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Vietnam’s Visionaries: Indochina Land

Vietnam’s Visionaries: Indochina Land While pitfalls exist, Indochina Land has put solid stakes in the ground to lead the hotel charge in a land ripe with potential. By Jeff Weinstein, Editor in Chief -- Hotels, 9/1/2009 Indochina Hotels and Resorts’ leaders (l. to r.) Peter Ryder, Baron Ah Moo and Rick Mayo-Smith. It took a cowboy’s posture, a pioneer’s spirit and really good timing to be the first international developer to make inroads into the burgeoning Vietnam hotel market, which, with limited new supply, witnessed RevPAR growth in excess of 30% between 2005 and 2007. Peter Ryder and Rick Mayo-Smith, co-founders of Indochina Capital, Ho Chi Minh City, have been able to raise a lot of cash during a roaring five-year run and, at the same time, learned to be steadfast and resilient in their approach to upscale hotel development driven through their real estate division, Indochina Land (IL). Along with Indochina Hotels and Resorts’ (IHR) CEO Baron Ah Moo, the principals have, perhaps, absorbed a lifetime’s worth of business lessons in a land still so new to Western-style commerce, with multiple infrastructure hurdles, internal financial growing pains and, now, exposure to global financial headwinds. Such are the trials and tribulations facing pioneers as IHR’s hotel performance through June was running about 20% behind 2008’s numbers, according to Ryder. IHR forecasts that this year’s portfolio performance is tracking 10% to 15% below that of 2008 on an EBITDA basis. Those numbers reflect the 19% falloff in international arrivals this year with key markets, including China, Japan and South Korea, dropping as much as 39%. Ryder, a trained anthropologist and former Wall Street banker who has been toiling in Vietnam for nearly 20 years, had nearly perfect timing in 2005 when he and Mayo-Smith raised a US$42 million property fund, sold the Sofitel Metropole in Hanoi and quickly provided a 20% return. Soon thereafter, as Vietnam’s prospects began to catch the attention of the global investment community and property prices skyrocketed as much as 30% per year, Ryder and Mayo-Smith were able to secure a US$265 million second fund, which helped their team create a beautiful yet still underutilized flagship in The Nam Hai resort managed by General Hotel Management Ltd. in Hoi An; among others acquire a palace hotel and golf facilities in Dalat; develop the nearly completed Six Senses Hideaway resort in Con Dao; build a golf and country club retreat designed by Colin Montgomerie in Quang Nam Province near China Beach; and, most recently, start development on a Hyatt-branded, mixed-use beachfront development in Danang on China Beach. In fact, some experts are calling the Danang beach area the next great Southeast Asia resort destination similar to Phuket, Thailand. In total, Ryder estimates Indochina Land’s hospitality investment at approximately US$300 million. Now comes the tricky part—managing hotel real estate, as well as commercial and residential property, through a dicey downturn in a still immature market with fund investors hungry for returns. In fact, rumors surfaced earlier in the year that Indochina Capital was seeking an exit from Vietnam as investment became difficult and real estate values diminished. “We have reached an overall agreement with all of our investors, and announcements will come soon about the direction of the fund, but exiting Vietnam is not an option,” Ryder said in mid-July. Not An Easy Market A third fund valued at approximately US$150 million also has been raised but not yet deployed as the global economic crisis has weakened demand, values and returns. Some analysts speculate the property market will not rebound in Vietnam for another three years, but Ryder—not one easily deterred or ruffled by the recent turn of events—says his group’s track record speaks for itself and is quite confident about his team’s ability to manage and perform in difficult times. “Most importantly, our exits to date have been very profitable and our projections show attractive returns going forward,” Ryder says. In fact, Indochina Land is about 50% exited from its first fund, with Ryder expecting another big sale before the end of the year. “We are in good shape. The basic fee income from the funds keeps us comfortable enough—but not too comfortable,” Ryder adds. Indochina Hotels and Resorts’ flagship Nam Hai resort in Hoi An. While the ever-confident Ryder says he is starting to look at exits from the second fund, there is still about US$250 million not yet put to work that likely will be spent on for-sale residential products—not hospitality. “The for-sale residential market has legs and is something we have been good at. We plan to focus on what we do well.” In fact, Ryder says a memorandum of understanding has recently been signed on a large residential project in Hanoi. As for the exit from funds, Ryder says, “We are not in a hurry [to exit]. If someone makes us an offer we can’t refuse, of course we will consider it,” he says. “But this is not the best time to be exiting, even though things have recovered significantly from their lows about a year ago.” Ah