ADRIAN DAY'S GLOBAL ANALYST
November, 1999
BUY LEISURE CANADA (LCAN.CDN)
Viva la revolu‡ion! There's a revolution taking place in Cuba today, but it's not the one Fidel Castro and Che Guevara had in mind when they rode into Havana 40 years ago. Cuba is changing. Indeed, a visit last week showed how dramatically it has changed since my last visit five years ago.
Then, Cuba was in a devastating depression, following the collapse of the Soviet Union and the withdrawal of Soviet subsidies. At that time, out of necessity, Cuba slowly began to open up its markets to foreign tourists and investors, as well as to permit very limited forms of private ownership, which have transformed the island. This revolution will not be turned back; the cat is out of the bag.
The liberalization accelerated following the visit of the Pope. By visiting the island and meeting with Castro, he made it respectable to visit. Beyond that, his visit ensured freedom of religion, not just for Catholics but for other religions as well. Today, one sees many yarmulkas, for example, something not seen five years ago. The Pope's visit legitimized Christmas again and made it acceptable for Cubans to return to church. These changes had a more profound if subtle impact. To some extent, given the suppression of religion under the communist regime, being religious was seen as opposition to the government. Now, being religious is acceptable, and has chipped away at the omniscience of the state.
Cuba has come a long way in a short time
Five years ago, there were few cars on the road, few restaurants, and certainly no construction. Today, Havana is on the edge of a boom. The main roads are busy with traffic at all hours of the day and night; there are dozens of good restaurants (some much better than good); construction scaffolding is everywhere; and tourist traffic is booming with frequent flights from British Airways and Air France. Over 60 major airlines now arrive at Havana's new $100 million airport. Tourists are flocking from Spain, Germany, Mexico, Canada--everywhere, indeed, except from the United States. Whereas five years ago you couldn't get a decent hotel room because there weren't any, today you can't get a decent hotel without a reservation. Ironically, in light of the U.S. embargo, the U.S. dollar is now the de facto currency of Cuba.
Profit opportunities in tourism
The place has changed. Within five years Cuba will be booming and some investors will participate. At present, the changes are cautious and controlled, but they are noticeable and they are irrevocable. In part owing to the lack of private property rights, there are few ways in which an investor can participate, either in an active or passive way. The main industries--cigars, rum, sugar--offer no possibilities (at present). But the number one foreign currency earner is tourism. And there is one company, a pure play on the growth in Cuba's tourism, that offers outstanding potential at present levels.
Tourism is booming from an admittedly low start. Visitor arrivals are growing at a staggering 20-25% per year, far exceeding anything in the rest of the Caribbean. Cuba is the largest country in the Caribbean, with a land mass three times the rest of the Caribbean combined, and a population of 11 million. And it offers so much that the rest of the Caribbean doesn't - it has culture, very low crime, and genuinely friendly--and literate--people, all in addition to the sun and the sand. The old city of Havana, recently designated a World Heritage Site, is being restored to its former splendor. With its 17th century cathedrals, buildings and plazas, Old Havana is one of the most delightful cities in the world. It is not for nothing that Havana used to be called "the Paris of the Caribbean".
There is also, of course, the mystery of its being off-limits for the past 40 years, which adds to the attraction. The U.S. embargo will be lifted one day and Americans will return to Cuba. A recent study by Pricewaterhouse suggests that 6 million Americans will visit the island nation within the first year of travel restrictions being lifted. Many of these, of course, are Cuban-Americans who will stay with friends, but there simply are not enough hotel rooms at the moment or on the drawing board to accommodate such a surge in visitors. Tourism is perhaps the ideal sector in which to look for investments.
A leader in the nascent tourism industry
Leisure Canada (LCAN, CDN), a company developing major hotel and resort properties on the island, is an outstanding investment opportunity for people with patience who can tolerate some risk and volatility, but who can recognize the incredible potential of this sleeping giant.
