05/30/2012

Hotel Owners Rush to Sell in Sizzling Miami

The run-up in values of Miami-area hotels has sent developers and redevelopers racing to cash out of their properties far ahead of what used to be considered the right time to sell.

Case in point: The owner of the Hilton Cabana, an upper-upscale oceanfront hotel under construction at the northern end of Miami Beach, has already tapped Jones Lang LaSalle Hotels to line up a buyer. The developer, a joint venture led by Rockpoint Group, expects 231-room the property to fetch about $360,000/room, or $83 million. The Rockpoint team is hoping a buyer will take over the hotel as soon as construction is done next year.

In the past, developers would typically hold their hotels for several years until revenues and other performance measures ramped up. The optimal time for a sale was thought to be after the occupancy rate stabilized and the hotel started producing a steady income stream.

But investor exuberance has driven up prices for high-quality hotels in prime locations — particularly for the South Beach section of Miami Beach. What’s more, few listings have come to market. The strong demand has some developers hoping to earn quick returns by handing off their hotels as soon as the final coat of paint is applied.

“Anyone developing a hotel is thinking of an earlier take-out,” one broker said.

A Carlyle Group joint venture is mulling a similar strategy for two boutique hotels. The 75-room Blue Moon and 71-room Winterhaven hotels are undergoing substantial renovations that will convert them to the Autograph Collection, a new Marriott International luxury brand. And more listings could come from a handful of older properties slated for or undergoing renovations.

“I think there is enough confidence in the market. Investors are willing to underwrite pro-forma,” said Gregory Rumpel, a broker at Jones Lang. “That means that if you are repositioning an asset or redeveloping an asset, the buyer community is willing to pay you close to the stabilized value.”

Investors are motivated by the strength of the market’s fundamentals, which took only a moderate hit during the downturn and rebounded quickly. During the first four months of the year, occupancy rates for hotels in Miami Beach averaged 79.8%, up from 78.9% during the same period the year before, according to Smith Travel Research. Room rates increased 9.2% to $270.02, while revenue per room rose 10.3% from year-ago levels.

As of February, hotels with some 639 rooms were under construction in the 48,053-room Miami-Hialeah market. A number of others are undergoing substantial renovations.

Meanwhile, the market has seen several high-profile deals, and fierce bidding for the few properties that have come to market. That includes the February sale of the 589-unit Gansevoort Miami Beach for roughly $300 million. A joint venture between Starwood Capital of Greenwich, Conn., and LeFrak Organization of New York acquired the hotel from lender Credit Suisse via Jones Lang LaSalle.

Positive performance data motivated many investors with high-yield strategies to pursue tired, underperforming or troubled hotels over the past year — a strategy that appears to be paying off.

Boston-based Rockpoint, a high-yield fund operator, last year teamed up with Highgate Holdings of Dallas and the Witkoff Group of New York to buy the shuttered Cabana on Collins, a failed condominium conversion project, out of foreclosure for just $11.3 million. They undertook a complete rebuild of the property, saving just a few architectural elements with historic value. The new full-service hotel will include two pools, meeting space, underground parking and direct beach access. Highgate would prefer to stay on to manage and operate the hotel, but is willing to step aside for a buyer.

The Blue Moon and Winterhaven hotels were acquired by Washington-based Carlyle and Urgo Hotels of Bethesda, Md., for $27 million just last year and are undergoing renovations that will cost approximately $6 million.

Some investors have already turned quick profits by cashing out. For example, in January, SteepRock Capital of New York opted to sell the 94-room Traymore Hotel in Miami Beach shortly after foreclosing on a defaulted loan, without completing renovations of the shuttered property. A foreign investor paid some $17.5 million for the hotel. SteepRock had acquired the nonperforming loan for about $8 million in December 2010 and spent additional funds completing the foreclosure. The plan was to renovate and sell the hotel, but SteepRock switched gears after receiving a number of unsolicited offers.

The market’s resilience is due in part to its international appeal, as it attracts tourists from South America and Europe. In fact, during the first three months of the year, the number of international flights arriving at Miami International Airport surpassed the number of flights arriving from abroad at John F. Kennedy International Airport in New York — a factor that’s further fueling investor interest.

“Miami used to be a distant tier” for investors, Rumpel said. “But now it is front and center.”

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