In October 2012, an affiliate company of Five Mile Capital Partners LLC purchased The Ritz-Carlton, Grand Cayman. Since then, the new owners have begun an investment program at the property that has already completed US$15 million of improvements, with an additional US$25 million in progress. The Journal sat down with Five Mile Capital’s Managing Member James Glasgow to discuss his company and its plans for the future of the Ritz-Carlton property.
Most residents of the Cayman Islands probably never heard of Five Mile Capital Partners LCC before 2012. That was when The Ritz-Carlton, Grand Cayman and its associated properties were put into receivership and subsequently sold on auction for the reserve price of US$177.5 million to an affiliate of Five Mile Capital. What many people would be surprised to learn is that Five Mile Capital had already been invested in The Ritz-Carlton property for nearly five years by that time.
Five Mile Capital’s Managing Member James “Jim” Glasgow said that, in 2007, the company was approached by Credit Suisse, which was arranging a $235 million financing on The Ritz-Carlton and was trying to securitize the debt.
“The market back then started to get volatile and Credit Suisse was having a hard time securitizing it,” he said. “So they tranched it up into several different tranches and came to us and asked if we’d interested in buying a piece of this debt.”
At the time, the partners at Five Mile didn’t know much about the Cayman Islands or the hotel.
“So at that point, we did our homework on Grand Cayman,” he said. “Simple things, like Grand Cayman being a part of the United Kingdom, the laws it followed, and really making sure that we understood what the tourism market is like in Grand Cayman.”
Five Mile’s team saw that The Ritz-Carlton, Grand Cayman was new and already iconic, winning various accolades. They were intrigued.
“We came down here, we visited the hotel, we met with the previous borrower’s principal, who at the time was Mike Ryan,” he said. “We did all of our due diligence and all of our homework and decided that despite the volatility in the financial markets, Grand Cayman was a beautiful place, a destination for U.S. and global tourism, and that this asset was one of the top resorts in the Caribbean.”
Because the financial market was so volatile at that time, the $50 million of the debt Five Mile bought was in a more secured tranche than others.
“The reason we bought so secure in the stack was because we were concerned about the prospect of a recession in the U.S.,” he said. “So we bought at where we knew we could be comfortable.”
The feared recession did indeed take place, but because of Five Mile’s conservative investment approach, it found itself in a better position than many of its competitors. Opportunities arose as a result, and one of those opportunities was to buy a bigger portion of The Ritz-Carlton, Grand Cayman’s debt. Credit Suisse had been unable to sell all of the tranches before and during the recession, and in 2011, it came back to Five Mile with an offer to buy the debt it still owned, including the controlling tranche. Five Mile agreed as this gave the company an opportunity to have a seat at the table during the restructuring process and be in a position to make decisions.
“We looked at it and said, ‘Are we going to sit here and let someone else control the process and get bought out, or do we now have the conviction of our initial beliefs in the specialness of Grand Cayman? We knew the asset wasn’t performing as well as it could have because it was over-levered, so little new capital was being invested, and we had an opportunity to make a difference by buying out the rest of the debt stack.”
Once again, Five Mile did its homework on Grand Cayman and took a close look at the hotel’s operating numbers.
“We did everything we should do to make the decision and were convinced at that point that we should buy out the rest of the debt,” he said. “We did so with unlevered capital, so now we had over $170 million invested.”
Eventually, Five Mile Capital had to take one step more, moving to secure ownership because it saw an existing ownership position that was over-levered, with more than $550 million of debt on a property worth significantly less than that. An affiliate of Five Mile bought the property at auction for $177.5 million of its debt.
“We believed that we could put the necessary capital into the property to assure that Ritz-Carlton, Grand Cayman is one of the top, if not the top, destination in the Caribbean, which was our goal,” Glasgow said.
Based in Stamford, Connecticut, with an office in New York City, Five Mile Capital Partners was formed in 2003 by four financial industry professionals who had top-level experience with firms such as UBS, Paine Webber, Greenwich Capital Markets, Kidder Peabody and Solomon Brothers.
“There are four of us: myself, Steve Baum, Chip Kruger and Tommy Kendall,” said Glasgow, who was approached to join the firm by the others to head up the commercial real estate activities, something he was doing for UBS at the time.
“It was founded as an investment manager of funds, which means we manage money for institutional investors that include foundations and endowments, state public pension plans, sovereign wealth funds, insurance companies and private pension plans,” he said. “Those investors represent public employees, students and teachers, charitable foundations, and private employees.