The company is well established in Cuba. Although other companies have beaten it to the punch with completed hotel buildings, Leisure Canada is taking a longer-term view. It has tied-up three superb tracts of ideally located land. And, whereas most tourism to Cuba at the moment is either packaged tours or cruise ships--both notoriously low-spenders--Leisure Canada is planning five-star destination resorts. Master plans and architectural drawings are already complete on all properties, with ground breaking on the first site set for next month. Let's look briefly at these three main properties, all ocean front.
Three properties offering different possibilities
* Jibacoa lies half way between Havana and the popular vacation destination of Varadero. The location is ideal, with a major highway and main power lines running through the property. So too is the setting. With spectacular views, palm-tree studded hills as a backdrop, old growth trees throughout the property and several beautiful sandy coves, the 5 1/2-square kilometre property will eventually host five hotels with 1,400 room, as well as villas and timeshares, two golf courses, a marina, an equestrian center, a spa, and numerous other attractions. This development has been designed to be a 5-star rated destination resort, anchored by internationally recognized brands.
Groundbreaking on Phase 1, to include a 600-plus room hotel complex, is scheduled for within the next 60 days. This first hotel will be managed under a recently announced agreement by Le Meridien Hotel group. The entire Meridien Village Phase 1is estimated conservatively to be completed by November 2001.
* Cayo Largo, 30 minutes from Havana, was reputedly described by Columbus as "the loveliest land ever beheld by human eyes." It is the archetypal Caribbean island, with soft white sand and the clearest turquoise waters imaginable. The island hosts seven fine but modest hotels--and, indescribably (but so typical of communist nations) a fully operational airstrip that can accommodate 727s and DC-10s. I saw a fully laden Lufthansa 767 land on this seven-mile long speck of sand and lush vegetation non-stop from Frankfurt. Because of concerns about the environment and infrastructure, Leisure Canada's 900 room in three hotels will likely be the last built on the island.
* Monte Barreto is a two-square block site in the middle of the fast developing modern section in the western part of Havana. Around it are brand new hotels and office buildings. Adjacent to it, a new aquarium is under construction. Leisure Canada's 850-room hotel on the site will cater to both business and tourist traffic. It will sit on the last waterfront site available in Havana.
The goal is first-class facilities with a Cuban flair
Although each site is quite different in location and ambience, Leisure Canada is determined that all three will be built to first-class world standards and each will retain a strong Cuban character. When the Meridien Hotel is complete, it will be Cuba's only first-class hotel.
The deal with Meridian is illustrative of how Leisure Canada intends to proceed, planning joint ventures of various types with leading hotel groups and vacation operators around the world. This provides the necessary expertise as well as potentially capital, and also provides marketing and other essential services once a hotel is operational.
Leisure Canada plans joint ventures with major groups
It is currently in discussions with other groups for its other planned hotels. A recently announced joint venture, for example, gives the company rights to the PGA-Cuba name, as well as merchandising and media rights. Two recent additions to the board of directors--the senior vice president of Marriott International, and the past president of Four Seasons international division--provide a clue to the attractiveness of what Leisure Canada has to offer. It has tied up three of the finest sites in Cuba, has excellent relations with the government, and is in a position to lead the renewal of Cuba's high-end tourism market.
Solid revenue projections
It should be pointed out that the local company (50% owned by Leisure Canada, 50% by the Cuban government's Grand Caribe hotel group) provides for a 50-year lease. There are no land taxes during that period, and no operating taxes until income has repaid the original investment. Thereafter, tax is at a maximum 30% rate.
Projections are that Leisure Canada could be earning $70 million a year by 2004. A rough calculation would put that at $1 a share after allowing for equity dilution to raise the capital costs.
The company is led by Wally Berukoff, former CEO of Miramar Mining. In 1992, he was the first person to start a joint venture with the Cuban government. He developed the first copper mine after the revolution. And he was also responsible for bringing the first loan to Cuba through Barclays Bank of London. Before Miramar, Berukoff's background is in hotels and real estate. Through a stable commitment to investment in Cuba, Berukoff has expanded his operations to the development of 11 world-class resorts and two 18-hole championship golf courses. Because of this long commitment to investing in Cuba, Berukoff and Leisure Canada were featured on a 15-minute CNN segment on investment in Cuba.