Moo believes the Vietnam economy has turned the corner, with financial markets rebounding slightly and lending and liquidity coming back. However, Vietnam is primarily an exporter, and a rebound also will depend on a global recovery. “Real estate lending is no longer a dirty word here,” Ah Moo says. “The interesting dynamic is that local companies are buying international projects being shopped, including hotel projects.” He cites Kingdom Holding’s sale of the Raffles hotel project in Danang, as well as other local companies coming in as joint-venture partners to inject the necessary cash to activate existing projects. “The internal issues affecting foreign investment have abated and inflows are starting to return, though still constrained by global economic conditions,” says Robert Hecker, managing director of Horwath HTL, Singapore. “So material recovery is not really expected until next year… There are certainly plenty of beachfront sites and projects in the works, but financing has been an issue.” Ryder says it is a good time for his group to pause with hospitality development and see how the market develops over the next few years. “We think we are well positioned with what we have but must focus on how to make it work—to improve access, whether it is Danang, Dalat or Con Dao,” he says. In the meantime, Ryder says the hotel company has been very proactive on the expense side. With the decline in foreign visitors to Vietnam, the sales and marketing strategy for the hotel portfolio has shifted, focusing on the domestic market to drive occupancy through aggressive pricing and promotional campaigns. Domestic travel within Vietnam during the second quarter remained robust, and across the portfolio IL reports witnessing a significant increase in the percentage of guests originating from within the country—both Vietnamese nationals and foreign residents. Early indications also point to a positive fourth quarter. “We are suffering less than a lot of our competitors, but it is a tough market,” Ryder says. Critics Chime In While Indochina Land is doing work to ride out the global downturn, it is not without its critics who point to poor execution on acquired properties, questionable site selection and concerns about the viability of golf operations in Vietnam. Ryder is quick to respond on all points, and that includes whether or not IL is feeling any pressure from its lenders or investors. “Our investments are not heavily geared (total borrowings of US$35 million on approximately US$1 billion asset values) and, therefore, our debt exposure is very limited,” Ryder says. “In fact, we are seen as a preferential borrower and our onshore reputation and relationships with our financial partners is so strong that, as liquidity returned to the market after Vietnam’s domestic credit crunch in 2008, we were able to secure two of the largest real estate-associated credit facilities in 2009—US$44 million for Indochina Plaza Hanoi, a mixed-use residential development, and US$39 million for the Hyatt Regency Danang Resort and Spa.” Ryder adds that on a portfolio basis within each fund, the businesses are cash-flow positive (after debt service). “Most important, we have never missed a debt service payment and are current with all of our (limited) borrowing.” What about investor anxiety? “They are, of course, being rigorous with their due diligence and asking the right questions,” Ryder says. “However, the sentiment amongst our investors is that Vietnam’s long-term growth potential outweighs the current downturn in the market, and the country’s GDP in the first half of 2009 not only outpaced the world average but all other Southeast Asia nations.” Ryder adds that unlike other funds, Indochina Capital has not requested additional money from investors and has been able to delay capital draw-downs in certain situations by acting fiscally prudent. “This speaks volumes to the investment community about our ability to manage and perform in difficult times,” he says. As a developer, Ryder says his group has been quite skillful over the last decade. For example, IL acquired the land on which it developed The Nam Hai in 2002 for approximately US$3 per square meter. “Today, the land would trade for at least US$70 per square meter,” Ryder says, adding that he could point to three other land acquisitions made from the first fund that sold at prices significantly more than they paid. “Did we overpay for the Dalat portfolio? Probably,” Ryder says. “The market was red hot and we should have exercised more discipline and, yes, we have been stymied in our attempt to expand the development entitlements… As we now refine our redevelopment and exit plans for the Danao portfolio (Dalat, Phan Thiet and Saigon) we remain confident that our investment will not have lost value and, in fact, will result in solid profitability.” The Hyatt-branded mixed-use development in Danang. As for overspending on The Nam Hai, which was somewhat intentional as the group positions the property as its flagship, Ryder says it had good years in 2007 and 2008 and will remain cash-flow positive in 2009, despite the big decline in global tourism. “Today, we have a relatively small amount (US$13 million) of inexpensive