Carlos Rodriguez, CEO of Driftwood Acquisitions - one of the largest operators in the U.S. hotel market
We are living through a recession far deeper than that of 2008, one that is affecting many more companies and people, especially in the service sector and the tourism industry. But above all, it is necessary to keep in mind that there is nothing we can do about what happened as a result of the pandemic. This was no one's fault. What matters is how we react to it. We can stand still and dwell on the situation, or take advantage of it to buy assets when everyone is afraid and getting rid of them.
Here at Driftwood, specialized in the hotel niche for more than 20 years, we believe in a swifter recovery, for two reasons: (1) there is far more liquidity available, enabling us to take advantage of the situation, and (2) with the arrival of vaccines, the recovery could be faster, since this recession does not stem from structural economic problems.
But how do you survive the crisis?
It is essential to act quickly, boldly and decisively: cut costs and payroll. Timing is crucial for these decisions. In addition, it is necessary to make sure there is no excessive leverage and that the debt terms are appropriate. Having sufficient working capital at all times is fundamental, as is a friendly relationship with your bank manager, since that is invaluable in times of crisis.
Think outside the box
There are many ways to solve problems: be creative when thinking about revenue to increase…revenue. Here are two examples:
- During the September 11 recession, when no one was traveling, I kept one of my hotels full by accepting used trucks as payment in exchange for stays. I sent those trucks to Costa Rica, leased them to Pepsi Cola, and then sold the lease contracts to a financial institution. I filled the hotel, the trucks became currency for my client, and I won that client's loyalty forever.
- In 2020, I leased two entire hotels to the government at a very good price for them to use as quarantine rooms for patients. They fully agreed to sterilize the hotels afterward. Once again, by doing this, we earned the government's goodwill in a city where its business represents a large share of these hotels' business. When there is turbulence, there is opportunity.
I believe 2021 will be a year of opportunities.
We are actively seeking opportunities to buy, lend and build. We have an opportunistic profile, we look for value-add and essential assets, and we feel comfortable making acquisitions at current prices, because we only invest when there is potential for substantial returns. But you have to be selective and disciplined when providing guarantees and conducting due diligence. In any case, this year I believe we will have once-in-a-lifetime opportunities to invest in the U.S., especially in the hotel sector.
Many hotels will end up going bankrupt, but that is when we will have the opportunity to buy them at very steep discounts, which in turn will increase the opportunity for greater profits.
The current financing landscape
Banks are lending less and at a higher cost, and are being more inflexible on loan terms and guarantees. This leaves room for groups like ours to offer financing to those who need capital to buy or maintain a hotel.
Where the best markets are now
The search for the best market depends on the investor's investment criteria and risk tolerance. If the search is for high-risk but high-return opportunistic assets, it is worth looking at malls in urban centers, because they are the ones suffering the most and will have the largest discounts, but likewise will deliver the highest returns when the economy comes back. And it will come back.
For those who are more risk-averse, look for deals in AAA locations with strong barriers to entry and in fast-growing markets, because it is now possible to do deals that would not be possible at other times.
Here at Driftwood, on the construction side, we are currently seeking resort sites and extended-stay hotels in areas with strong barriers to entry. We are also looking for regions where the local government gives us an economic incentive to invest. In acquisitions and private financing, we look for good, strong markets that are growing, but here we are more opportunistic. Money is made on the purchase, because you have to buy at the right price to truly make a substantial profit.
Trends arising from the pandemic
In new hotels, we are incorporating more outdoor spaces and adding technological resources to enable remote check-in and provide better service from a distance, because concern with cleanliness and sanitation is here to stay.
Calls via Zoom are a trend, but people have a need to create memories and travel to meet family and friends or to build closer personal bonds with clients. That will never change. With more technology, people will have more freedom to travel and work from anywhere in the world. The pandemic created a temporary interruption and a “travel fever” effect. When this is over, travel will resume, and I would say we will see a spike in demand.
With Biden as president, we foresee higher taxes, but a more stable presidency that is more open to immigration and to foreigners visiting the U.S. For all these reasons and many others, I firmly believe in the real estate market in this country and in the hotel industry in particular.
On interest rates, the trade war with China and the second COVID-19 wave
I do not see interest rates rising in the foreseeable future. The Federal Reserve has been very explicit about this. I believe that with Biden, frictions with China will ease. On the new coronavirus, I have great hopes for the vaccines and all the new treatments and tests being rolled out. So, in general, I am very optimistic.
The coming years will provide incredible returns for those who start investing now. Personally, I am fully committed to investing in the funds we are launching to take advantage of the current situation. I believe it is a once-in-a-lifetime opportunity.
For Brazilian investors, I must say that taxes are a significant issue. Therefore, it is necessary to structure the investment the right way. Ativore can definitely help you do this. With the right structure, I cannot think of a better time to invest in hotels in the U.S. I am extremely excited about the opportunity ahead of us.