“We recognized up front that to represent those kinds of investors we were going to have to be committed to the highest standards of professionalism, integrity, ethics, transparency and disclosure to our investors, so it was clear what we were doing and why we were doing it.”
As a private equity firm, Five Mile Capital is a long-term investor focused on maximizing value, Glasgow said.
“What Five Mile does is that it takes financially and operationally challenged assets and fixes them,” he said. “We buy the debt in these assets with the expectation of being repaid but with the conviction to step in with money and expertise to reposition these properties as the owner if necessary. For example, The Ritz-Carlton, Grand Cayman is a fabulous property that because of the 2008/2009 recession, never stabilized. So, Five Mile’s plan is to move it from an unstable asset to a stable asset that’s considered a sustainable core institutional-quality asset for the long term.” Strong position
Although it initially had a total equity position in The Ritz-Carlton property, Five Mile late last year borrowed $130 million against it.
“It’s just on the hotel,” Glasgow said. “The rest is unencumbered because we want the ability to make additional improvements without going through a cumbersome lender-approval process.”
After the borrowing, the ownership position is still much stronger now than it had been.
“There was over $550 million of total debt, of which $230 million was secured and the rest was unsecured,” he said. “We now have $130 million of debt.”
Five Mile’s conservative approach on this financing is consistent with its business approach, which served the company well through the recession.
“Not only did we survive the recession, but we actually raised additional capital,” said Glasgow. “That speaks to the viability and success of our investment philosophy and the conservative nature in terms of how we manage our business. We did not default on any of our obligations; we are an investment manager in great standing with our financing sources, and that is critical.”
Five Mile will approach its investment with The Ritz-Carlton the same way.
“We’re never going to do anything to put our investment at risk,” he said. “I can’t control tourism or airlift, but what I can control is how this asset is positioned in its competitive market, how much capital we invest in it, and how much leverage we use. Today, The Ritz-Carlton, Grand Cayman is in an extremely stable position with a tremendous amount of upside.”
Five Mile can do things related to this investment that would have been difficult if not impossible for the previous over-levered ownership to do, namely make improvements to the property. Five Mile has already started doing just that with a $15 million investment last year, and an additional $25 million in progress, Glasgow said, adding that the total investment plan is $40 million over the next several years.
Those who frequent the restaurants at The Ritz-Carlton, Grand Cayman will have already seen the completed renovations of Blue by Eric Ripert, Seven, and Taikun, as well as the Silver Palm Lounge and the hotel lobby area. In addition, the hotel rooms have already been upgraded.
Glasgow said more renovations are coming.
“We’re going to renovate the spa in 2014 – it hasn’t really been renovated since it was built,” he said. “We’re going to renovate the fitness center and we may actually expand the fitness center.”
Other planned renovations will include upgrades to the ballrooms and the creation of 8,000 square feet of high-tech meeting space in an area of that hotel on the fifth floor that’s never been used. This upgrade will allow for about 3,000 square feet of area on the lobby level that is currently being used as meeting rooms to be converted into glass-front retail space in one of the areas of the hotel with the most foot-traffic.
“We’ve already done that in the corner with Magnum Jewelers,” Glasgow said.
The mezzanine space formerly held by Magnum will be converted into a display kitchen for culinary events.
Five Mile Capital owns the row of “garage” buildings along the north side of the property, and since taking ownership has moved a lot of management offices out of the first-floor level – where it shared cramped space with the laundry and food and beverage operations – to newly renovated office space in the garages. One of the key departments to move to these offices is human resources.
“HR is now a lot more accessible for prospective employees to apply for jobs,” said Glasgow.
Another planned renovation is on the 7-South Tower, which has 22,000 square feet of undeveloped oceanfront penthouse space in The Residences. How it will be developed hasn’t been decided yet, Glasgow said.
“We’re still evaluating the best use for that space, but we’re definitely going to do something fantastic with it.”
Another major project in 2014 will be significant upgrades near the North Sound pool, with the goal of making it family oriented so that parents feel as though they have access to amenities that are important for their children.
Some of the ideas for what to do on the North Sound/lagoon side of the property came during a vacation Glasgow had with his family at The Ritz-Carlton in 2013.
“I was here last March for about 10 days with my wife and kids – I have a 10-year-old boy, a 7-year-old daughter, and a 5-year-old boy,” he said. “We did everything; we did Stingray City, we did the Turtle Farm, we did Starfish Point, we went fishing – it was all incredible. The natural beauty of Grand Cayman is amazing and it’s actually very kid-friendly … but what I realized was that, on the ocean side of the [Ritz] property itself, besides its world class beach, there’s not as much for families to do.”