debt on the property, and we were ahead of the curve by beginning to cut expenses this time last year,” he says. In response to the secluded location of the Six Senses resort, Ah Moo says it is in keeping with the Six Senses criteria and, to date, it has been a successful model for owners. “In fact, given the style of the Six Senses product and services, operating costs are extremely low, yet revenues are in line with 5-star luxury resorts,” Ah Moo says. IL launched residential villa sales at the Six Senses site in 2007, which were well received at the time, attracting buyers for one-third of the 16 available villas, according to Ah Moo. “While interest has been subdued, we have seen a renewed interest in the project from international buyers, many of which own a residence at another Six Senses property.” Lastly, Ryder responds to the viability of golf in Vietnam by stating that the government has placed a moratorium on any further golf course development and believes fundamentals truly line up well for private course ownership. “Vietnamese have fallen for golf in a big way,” he says. “Think Japan in the 1960s, Korea in the 1970s and Thailand in the 1980s. Let’s assume only 5% of today’s population could access golf—that translates to 4.5 million golfers. OK, say only 1%, which still equals 900,000 golfers.” The IL Model The 43-key Sofitel Dalat Palace was built in 1922 as a summer home for Emperor Bao Dai. So what is it like being a trailblazer in an emerging market? Indochina Land—along with a handful of other local developers such as Saigon tourist, VinaCapital and Serenity Holdings—has endured numerous detours and delays. Without Ryder’s 20 years on the ground, the outcome might have been much different. “My biggest weakness is that I am myopically focused on Vietnam, and my biggest strength is that I am myopically focused on Vietnam,” Ryder says. The IL model has been to create a hotel with a residential component—not too surprising by today’s lending standards, but nonetheless a requirement. At the Hyatt project in Danang, Ryder says 100 of the 180 residential units have been sold with the first 10% of hard money put down on 80 of the 100 units. With foundations in the ground, Ah Moo estimates a January 2011 soft opening for the 225-room Hyatt Regency. IL went with Hyatt, which also will manage the villas and condominiums, because of its strong presence in the region. “They operate the best hotel in Ho Chi Minh City and moved the bar in terms of quality in Vietnam,” Ah Moo says. “We courted them, initially, and got good terms. It helped that Hyatt was more than willing to do the residential with us and has some experience in that area.” Certainly, IL is not alone in its interest to develop hotels, as during the first half of 2009, half of the US$8 billion in foreign direct investment was hospitality-related. What could make life easier for all developers, say Ryder and Ah Moo, would be accelerated infrastructure investments, including better lift options into the country, especially to resort destinations like Danang and other beachfronts, where access can sometimes require a three- to five-hour ride over poor quality roadways. In addition, to date there is not one direct flight from the United States to Vietnam. “The country is in its infancy of being able to provide quality services, infrastructure and efficient services to mid-level tourists,” Ah Moo says. “We are at the turning point—the fork in the road—for Vietnam if it is going to consider tourism as a true industry that requires investment.” One issue Ah Moo is dealing with as chairman of the country’s tourism working group is the visa on arrival program, which he calls a farce as visitors still need a “piece of paper” to get into the country. “The government says visas don’t stop people from coming and can’t get past the fact that an efficient system would double or triple visitation. There is hesitation and resistance to change, and opening the country and really investing in tourism.” On the development side, things like entitlement issues are breaking down and the approach is becoming more professional, according to Ah Moo. “Vietnam is slightly behind China but ahead of India on deal complexities,” he says. “If you have the right partner, access and representation, deals can be expedited in Vietnam. Some things are built in to protect national interests, but we can stand toe-to-toe with India as a good place to build.” That being said, Ah Moo admits some roadblocks exist where people sit on things to the point where deals die on the vine. “Opportunities elsewhere in the region can get done quicker, so why wait,” he says. “It is an issue of timing and maturation of the market, which will happen. Fifteen years ago there was one real hotel in the country, so we have come a long way.” Dynamics Ahead While a lot of concerns remain about hotel development in Vietnam right now, both Ryder and Ah Moo still allude to opportunities in the untapped middle market as most developments to date have been at the luxury end. Ah Moo says a quality product could work at the beaches as well as the city center if you get out of District One. He adds that advanced discussions have taken place with a