Strong management in place
Vice-president is Graeme Lempriere, who has worked with Berukoff in all of his real estate developments for over 12 years. Heading the local operations is an Ecuadorian, Marcello Montenegro, who has lived in Cuba for eight years, and built 10 hotels on the island for the Delta chain. Peter MacLeod, Senior Vice President for Design and Development, has over 20 years experience in design and construction in the hotel industry, including positions with Delta Hotels, Imperial Group and CP Hotels. Throughout his career, he has been responsible for the development of over 50 hotels, including nine in Cuba for Delta. These, along with the rest of the team, are men of vision and practical entrepreneurship, with a combined 30-years plus of experience in the design, development and management of hotels in Cuba, men who can get the job done.
Raising big money for Cuba will not be easy
There are two main risks. The first is the obvious Cuba factor. One could spend a long time discussing this, but three key points may suffice here. One, I do not believe Cuba can go backwards. It has no major godfather any longer, following the collapse of the Soviet Union, and the people like their new-found wealth and freedoms (such as they are).
Two, although the government retains ownership of most land and businesses and there are many onerous rules and regulations (in particular, regarding employment of Cubans), it was emphasized to me over and over that the government--having made an agreement with a foreign investor--has always abided by that agreement. And three, Leisure Canada has ensured that there are no U.S. claims on any of its properties.
Lots of money will be required
The second risk is financing. The company will require tremendous sums of money to bring its plans to fruition. The planned development of the three projects will require a total of $400 million over 10 years, half of which is Leisure Canada's responsibility. Although it is well funded now, with C$7.5 million in the bank following a summer financing, the money will go quickly once construction is underway. Its share of Phase 1 of Jibacoa alone, for example, is $32 million. The company plans to raise the necessary financing in various ways. Some of the groups with which it is discussing, for example, want an equity interest. But the company will have to raise some equity itself, and the risk is that it may have to do so at times that are not propitious in the marketplace. That is something we will monitor.
A third problem will soon be out of the way. Leisure Canada stock currently trades on the notoriously opaque Canadian Dealer Network. However, the company will be moving to Vancouver within a couple of months, and this will improve the liquidity tremendously. (You know how bad the CDN is when Vancouver is considered a major step forward.)
This is a great time to buy, just as the story is unfolding
This is an excellent time to buy. The island's "liberalization" seems secure, and tourism is booming. The company has completed the long preliminary footwork and is ready to start building. Over coming months, we can expect many announcements, including groundbreaking, the move to Vancouver, and probably more joint ventures on the different hotels.
And the stock is cheap. The financing was weighing on the stock while there has been heavy selling from a determined seller. This selling now appears out of the way, and the financing is done. Although the stock has bounced a little off the absolute lows, the current level is more or less the long-term low. The stock has been here twice before and each time given investors a double. I believe it will do that and more for us this time. The float is small. Berukoff and other insiders own approximately 10 million shares, with strong supporters such as the Robertson Stephens funds in the U.S. who own another 4 million. Together, that's over half of the shares outstanding. This strong support is encouraging, while making the stock more responsive to positive news.
Get more information!
The company has an excellent package that will help you see--more than my mere words can do--why I am so excited about the company and its prospects. For a package, call John Gray or Ryan Mulhern at 604-990-9599. In addition, you should get hold of the June 1999 issue of Cigar Aficionado, which was devoted in its entirety to Cuba, with a discussion of the embargo issue and a thorough travel guide (Shanken Communications, 212-684-4224). I thought the writers were a little harsh on many of the hotels and restaurants--what do you expect after 40 years of Marxism?--but the articles are full of valuable insights.
Cuba is changing, and you can participate through Leisure Canada. Buy now, while the stock is low, before groundbreaking and the positive developments I anticipate in coming months.
LEISURE CANADA
LCAN.Canadian Dealer Network
Market Cap.: C$45 million
52-week high-low: C$3.15/1.25
213 West 1st St.,
North Vancouver, BC, Canada V7M 1B3
604-990-9599
www.leisurecanada.com
For Immediate Release:
July 28, 1999
CNN BROADCAST FEATURES LEISURE CANADA INC.
