As Puerto Rico struggles to restructure its outstanding debt, which economists suggest could take a year or more, except for some instability with group bookings, hotels so far are holding up fairly well despite the recent negative economic headlines.
“It is true that the very large hotels such as The El Conquistador (over 1,000 rooms) have experienced postponement of groups,” Marie Dexter, Resort Development Consultants, Key Biscayne, Florida, told HOTELS. “However, smaller hotels and resorts targeting small groups and the leisure market are doing quite well to date and in their short term outlook.”
Jose Suarez, president of International Hospitality Enterprises, the largest owner-operator based in Puerto Rico, cited data suggesting RevPAR performance in June was up 7.7% versus 7.6% for the Caribbean. “Tourists don’t look at the balance sheet of country to decided where they want to go,” he joked, adding that forward-looking business for the upcoming high season looks very good.
At the same time, Suarez said meeting planners need faith to recommend Puerto Rico. “We are working closely with the convention bureau to get funding to stimulate and incentivize groups to continue to come here,” he added. “We have to work hard on PR and educating meeting planners. They shouldn’t be concerned as things are normal, so far.”
While the big increase in leisure demand is not driving rate, it is helping build occupancies. Occupancy is up 5.5% for the first six month of this year, according to STR data, versus 3.2% for Caribbean hotels. But ADR has shown only 2.2% growth versus 4.3% for the Caribbean.
“There are not as many commercial projects as a result of economy that induce business demand, but it is being replaced by leisure demand,” Dexter said, adding that the luxury market is also holding up with the newer Ritz-Carlton Reserve, La Concha and St. Regis resorts reporting strong performance with US$1,000 rates.
Energy price issues loom
What does worry operators like Suarez, who runs seven hotels, including the luxurious Condado Vanderbilt Hotel and La Concha in San Juan for new high-profile owner John Paulsen, are pending tax and energy cost increases. The sales tax has increased from 7.5% to 11.5%, but the good news is guest rooms already have a tax separate from sales, so there have been no major changes in consumption. The sales tax does apply to F&B sales, but again Suarez said he is not feeling a big impact. Soon, however, hoteliers will be impacted by a B2B tax for things like landscaping and elevator services, which is increasing from 4% to 10% or more and will require some budget modifications.
The bigger issue still will be energy prices, with rates expected to increase, perhaps dramatically, as bondholders negotiate with the Puerto Rican power authority. “We haven’t started the budgeting process, but the biggest question mark is on the energy side, which is typically 10% of revenue. How to forecast the cost of energy is a big question,” Suarez said.
Steals and deals
On the development and acquisition side of Puerto Rico’s hotel equation, hedge fund operators like Paulsen see the glass as half full and expect a nice upside to their very reasonably priced recent investments. At the same time, because the government at the moment has to place its funds elsewhere besides supporting tourism investment, it is harder to find development debt, which will keep a cap on supply growth for an island that is far from oversupplied with just some 12,000 rooms.
“The economy will almost certainly continue to contract this year and next. The impact on new hotel developments will be felt mostly because the Tourism Development Fund, which used to finance new hotels, is no longer,” said Puerto Rico’s leading economist José Villamil. “New hotel developments will have to find financing elsewhere.”
On the merger and acquisition front, Dexter also believes many investors see an opportunity during these times with properties like the El San Juan in Isla Verde recently trading for US$71 million with another US$40 earmarked for refurbishment. Also, the San Juan Marriott in Condado reportedly was acquired for an unexpectedly high price of more than US$190 million.
“In absence of the Government Development Bank having liquidity to invest, we have seen local banks lending to hotel sector, which has not happened in past,” Suarez observed. “Now they are getting heavily involved in new projects and refinancing existing hotels.”
At the same time, Suarez pointed out that a few of the big developments now have a gap in their financing and are not sure where the answers will come from. “The government is still supporting development, but it must be cautious based on the economic situation. They have taken a few hits on hotel investment in the past,” he said.
In the meantime, Suarez added that Puerto Rico remains a great destination and the infrastructure for tourism continues to be supported by the government. “The numbers from the lowest point in 2008 continue to move up,” he said. “Even with the challenges, the market is strong and upswing is still there.”