well-known 3-star brand to help bring them into Vietnam to open multiple units. “One major operator has bit in return for access and development expertise. We are looking at this seriously.” In the Hoi An area, Ah Moo says IL has rights to several pieces of land along the coast that have great potential but are not yet active. However, he says one potential development there could include a vocational hospitality school to meet the growing need for trained staff. “It would be a good community investment there,” he says. Ryder also would caution anyone trying to get into the hotel market in Vietnam right now. “There is a fair amount in the pipeline and this being Vietnam, about 20% will actually happen. TIV—This Is Vietnam,” Ryder says. “It is not hard to get a license for a real estate project. It is very difficult to implement, though, and do the 100 things one has to do to get the first nod from the government to open the doors—from clearing the site, design approval, etc. This is not an easy place to operate.” Will the dynamics change soon? Ryder is not so sure. “It will be difficult for awhile. There are issues that have long been resolved and processes made more transparent only to be matched by new rules and regulations.” The Six Senses Hideaway Con Dao will have a phased opening, starting in mid-2010. That being said, a few major hotel projects have been announced in recent months, including Marriott International’s deal with Binh Minh Import Export Production and Trade to develop a 450-room JW Marriott Hotel Hanoi adjacent to the new National Convention Centre. Singapore’s Banyan Tree Group has announced plans to build a US$900 million complex near Hue in central Vietnam which, when completed, will include seven international branded hotels (2,000 rooms), golf, convention facilities and a town center. “There is tremendous potential for arrivals,” Ah Moo says. For example, Siem Reap in Cambodia gets about 4 million annual visitors, while all of Vietnam just barely hit 4 million in 2008. “Domestic demand with 85 million people is just starting to develop. With 90% of the population literate it offers great fundamentals for travel and tourism, as well as general economic growth,” Ah Moo says. “We have been focusing on domestic travel and it has paid off. Still, discretionary income is limited here.” Eventually, Ryder says, the infrastructure issues will be overcome, but he estimates it might take a good 10 years. He adds that Vietnam’s political stability is a serious advantage in the region. “As long as the government delivers on economic growth and basic material benefits, Vietnamese have a heart-felt urge for stability. It would take a big screw-up to consider alternatives.” At the end of the day, Vietnam has as much upside as any market and, Ryder says, “maybe more. Costs are low and you still don’t have a whole lot of supply. It is a rapidly growing market with a very young population. The long-term macroeconomic positives translate into a profitable investment.” Indochina Land At A Glance Principals: Peter Ryder, CEO of Indochina Land and co-founder and CEO of Indochina Capital; Rick Mayo-Smith, co-founder and co-chairman of Indochina Capital; Baron Ah Moo, CEO of Indochina Hotels and Resorts, a division of Indochina Land. Investments: Indochina Land, Vietnam’s first real estate fund, currently manages three funds with over US$460 million of committed capital, facilitating over US$1.5 billion in development over the next five years. Real estate holdings: Full-service offices, residential, retail and commercial in Ho Chi Minh City, Hanoi and Danang. Hospitality assets include the US$60 million Nam Hai, Hoi An; the US$36 million Montgomerie Links & Estates, Danang; the US$129 million Hyatt Regency Resort & Spa Danang; the US$35 million Six Senses Hideaway Con Dao. Through a 55% interest in Danao Holdings International acquired in 2007, assume control and management responsibilities of the Sofitel Dalat Palace, the Novotel Dalat, the Dalat Palace Golf Club and the Novotel Phan Thiet & Ocean Dunes Golf Club, totaling US$41 million. Hospitality Strategy: While hotel expansion plans appear to be muted at the moment, Indochina Hotels and Resorts owns, acquires, develops and finances lodging assets in all segments and within key geographic markets throughout Vietnam. Its investment platform capitalizes on a residential-plus strategy and adds value by aligning with internationally recognized brands and top-tier management companies who share the company’s philosophies. Indochina Land also acquires distressed real estate assets in need of financial or operational expertise to realize their full market potential and partners with prominent names in architecture and design to ensure quality and add value. Sustainable development is a key consideration. Goals: At the moment, stabilize existing operations; open the Six Senses resort in Con Dao; and further develop the Hyatt-branded mixed-use project in Danang. Also find further opportunities to exit from the first two funds and deploy US$250 million of existing fund money, especially in the for-sale residential market. Talkback We would love your feedback! 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