Earlier this year CNN International featured Leisure Canada on the program "Fortune", which reached 160 million viewers in Latin America, Asia and Europe. In addition to key interviews with Leisure Canada management, the program highlighted Leisure Canada's vision: to create world class destination resorts in Cuba. As a result, positive feedback is still arriving from around the globe.
On July 28th at 8:00 pm EST, CNN again aired the same episode of "Fortune" across North America captivating 30 million viewers and exposing Leisure Canada to tens of thousands of potential investors.
For Immediate Release:
THE NEW YORK TIMES
July 7, 1999
U.S., Avoiding Castro, Relaxes Rules on Cuba
By Tim Golden
The Clinton administration is quietly moving to expand contacts between the United States and Cuba, pressing a modest opening that largely sidesteps President Fidel Castro's government.
With a series of small steps -- some announced earlier this year and others now being prepared -- the administration is mainly seeking to ease the hardships of the Cuban people and to allow certain Americans to visit Cuba, set up offices there and send money, food and medicine more freely.
In coming weeks, officials said, they will lift more restrictions on money transfers and travel and announce the start of direct charter flights between Havana and the New York metropolitan region and Los Angeles, in addition to those that now depart and land at Miami.
The moves have included a tentative new approach to the Cuban government. On June 21 in Havana, U.S. and Cuban officials agreed to begin working more closely to combat a sharp rise in drug trafficking in and around the island, and they proposed other measures that American officials said could lead to greater cooperation.
The initiative falls well within the limits on American policy that were set in 1992 and 1996 by laws that stiffened the 37-year-old economic embargo on the island. Some of the steps now being taken were postponed in the outcry after Cuban fighters shot down two civilian planes in 1996, killing four Cuban-Americans who had planned to fly over Havana and leading to the 1996 law.
But the laws leave the White House considerable authority to widen American contacts with Cuba, and officials say they are resolved to make that happen.
"There is a conscious decision in this administration to do what needs to be done," a senior official said. Referring to Cuban-American opponents of Castro's government, he added, "This is a policy that has been held hostage to interest groups for way too long."
Some officials said the administration was already being pulled on Cuba policy between the legacy of President Clinton and the political aspirations of Vice President Al Gore. Clinton is said by aides to see Washington's approach to Cuba as archaic and ineffective. Gore is described as highly aware of the considerable influence that Cuban-American voters may have in two pivotal states, Florida and New Jersey.
Yet other officials say however modest the recent measures, the shift is particularly significant because it reflects a widespread view in the administration that the domestic politics of dealing with Cuba are changing in fundamental ways.
A decade after the Cold War's end, administration officials say they see the strength of conservative Cuban-American groups waning, while opposition to the embargo continues to grow among business people, farmers, religious groups and younger Cuban-Americans.
After years of waiting for some political opening in Cuba, American officials say, they are now determined to go forward, even if Castro responds by cracking down on dissent, as he did soon after Washington announced measures in January to increase contact between the two countries.
The Cuban response has even encouraged some American proponents of a hard-line policy to say that the so-called people-to-people initiative might help destabilize the Communist government by empowering the few dissidents on the island.
For its part, the administration sees the approach as a means of undercutting Cuba's argument that it is under siege by the United States. The new direction is also widely seen as a way to present a kinder American face to ordinary Cubans and, perhaps, to build a modicum of trust with younger Cuban officials who will become more important after the 72-year-old Castro passes from power.
The administration's latest actions on Cuba recall an even more low-key White House effort in late 1995 and early 1996. Officials said that initiative, which focused more directly on the Cuban government, was approved by Clinton and managed by Sandy Berger, deputy national security adviser at the time.
It started with a relaxation of travel and other restrictions in October 1995. But according to current and former officials, the administration also choreographed a series of possible steps to ease American sanctions if Cuba continued to open up its economy and to promote a more cooperative relationship with the Cuban government.
"We were trying to open the door -- to push it open if necessary -- and make it clear to the Cuban government that if they walked through that door, nothing bad would happen to them," one former official involved in the planning said.
