HOLLYWOOD, Florida — Buoyed by pent-up leisure travel demand, hotels in the Caribbean so far are making it through the pandemic, which for opportunistic buyers means there are fewer assets on the market at discount prices than are generally expected during a downturn.
Hotel transactions in the region are relatively rare anyway, given that many of the existing assets are owned by local families and handed down through generations.
Brands and other investors looking to buy their way in to the hot Caribbean hotel market might have to wait a while longer for the kind of financial distress that could motivate an owner to sell, according to hotel and investment executives on a panel at the Caribbean Hotel & Resort Investment Summit.
“A lot of people thought there was going to be a lot more distressed assets coming on the market in the last six months, nine months, and that hasn't really happened. We think there's a lot of people hanging on by their fingernails, waiting for the cash flow to come in ... so there could still be some properties that would come to the market in greater numbers over the next few months," Robert MacLellan, partner at hospitality investment advisory firm MacLellan & Associates, said.
Bill Stadler, executive vice president and chief investment officer at hotel management firm Aimbridge Hospitality, said that one factor limiting distress in the market is a lack of debt.
"We operate a dozen hotels in the Caribbean. We're at 1,500 hotels globally that we manage. I think one of the reasons you're seeing less distress in the Caribbean is the recovery — a lot of our hotels are now back to 2019 levels in performance — but also you don't have the levels of debt that come with hotels in the Caribbean. It's very difficult to get debt. The leverage ratios are typically 50%. So that has saved a lot owners," he said.
He said owners have been able to lean on restricted cash or reserves to survive the worst of the pandemic. In addition to leisure demand, business bookings are coming back at some hotels, like the Hyatt Regency Grand Reserve Puerto Rico, which Aimbridge manages.
"We're very optimistic about the future, and I don't think there will be a lot of distress," Stadler said.
The pandemic is unpredictable, of course, and the situation could change.
"I'm not sure about this whole new Delta variant. The impact of that is still honestly uncertain," Stadler said. "We just opened a Margaritaville a month ago in Nassau. We've got great bookings in the future. Will that hold up now? I don't know."
Something that is predictable: Hotels require renovations, and owners who have delayed that work will eventually face a reckoning.
Rob Mentnech, managing director of SureStay Hotels by Best Western, said that itself could spur a wave of distressed assets hitting the market.
"The problem is that if somebody didn't do a renovation in 2018 or '19, they didn't do it in '20, they're not going to do it this year, and chances [are] they're not doing it next year. You could have a five-year period where we're going to be dealing with a lot of hotels in certain markets that have had zero capital improvements, and that's going to be the challenge," he said.
It's only a matter of time, he said, before the brands like Marriott International and Hilton start putting pressure on their owners to carry out property improvement plans, which have been delayed.
"That's when we'll really see which owners make it and which ones are going to be in trouble," he said.
Stadler agreed that will likely be a turning point for many owners.
"Personally, I think that's where the distress would come in, when these brands start leaning on these owners that it's time to renovate, and they're looking at $50,000- or $100,000-per-key renovations. They just can't find more time," he said.
In the meantime, there is a lot of capital looking to be spent in the Caribbean, and it might make more sense to build.
"Part of the problem is there's so much money on the sidelines right now," Mentnech said. "In the first and second quarter of this year, every week I was talking to a group that was looking to raise $100 million to purchase distressed assets, and they weren't out there."
He said he has advised some operators and developers: "There's so much unknown, you might be better off building now, and when the economy comes back, instead of having a 25-year-old asset, you get a brand new asset."
"The mindset is starting to shift that way," he said. "While the franchise companies want to see some distressed assets come in, who's going to pay the long-term liabilities? What you're talking about there are deep pockets."