By Craig Karmin
A U.S. investment firm that recently acquired one of Brazil's
largest hotel companies is planning to expand and upgrade in the
country, wagering it can steer through a sluggish local economy and
fend off new foreign competitors.
GTIS Partners and a Brazilian partner this month completed a
tender offer for the shares of Brazil Hospitality Group in a deal
that values the lodging company around $400 million.
New York real-estate firm GTIS now owns a 69% stake in BHG, with
its partner, private-equity firm GP Investments, controlling the
rest. GTIS expects to invest an additional $150 million to upgrade
most of the more than two dozen properties owned by BHG and to grow
the management company.
GTIS joins a small crowd of global real-estate investors,
including Blackstone Group LP and Brookfield Property Partners LP,
who have been scanning the country for opportunities at a time when
many other foreign money managers have been frightened off by an
economic slump and street protests against government
corruption.
"People have been selling first and asking questions later when
it comes to Brazil," says Thomas Shapiro, GTIS president. "We think
it's a great time for distressed investors."
GTIS has invested $2 billion in equity across 40 different
projects in Brazil, from warehouses to condominiums. It has
developed office projects in São Paulo and Rio de Janeiro that
count Facebook Inc., Apple Inc. and Goldman Sachs Group Inc. as
tenants, GTIS said. BHG is the firm's largest equity investment in
that country.
Mr. Shapiro thinks the highly fragmented Brazil hotel market
presents a particular opportunity. With most banks in Brazil
reluctant to finance hotel development, which is considered more
volatile than real estate like office buildings with long-term
leases, the majority of the country's lodging stock is controlled
through condo-hotels.
In these projects, individual owners buy units and rent them
through the hotel when they aren't staying there. BHG, which owns
27 of the 52 properties it manages, holds more properties than any
other company in Brazil, Mr. Shapiro says.
BHG is also the country's third largest hotel operator, with
about 10,000 rooms. It has the rights in Brazil to franchise the
Tulip brands, which are owned by Paris-based Louvre Hotels Group
and range from midmarket to higher-end accommodation.
Mr. Shapiro's plan is to upgrade to the luxury level some of
BHG's properties in prime Rio and São Paulo locations, taking
advantage of the lack of five-star product in Brazil. GTIS also
plans to acquire new hotels in southeast Brazil and compete for
management contracts from independently owned hotels across the
country.
Analysts say GTIS faces some challenges. In addition to the
slumping economy that has slowed business travel within Brazil,
there is a wave of new supply from foreign hotel operators looking
to establish a presence in Latin America's largest country and to
have hotels open ahead of the 2016 summer Olympics in Rio.
Local government officials have projected 75 new hotels will be
operating in Rio by the start of the games, a 60% increase in six
years. Property tax reductions and other government incentives have
lured brands from companies like Hilton Worldwide Holdings Inc. and
Hyatt Hotels Corp. to the market, raising concerns of a glut of
rooms after the Olympics are over.
For now, Brazil's weakening currency has hurt hotel revenue when
converted back to dollars. For the first three months of 2015,
revenue per available room in dollars fell 22.5% compared with the
same period last year, according to STR Inc. In local currency,
that revenue fell only 3%.
Still, Lindsay Gordon, manager of hotels in Latin America for
broker Cushman & Wakefield, says BHG looks better positioned
than peers. "The majority of demand in Brazil is going to be
domestic," she says. "The Tulip brand is well-known and BHG has a
strong name and quality hotels."
Josh Pristaw, a GTIS senior managing director, thinks that much
of the projected new hotel supply will be delayed because of the
economy.
"We are seeing projects without the capital to finish," he says.
"That could provide an opportunity for us to acquire more
distressed property."
Write to Craig Karmin at craig.karmin@wsj.com
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