South American Capital Markets: Is The Grass Greener?

As many of you know, my son, Adam, is pursuing life and career as a hospitality transactions consultant (this acorn did not fall far from the tree) in Buenos Aires. I have asked him to provide some color to the impacts of the capital markets in South America. Here is the first of a two-part series: 

The winter and end of year is approaching in el Norte, the South American region, where we are in the midst of spring. We have been receiving a relatively increasing level of press, ranging from the International Olympic Committee’s decision to award the Summer Games of 2016 to Rio de Janeiro (breaking my Chicagoan heart – something I am quite used to as a lifelong Cubs fan) to President Chavez’s decision to nationalize a Hilton-branded property in Venezuela and an Argentine development group investing in a U.S. hospitality REIT – not to mention the looming sovereign debt crisis that threatens to hit Argentina for the second time in less than a decade. In these times of economic uncertainty, the region with a long-standing history of explosive inflation, economic turmoil and political instability is at an international investment intersection. The time is right.

How can ‘deal hunters’ capitalize on the opportunities that the international capital markets seem to have no stomach to pursue, especially in markets that have long been on the bottom of most lists for places to investigate, much less invest? Many of these questions have been posed at a variety of conferences over the last quarter, including two that I was able to attend: the one-ay RealShare Hotel World event held annually in New York City and the second annual South American Hotel Investment Conference (SAHIC), which took place in Rio de Janeiro.

Each of these conferences maintained a regional focus, logically, and attention was paid to ‘challenges’ in the immediate hospitality environs in which each conference took place. RealShare had a more finance-oriented agenda, dealing with current debt/capital availability and loan defaults/servicing, branding/’latchkey’ hotel issues, and corporate business travel. SAHIC dealt more with rooms-supply growth, infrastructure investment and the forthcoming international exposure (the bi-centennial celebration of many South American countries, the South American Games in Medellín in 2010, the World Cup in Brasil in 2014, and the now- awarded 2016 Summer Games in Rio de Janeiro, the decision that many officials and attendees were anxiously awaiting during the conference).

New From RealShare
With much of the focus on loan defaults, liquidity issues facing owners and debt servicing within the U.S. domestic hotel market, I opted to dedicate my time on the presentations, and discussions thereafter, regarding U.S. interests abroad. As an expat in a foreign land – I can safely say that after nearly one year in Argentina I am now confusing people when I politely inform them that I am from the U.S. and not actually a Porteño (the term for a person from Buenos Aires) – my focus is on bridging some of the cultural traditions and business practices between the ‘western’ and ‘latin’ styles. Sitting in on the ‘International Opportunities’ panel  – which included representatives from a development sponsor, an institutional investment advisor, a hospitality consultant and a management company  – was a good opportunity to get my first ‘painted picture’ of how U.S. based groups perceived the Latin American market in a conference and/or panel setting, and what, if any, steps are being taken to actively pursue opportunities.

The comments made regarding investing abroad were not necessarily surprising; rather, they reaffirmed some of the observations I have made about the challenges of entering foreign markets. As is the case in the U.S. when the investor is not located, nor has an office representation in the market in which it is investing, the local development/operating partnerships are paramount to the confidence in, and eventual success of, a particular project.

When investing abroad, especially in Latin America, this relationship is taken to a new level, as the business practices, customs, laws and regulations may differ drastically from the ‘home’ arena. However, these hurdles are not terribly dissimilar from those we experience within the U.S. (in number or types of foreseeable challenges, not in the actual differences, which can be wildly disparate). Due to the relatively unstable economies of Latin America, local development partners need to have exceptional project execution experience and must understand the political subtleties that exist within various planning and development agencies (this is also of importance in the U.S. but recent implementation of technological solutions in ‘our’ municipal agencies may have reduced the need to have close relationships with an array of officials).

In addition, many sources of foreign capital are looking to position themselves in a structured capital stack, as we have seen to be quite common in U.S.-based investments (e.g. the waterfall/promote structure). But groups in Latin America have never had great access to global capital markets, including both debt and equity, and are therefore less familiar and less comfortable with the potential for ‘funny math’ to take place over the life of a project. Down here, cash really is king, and money actually talks.

This rather novel concept comes with caveats, like most other things in structuring investments abroad, as it often takes many years of research and inquiry to be in a position to develop a long-term strategy for a particular ‘foreign’ market. The political stability, economic viability tied to ‘western’ practices, liquidity concerns regarding repatriation and currency strength/devaluation of countries were highlighted as key metrics for underwriting investments abroad. Without a critical mass (e.g. a multi-property/portfolio investment, an expandable platform, etc), the start-up costs associated with launching an international operation tend to be difficult to justify on a single-asset basis. The deal sizes in the region are typically not as large as we are accustomed to in the U.S. so the opportunity cost of passing on a series of smaller deals, far away from home, are justified by larger deals on home soil. This is part of the equation that many groups in the region are trying to solve as they adapt a growth strategy that takes into account the investment decisions made by U.S. groups, specifically, and foreign capital, generally.

SAHIC Wrap-Up
Having never been to Brasil before this conference (shame on my parents for not vacationing along the Brasilian beaches when my sister and I were growing up), I was ready for an experience. It was the ‘second’ conference I was attending under the joint relationship between Wilshire Hospitality and Four Corners Advisors and many groups had contacted me in advance. I was looking forward to this potential boost to the practice and I was equally excited about learning more about the ‘mystery’ behind the thriving success of the hospitality market of Brasil.

In late July, STR declared that Brasil was one of the few countries in the world to experience operating/performance gains for the first six months of 2009, amidst one of the largest global economic crisis in history – how could this be? Well, there are lots of reasons, some of which I found strolling the boardwalks of Copaçabana, Ipanema, and Leblon: Brasilian culture is all about the ‘experience’ of the day and enjoying life with as much ‘passion’ as possible. This comes with a heavy caveat as it is ‘in your face’ apparent how poor some of the communities are in Rio, with the favelas being very visible from almost all points in the City. In a word, Brasil is, amazing.

More to come next week…