The Five Mile Capital team considered the issue and decided to build a waterpark feature at the North Sound pool, as well as six family cabanas with daybeds and televisions. Nearby, they’ll build a basketball court with adjustable hoop heights to make it accessible for all ages, and a volleyball area will also be there.
The idea is that by adding all of these new family-friendly features, along with the Ambassadors of the Environment program facility that is already there, it will create enough scale to lure families to the North Sound side of the property. These upgrades by the lagoon-side pool will cost about $2 million, he said.
There are some other ideas for that side of the property as well, including converting two garages into a “kids club” with state-of-the-art video consoles.
“It would have everything a child would want when they’re trying to just hang out away from the pool,” said Glasgow. That, along with the possible expansion of the golf course from nine holes to 18, is something on his wish list, he added.
The Ritz-Carlton properties owned by Five Mile Capital also include 38 acres abutting the North Sound. Glasgow said Five Mile is considering what to do with this property, and the possibilities could include a marina, retail space or even more meeting space.
“These are all things that we’re considering in terms of how to continue to make improvements to the property and increase the scale and the amenities associated with the property,” he said. “I want The Ritz-Carlton in the renovated repositioned format to be a significant barrier to entry to anyone who wants to build a luxury five-star resort anywhere in the Caribbean that might compete with The Ritz Carlton.”
Five Mile Capital got off to a bit of shaky start with the previous administration of the Cayman Islands government over the stamp duty payable on the land transfer after it purchased the property at auction. After having an agreement with the government body that appraises value for stamp duty and paying the requisite amount of duty, the government at the time felt that the property might have been undervalued and instructed that the land transfer be delayed and another appraisal done.
After more than four months of delays and two additional appraisals, Five Mile had to take legal action to force the transfer. Eventually, in May 2013, the transfer of title was finalized. That same month, a new government administration was voted in and took office.
Glasgow said he thinks Five Mile has a good working relationship with the new government.
“I think we have an open dialogue with the government which provides the opportunity for an excellent public-private partnership going forward that will benefit both the island and the property.”
From The Ritz-Carlton side of things, Glasgow knows what’s expected, particularly when it comes to providing jobs for Caymanians.
“It is a stated goal of both the management of the hotel, as well as the owner of the hotel, to make sure that we’re employing as many as Caymanians as possible,” he said. “We have training programs and we have all types of initiatives to attract Caymanians to the hospitality industry. We have over 800 jobs here. If we could fill them all with Caymanians, we would.”
One positive move toward getting more Caymanians employed at The Ritz-Carlton will be the launch of a hospitality program at the University College of the Cayman Islands in the fall of 2014. Five Mile Capital, as the owner of the hotel, and The Ritz-Carlton are both supporting the initiative strongly, Glasgow said, noting that some of the practical course work will even take place at The Ritz, among other hotels.
Glasgow understands that Five Mile Capital has a role to play in the community beyond providing jobs at the hotel, and he said that the firm will get involved by supporting various community groups, just as The Ritz-Carlton has done for many years.
“I think that we are fortunate to be involved in a property like this on the island,” he said. “So we want to be involved in the community and doing things we think are important to the community is our way of showing appreciation.”
From the government’s side of the public-private partnership, Glasgow said he just wants the work permit process to be efficient so that the positions that cannot be filled locally can be staffed with the expertise and manpower it needs to be a world-class, five-star resort. He’d also like to see a commitment to making sure there’s sufficient airlift to Grand Cayman, especially during the peak time, and perhaps getting some direct airlift from Europe.
“I’d like to see some of those flights here because I think it’s good for Grand Cayman and it’s good for us as the premier resort on the island,” he said.
Glasgow said Five Mile is committed to the same high standard of business practices in its ownership of The Ritz-Carlton, Grand Cayman as it is with all of its investments.
“I want people to say Five Mile Capital was one of the best owners they’ve ever seen in Grand Cayman, and that we had respect for the community and Cayman’s culture and traditions,” said Glasgow. “When Five Mile makes an investment, we have a fiduciary responsibility to our investors, but we also believe we have a responsibility to everyone else that’s involved with the investment. This sense of responsibility distinguishes our firm.”
Alan Markoff is affiliated with AtWater Consultants, which represents Five Mile Capital Partners LLC.