The Real Deal Miami

Beleaguered hotel owners sell for prices originally paid, others go belly up

By Mike Seemuth | September 25, 2009 02:40PM

Some South Florida hotel owners may unload their properties even after the traditionally busy winter season begins because room rates are so low.

The tourism and business travel trade has plunged so precipitously in the last two years that some owners may not be able to make the economics of the hotel business work any longer. Rising costs aren’t matched by high-end revenue streams, they said.

“We’re achieving the room rates we achieved in 2004 and 2005,” said Stuart Blumberg, president and CEO of the Greater Miami and the Beaches Hotel Association. “Spending $500 or $600 for a room, it’s not there anymore.”

It may be three or four years before owners of Miami-area hotels regain the record room rates they enjoyed in 2007, Blumberg said.

Though room and occupancy rates at South Florida hotels normally rise in winter, heavily indebted hotels may emerge as the region’s most distressed class of commercial real estate.

“I’d probably rank them in order of — industrial in the best shape, office and retail kind of tied, and hotels the worst,” said Jack Lowell, vice president of Coral Gables-based Flagler Real Estate Services. “I think hotels have some more downside.”

Many hotel owners who built, purchased or refinanced their properties from 2005 through 2007 are carrying more debt than cash flow from operations can sustain, said Lowell, a veteran commercial real estate broker who served in 2002 and 2003 as chairman of the Greater Miami Chamber of Commerce.

Some hotel owners are selling their properties for amounts near the prices they originally paid. The Daily Business Review, a legal newspaper based in Miami, reported that recent sellers of hotels in Miami and Fort Lauderdale got smaller prices than the properties commanded in the late 1990s.

Filing for bankruptcy is the painful solution for some overextended hotel companies. One is Spartanburg, S.C.-based Extended Stay Hotels, which lists 16 properties in South Florida on its Web site. With more than 600 properties in 44 states, Extended Stay filed for bankruptcy in June, about two years after the current owner bought the mid-priced hotel chain with more than $7 billion of financing.

“The key in every piece of real estate is your degree of leverage, and if you don’t have a lot of debt, you can weather this kind of storm,” Lowell said. But if hotel owners “have either built recently, or put a significant debt load on their properties, that means you are writing checks every month to operate.”

Hotel research firm Hendersonville, Tenn.-based Smith Travel Research reported that room rates in all three major metropolitan areas in South Florida were lower in July than in the same month last year.

July occupancy rates were higher in Miami, Fort Lauderdale and West Palm Beach than in July 2008, but room rates were substantially lower, Smith Travel Research reported.

Average daily room rates in July were $116.80 at Miami hotels, down 9 percent from July 2008, and $97.49 in West Palm Beach, a year-over-year decline of 11 percent. In Fort Lauderdale, the average daily room rate of $89.05 in July was 12.2 percent less than a year earlier.

Many hotel owners are making interest-only mortgage payments that are scheduled to increase in the future, to interest-and-principal payments, said Mike Cannon, executive director of Integra Realty Resources in Miami.

“When these things come due in 2010, 2011 and 2012, will the capital market be able to refinance them?” Cannon said.

Refinancing may be scarce if lenders retain tightened underwriting standards for hotel loans. Cannon said lenders are insisting on a loan-to-value ratio of 50 percent or 60 percent for hotels, versus 80 percent a few years back, and “they’re asking for personal guarantees” of loans secured by hotels.

Selling for less than the debt on a hotel through a lender-approved short sale may be a viable exit strategy for some highly leveraged owners. Cannon said short sales, which have spread in the residential real estate market, could become more common among distressed hotel owners if lenders decide to go along.