Mexican Hotel Chain Eyes Expansion Into Caribbean as Travel Industry Recovers

With $1.5 billion to invest, Mexico’s Grupo Posadas will open five properties in the Dominican Republic and is exploring other Caribbean islands, its CEO tells Bloomberg Línea

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Bloomberg Línea — A rapid recovery of the hospitality business following the hiatus imposed by the pandemic is the argument of Mexico’s Grupo Posadas (POSADASA) to convince its financiers that the model it has developed for decades can transcend national borders and expand its presence into the Caribbean.

Beyond its formula in the hospitality business, which includes hotel brands such as Fiesta Americana, Grand, Live Aqua and others, Grupo Posadas is applying what it has learned from its “Mexican model” to raise funds to support its expansion plans, José Carlos Azcárraga, CEO of the company, told Bloomberg Línea.

Part of that model, he explains, is to convince its investors to finance a plan that already totals more than 26 billion pesos (around $1.5 billion), and which involves the construction, either approved or underway, of 22 new hotels, plus 15 deals that are about to be signed, Azcárraga said.

The amount to be invested is more than one-fifth higher than what Posadas announced at the beginning of the year (20 b

illion pesos), he said.

The company’s business model, Azcárraga explains, revolutionized the company’s way of raising funds a decade ago, when real estate investment trusts (REITs) emerged as an industry in Mexico, and which became the “de facto financiers” of groups such as Posadas.

The entry of investment vehicles such as Fibra Hotel (FIHO12) or Fibra Inn, two Mexican REITs focused on the hospitality business, as well as the presence of other institutional investors in the fundraising mix, changed Posadas’ previous model, which was based on investments from family offices, and to whom the group turned to because of family ties or decades of relationship.

The evolution of this model means that, to date, of the 19

0 properties Grupo Posadas operataes, “50% are owned by REITs and 50% by private investors,” according to Azcárraga.

However, he added that, as a result of the pandemic, the participation of REITs in new projects has decreased, since the investment that Posadas obtained for the 22 formalized complexes, 75% of the resources come from private investors and 25% from institutional funds.

Likewise, the investment of its own resources has been decreasing and has been concentrated in assets such as technology and digital platforms, such as Fiesta Americana Travelty, which recently strengthened the group’s consumer-facing operations.

“In the 22 hotels and the 15 in the process of being signed, we have practically nothing invested from us. Of the portfolio between owned and leased we will have 15% of the investment,” he said.

Azcárraga says that the Grupo Posadas model has allowed them to gain in efficiency when operating the hotels, leaving the injection of resources to “people who know how to get money more cheaply”.

How easy is it to convince investors?

“The best way to convince people is to show them the results of what is happening,” Azcárraga says. “And hotel results are doing incredibly well, much better than before the pandemic.”

Other factors that influence, for now, is the Mexican peso

-US dollar exchange rate, which has brought benefits for imports of goods and construction materials, although it hits the balance sheet when converting to local currency.

Performance for REITs has also been positive. From July 2021 to July 2022, Bloomberg’s FBMEX index of REITs on the Mexican Stock Exchange offered a return of 12.37%. This index is comprised of investors in infrastructure, education and hotels, among other industries.

Caribbean expansion

After acknowledging competitive disadvantages in South America, where Grupo Posadas came to own properties in Argentina, Brazil and Chile, but which it later sold, Azcárraga says the Caribbean offers better growth opportunities, especially in the Dominican Republic, where they already have a property, Live Aqua, one of the group’s luxury brands.

“We opened before the pandemic and it has been such a success that we are focusing a lot of efforts there,” Azcárraga said.

In alliance with Spanish investors, Azcárraga says that the foundation has already been laid for a 427-room property and that five of the 22 hotels already confirmed in its investment plan will be in tha

t Caribbean destination.

In addition, the company sees potential in Jamaica and Aruba, but it is in the Dominican Republic where they will put their resources for now.

Part of this decision, says Azcárraga, comes from the Dominican vocation for tourism, but also from the willingness of the authorities to open the doors to foreign investment and, more than anything else, another part of the “Mexican model” that the company wants to develop: many of the clients that the company has in mind already know Posadas from their experience in Mexico.

“Visitors to Cancún or the Riviera Maya are practically the same,” he says. “The operating model is the same, the marketing model is the same. There is a lot of synergy.”

For the CEO, “the Dominican Republic is a country that has been able to understand that its tourism vocation is enormous; therefore, even though they have certain limitations in terms of supply, positioning and infrastructure, they have been able to face them. They have the capacity to generate incentives for investment, whether they are fiscal, for the import of materials, and they have become competitive. They are growing in activities beyond the hotel; they are following the Mexican model”.