Then as now, officials said, collaboration in antinarcotics efforts was high on the agenda. In meetings with Cuban officials, U.S. officials raised the possibility of American law-enforcement training for Cuban police and border-guard officials, as well as the stationing of a representative of the Drug Enforcement Administration in Havana, officials said.
"Narcotics was going to be a vehicle to get to other things," another former official involved in that initiative said. "The real question was what the next step would be."
Other proposals included encouraging American nongovernmental groups like environmental and human rights advocates to work in Cuba, some collaboration with the Cuban government on environmental issues and an exploration of how to initiate contacts abroad between military officers of the two countries.
Such efforts slammed to an abrupt halt in February 1996 when the civilian planes were shot down. The next month, Congress passed the Helms-Burton law, codifying the embargo and adding sanctions. Clinton signed the legislation over the advice of some senior aides and that November came surprisingly close to winning a majority of the Cuban-American vote in Dade County, Fla.
In recent months, the Treasury Department has begun to simplify the cumbersome procedures for travel to Cuba by Americans like researchers and athletes, aid workers and freelance journalists. Similar consideration is most likely to be extended soon to others like students, artists and representatives of religious groups.
In March, the administration moved to streamline the sale and donation of medicines to Cuba, and next month, a Florida pharmaceutical company is to start shipping medicines to Cubans for benefactors in the United States.
Under federal rules that will take effect this month, Cuban emigres and others will be able to send money to Cubans by Western Union, reducing the cost of transfers that have been handled by travel agencies and other small businesses. Americans can now send up to $300 to the island every three months, as long as the money does not go to senior government or Communist Party officials.
How much advantage Americans will take of the new rules remains to be seen. A spokeswoman for the Treasury Department, Maria Ibanez, said travel to Cuba had steadily increased since the new regulations were issued in May. The expected addition of direct charter flights from New York and Los Angeles is intended to accommodate that rise.
Since baseball games in the spring between the Baltimore Orioles and the Cuban national team, the administration has offered proposals for other sports events. Those plans have been set back, however, by differences over how to avoid generating revenue for the Cuban government, a State Department official said.
Over the past years, FBI counterterrorism officials have traveled to Havana to discuss the bombings of tourist hotels there, and weather experts from the National Oceanic and Atmospheric Administration have met Cuban officials to discuss sharing information on hurricanes. But the administration move last month to explore a more cooperative antidrug relationship with the Cuban government has run into stronger opposition, mainly from a few members of Congress, who say the Cuban authorities are involved in the drug trade.
Administration officials who have read a recent Central Intelligence Agency assessment of Cuba's role said it concluded, to the contrary, that although traffickers in the Caribbean might have bought the complicity of low-level Cuban officials, there was no evidence of high-level drug corruption.
American officials also cite a series of incidents in recent years in which Cuban officials helped track down drug shipments, as well as one in which they even testified in a federal drug-smuggling case in the United States.
The United States and Cuba have communicated for some time by fax about suspicious boats and planes around the island. At the meetings on June 21 in Havana, Cuban officials told State Department and Coast Guard representatives that they would speed up communications by using telephones and radios.
Cuba will not allow American ships to pursue suspected drug boats into Cuban waters, but will consider letting the Coast Guard station a drug-interdiction specialist at the American diplomatic mission in Havana and having Coast Guard experts join Cubans in searching large ships, administration officials said.
Although some officials said the administration's new approach was gaining momentum, others predicted that it would increasingly be filtered through Gore's presidential campaign. Gore, the officials said, has taken a relatively hard line on Cuban policy in the past, playing a prominent role in the decision to suspend charter flights in 1994.
"If the administration wants to help Gore, they're not going to push beyond the parameter of what they're doing now," said Rep. Robert Menendez, D-N.J., who also credited Gore with helping to defeat a proposal for a bipartisan commission to reassess Cuba policy.
"If they push the envelope much further," Menendez said, "I think you'll see more negative reaction."
A spokesman for Gore, Tom Rosshirt, said the vice president supported a policy of building contacts with the Cuban people while maintaining economic pressure on the government. Rosshirt declined to comment on specific advice that Gore has given Clinton on Cuba.
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