a defensive measure, Kracer noted, Atlantis recently announced an agreement to affiliate with Marriott International and become  part of its Autograph Collection, thereby giving it more distribution power via Marriott's global reservations system and access to 46 million Marriott Rewards customers.
 
Meanwhile, Freitag said, based on STR's data, “the Bahamas market currently looks pretty healthy.”
 
Year to date, average daily rate in the Caribbean region is up 7.7% compared to 2.8% in the Bahamas. But occupancy so far this year has increased 0.2% for the Caribbean compared to 6.6% in the Bahamas. Revenue per available room is up 8% in the Caribbean and 9.6% in the Bahamas. 
 
“Occupancies in the Bahamas for the year to date are almost 70%, and they grew by over 10% in May and July,” Freitag said. “And there has been no increase in supply, so that means all the new demand goes to existing properties.
 
“Now, that said, Baha Mar will have 2,200 rooms—and 2,200 rooms, on top of the existing 13,000, represents an increase of about 15%, which is a staggering increase in inventory in any market,” he added. 
 
Kracer is skeptical about whether Baha Mar will be able to generate enough new demand to fill all those rooms without having to tap existing demand and encroaching on the health of Atlantis and other local properties. 
 
“I don't think they will be able to do it on their own,” he said. “If it can be made to happen, it will require several stakeholders working together. But it's going to be a challenge.” 
 
Freitag agreed Baha Mar faces a big challenge. He does not know of a single mega-resort that ever created enough incremental demand to sustain itself. “But you could argue that Las Vegas and Dubai (United Arab Emirates) are prime examples that if you build it, they will come. But it's a very rare occurrence.”
 
Kracer said that in the end, the Baha Mar project will prove or disprove a trio of important market dynamics that will transcend the Bahamas. 
 
“One is whether Baha Mar can partner with key brands to open up new markets,” he said. “The second is whether Atlantis can defend an existing position. And the third will be whether they both can attract international real estate investors.” Both Baha Mar and Atlantis include real estate sales components.
 
“We won't know the answers to those questions for quite a while,” Kracer said.
 

9 Comments

  • StevenNorton August 28, 2014 2:06 PM

    To me a bigger problem for Baha Mar is that all of their new accommodations are directed at the luxury end of the market. And those of us that are familiar with the Caribbean demand structure, realize that the true peak season is the Christmas-New Years period and then February and March, plus Easter. And when temperatures get more livable in the northeast, warm weather destinations need to revert to less affluent travelers and the various sections of the meetings market. Baha Mar had an opportunity to save investment dollars and some 1950's and 60's hotel product, and offer several price points for the different segments of the traveling public. But they chose to go 100% luxury. So it appears that we will have a gigantic price war between Paradise Island, which I once called home, and the new Baha Mar properties. Even before the 15% increase in accommodations, we already see tremendous discounting on Paradise. Obviously, the major problem will come from the airlines that currently serve Nassau. Will they increase their available seats by anything near 15%.

  • Anibal Garcia August 29, 2014 3:19 AM

    I fully agree with Steve regarding the major risk both on the hotel occupancy side ass well as wiht the casino. The kuxury market in the Caribbean, although with some sucess is a tough sell, Specially if cannot meet airlift. As some of youmight have read, recent hotelier conventions show that main brands are moving into the all-inclusive market segment Including within the luxury category of all.inclusive. We shall see.

  • resort home seller September 3, 2014 6:42 AM

    How have the home owners and investors fared during the delays. Have they released updated sales figures on cancellations/ closings?

  • BobSonn September 10, 2014 3:15 AM

    This project will end up doing just fine. Jealous real estate people love to throw stones at new (un-proven) projects. This is a great, first-class addition to the marketplace. Bob S.

  • DanQ October 20, 2014 5:56 AM

    How do you think this will impact the time shares market? Will the price war diminish the current value of a time share ?

  • Joseph DENIS December 23, 2014 4:43 AM

    STAFF ATTITUDE WILL SECURE THE FUTURE PACKAGE DEALS WITH NO SURPRISES.ON TIME GET THERE PLAY IT LEGAL CASINOES AND...., NUMBER ONE ... TRENDY ENTERTAINMENT

  • Nick B. January 23, 2015 10:48 AM

    I predict this project will be a great success.. Having been to Atlantis many times (on Casino comps based on my play) I can say that the Atlantis overall service is quite poor. I'm talking from the grounds staff, the shops (inside the Atlantis) and the Casino staff/floor. We all know that right now that Casino is the only show in town, but I think that will soon change. The staff/training and service at Atlantis is no where near a Las Vegas "high end" Casino experience and the race/sportsbook is a joke in comparison (even after the recent reno's). Baha Mar and it's investors will make sure to get the Casino and service running at a high level.. I think they understand what it takes to bring a gambler back over and over again. Once the word get's out, it will be the place to go and Atlantis will get hurt.

  • William March 17, 2015 7:41 AM

    I have a timeshare beside this complex. We are ambivalent about Baha Mars success . We were quite happy before it came but may use its amenities and enjoy the increase in value of our condos. Many long time owners who miss the old Nassau Beach Hotel and Johnny Canoes could care less about this intrusive behemoth.

  • Michael Summerfield September 29, 2015 1:05 PM

    The airlift might already be in place. My son and I flew from Fort Lauderdale to Nassau on Thanksgiving and there were only eleven of us on the Bahama Air 737 800. That's less than 10% of its capacity. The return flight was different. The Bahama Air flight to Miami, already 4 hours late, was eventually cancelled and they put those passengers on the Fort Lauderdale flight, only 3 hours delayed, and we nearly filled the aircraft! Bad news for Baha Mar though. Most of these passengers were Bahamians going to Florida for Christmas shopping!

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