Atlantica Hotels International, São Paulo, established itself as the largest privately held company in Brazil under the guidance of President and CEO Paul Sistare and boasted impressive results, including 42 hotels representing 7,270 rooms under construction to be opened in the next 36 months and another 33 hotels under development that have already been contracted. Add to that 85 hotels already open in 44 cities in Brazil, 14% growth in systemwide revenues and year-to-date growth of 9% in RevPAR in managed hotels, and it’s not surprising Atlantica was an attractive investment target. In late October, funds managed by U.S. investment groups Soros Fund Management and Tao Capital Partners acquired Atlantica through a recapitalization for an undisclosed amount and brought in new leadership including industry veteran Doug Geoga as chairman.
Sistare, meanwhile, will continue as president and CEO. HOTELS recently asked him about the impact of the recapitalization, Atlantica’s plans for growth and the general outlook for hotel investment in Brazil.
HOTELS: What were the major factors that led to the recent sale of Atlantica?
Paul Sistare: Rumors have swirled for years regarding the potential acquisition of Atlantica. The attraction to the new buyer group was mutual. From our initial days in 1998 with a handful of professionals to more than 5,500 team members today, Atlantica has strengthened our position in the Brazilian marketplace, and we have only scratched the surface. What new ownership has clearly appreciated is that the wealth of human talent gathered by Atlantica is the true key to our past, current and future success. A platform including the human talent is in place to take our organization to newer and higher levels.
HOTELS: What can you share regarding Atlantica’s plans for growth, especially in light of the company’s new ownership?
Sistare: First, I would point out that in the recapitalization of Atlantica, no capital has been set aside or required for our current growth. Atlantica operates 85 hotels with more than 14,000 rooms in Brazil with a cross section of all brand and consumer segments. We have never set growth targets, and new ownership shares our vision. Growth is a consequence of our unit performance. Currently, our hotels systemwide operate at 114% market share.
HOTELS: Do you expect Atlantica to continue as strictly a hotel operator, or might the company pursue ownership interest in future projects?
Sistare: Atlantica’s business plan has always been a pure service provider. We have had the fortune to partner with two outstanding international brand groups (Choice and Carlson) who have allowed us to deliver a point of difference to our hotel owners.
That being said, the market in Brazil is maturing and changing. Real estate prices peaked a year or so ago, and with the current economic outlook for Brazil, real estate may become more attractive.
However, the culture in South America as a whole is that real estate ownership is both an inflationary and currency hedge. If we should move into equity positions, it will be a very small part of our inventory with significant economic and strategic benefits.
HOTELS: What are your thoughts regarding the overall outlook for hotel development in Brazil?
Sistare: Until recently, Brazil had been the envy of the economic world. High-single-digit GDP growth, minimal inflation and negligible unemployment have for the last decade been the norm.
Now we are entering into a new cycle. Brazil is experiencing its first technical recession in two decades. Inflation has crept up to 6.5%, and the currency has plunged to decade lows. The Brazilian economy is certainly not in a tailspin, but it is fragile. Current hotel owners are evaluating their profit margins. Hotel ownership is also pressuring their management groups for discounts and rebates to boost ownership profits. Development of new hotels has dramatically slowed, as would be expected.
The fact remains that the hospitality industry in Brazil is still embryonic. The picture here is much like the U.S. hospitality industry in the 1980s. We are beginning to see not only the application of professional management to the hotel industry but now the evolution of brands, management and franchising, but the industry is still highly fragmented and controlled largely by regional brands.
HOTELS: What do you see as the biggest challenges that remain for hotel developers in Brazil?
Sistare: Traditional hotel developers have yet to come to grips with the fact that leveraged hotels in Brazil are almost rare. The current interest rate is 12.5%, and unlike other international markets, it is not fixed. It floats on a monthly basis, and coupled with the current returns from existing hotels, the ability to cover such an extraordinary cost of capital is nearly impossible and unpalatable.
Once developers get past the shock of unleveraged assets, they have to come to grips with extraordinary levels of governmental bureaucracy and taxation, a Napoleonic legal system, high social costs — currently benefits for hotel staff are nearly equal to 100% of payroll — and a huge lack of experienced talent. Developers may be able to get a hotel open, but getting it professionally staffed is a major challenge not only due to the nature of our business but also the competition for talent in general from other industries.
HOTELS: Did the World Cup have the impact you expected on performance and development?
Sistare: While the World Cup did indeed push RevPAR in the 12 host cites, the rest of Brazil came to a screeching halt. The business traveler stopped traveling not only to the host cities but also the smaller secondary and tertiary cities. And of course, developers went overboard in introducing new and unsustainable inventory in some of the host cities.
While the business and group travel market slowly started to come back in August, several cities in Brazil are now struggling to accommodate the oversupply. The market demand has not reached pre-World Cup levels. The World Cup “hangover” is expected to be complicated further by the current fragile economic cycle. In our existing hotels, we are seeing flat RevPAR growth for the first time in decades and inflationary costs outstripping any revenue gains we may experience, leading to lower profit margins.
HOTELS: What are your latest expectations for the impact of the 2016 Olympics?
Sistare: When you consider the Olympics will be held primarily in Rio de Janeiro with some of the trials in a few metropolitan areas, we do not foresee a systemwide increase in RevPAR or sales. I believe the Olympics will continue to increase Brazil’s visibility on the world stage, however, the impact on our industry as a whole will be minimal.
HOTELS: What are your thoughts about broader hotel trends for 2015?
Sistare: While the Brazilian hospitality industry may indeed still be embryonic, we are rapidly catching up to the rest of the industry. A couple trends we are currently exploring is the elimination of voice-call centers and migrating almost exclusively to mobile applications to facilitate reservations delivery, check-in, check-out and in-room connectivity. At Atlantica, we are fortunate enough to have a very young and talented team who understand the technological revolution in our industry and, most importantly, how to apply it to our guest’s needs and wants. A friendly, efficient check-in, a clean room, attention to guest security and privacy, a great bed, a refreshing shower and a smile to make you remember us on the way out — everything else is just noise.