Welcome back: a Portuguese hotelier sees big business with its cultural and historical ties with Brazil.

The Portuguese have discovered Brazil all over again. At least that's the impression you get when you see all the Portuguese flags flapping and waving above Brazilian hotels these days. Companies like Vila Gale and Espirito Santo, among others, have conquered a significant piece of Brazil's hotel market. One in particular, Grupo Pestana, stands out: Portugal's largest single hotel company now wants to be king of the mountain in the former colony.

"Pestana is one of the largest hotel groups in the country today," says Frederico Costa, the director of the Finance and Investment Promotion Department of Brazil's Tourism Ministry. After studying Brazil for two years, Pestana decided in 1999 that economic conditions were right to open its first hotel, which it did in Rio de Janeiro. "We entered the market in the city that most represents Brazil," says Francisco Lopes, Pestana's president and CEO for South America. In six years, the company opened six hotels and one Pousada--a branded luxury inn--in cities such as Angra dos Reis, Natal, Salvador, Silo Paulo and Curitiba.

Mission. The goal is to grow even more. Pestana's new motto for Brazil is "10 hotels in 10 years" an echo of its mission for Portugal, which goes "30 hotels in 30 years." Nor is growth limited to South America's largest country. In 2004, Pestana opened its first hotel in Argentina. "South America should become a market for us equal in size to that of Portugal," Lopes says. Pestana has invested more than US$110 million in all of South America, and the returns have been greater than expected. In 2004, the Brazil division won Pestana's business unit of the year award for achieving a 31% average annual earnings growth rate.

Occupancy rates also shone in 2004. That year, Brazil posted the largest number of room-nights within the company, at 300,000. Lopes expects that number to reach 400,000 in 2005, accounting for up to a quarter of the company's total revenue. Helping things along was Pestana's new Pousada de Portugal, inaugurated in October in Bahia's capital city, Salvador.

Pousadas are luxury hotels created by the Portuguese government in the 1940s and taken over by Pestana in 2003. In Portugal they are divided into four categories--historical, historical-architectural, ecological and charm. Pestana's foreign expansion will involve only historical pousadas with 50 or more rooms. The company also plans to convert historic Portuguese buildings into pousadas, suggesting the expansion will be limited to former colonies.

Colonial capital. In Salvador, Pestana opted for the Convento do Carmo, a convent occupied by Carmelite nuns in 1586, a time when Salvador was the capital of all colonial Brazil. "We were contacted by the [Brazilian builder] Santa Barbara Group, and we thought the property fit into our strategy," says Lopes. Santa Barbara took charge of the restoration and adaptation of the building and now owns 25% of the business. Pestana owns the rest and manages the property. Inside the building are a church and a museum that remain open to the public.

"Brazil would almost have to be the first country besides Portugal to have a pousada," says Lopes, given Pestana's knowledge of Brazil's market, language and culture. Brazil's Minister of Tourism has said Pestana's hotels and its pousadas in particular will attract a higher class of tourist with deeper pockets. Carlos Eduardo Castelo Branco, the tourism manager for Brazil's National Development Bank, says enterprises like the pousada can serve as a model for other groups looking to capitalize on Brazil's cultural heritage.

Bahia's tourism agency, Empresa de Turismo da Bahia, feels Pestana's decision to choose Bahia for a pousada was a big win. "It's a luxury installation that will attract tourists interested in history and culture," says its president and CEO, Claudio Taboada. He says the agency shares Pestana's goal of wanting to diversify Bahia's tourism offerings. "The tourist who stays at the Pestana Salvador hotel has one profile; the one who stays at the pousada has another" he says. Taboada believes there is still room for at least one more Pestana unit in Bahia, which would attract a third type of guest--someone looking for a stay on the state's balmy northern coast. Judging by Lopes' claim that Bahia is the state that invests the most in tourism, such a property should materialize. At the moment, however, Pestana is mulling a resort in Itacare, on Bahia's southern coast.

Most of the chain's Brazilian hotels were financed entirely by the group's own resources. Just three undertakings--the Pousada de Portugal, the Pestana Salvador hotel and the Pestana Natal hotel--relied on state financing from the Bank of Northeastern Brazil (BNB) for a total of $18 million.

According to Francisco Rabelo, BNB's investment superintendent, the loan was funded in part by the Support for Tourism Development Program (Proatur) of the Constitutional Northeastern Brazil Financing Fund, which provides project financing at the lowest interest rates available in Brazil, at 8.75% to 14% per year. Rabelo says that the "international credibility of Pestana" is worth it, and that the BNB is very interested in supporting the chain's expansion in the region.

Credibility. Brazil's Tourism Ministry also calls Pestana's investments a boost to the credibility of the country. According to the ministry, Pestana is an opinion leader and can help the ministry understand the different ways in which it can promote the hotel sector. New hotels mean new tourists who recognize and appreciate brands from other markets. Maximino Pinheiro, a Pestana customer from Portugal, in 2004 insisted on staying with his family in the Pestana Natal--even though it was full. Pinheiro chose the hotel in Natal, he says, because of Pestana's "reputation for knowing how to treat guests." The pousada in Salvador was "a great initiative" that he means to visit soon; Pestana hotels will always be his "first choice," Pinheiro says.

In 2005, Pestana expected growth at its Brazil properties to fall a little short of expectations. It's not that business was slow, but that 2004 was so strong that it's hard to grow on top of that. Also, Brazil's currency strengthened, which put a little dip in revenue. Yet the expansion continues. In 2006, Pestana plans to take the first steps toward opening a hotel on Beberibe beach in Fortaleza. And, besides a project in Itacare, the group is studying sites in Porto de Galinhas, near Recife in the state of Pernambuco. In coming years, Pestana wants to build in other South American countries such as Chile, Venezuela and Peru.