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Florida's Hotel Market Will Present Buying Opportunities Monday, October 19, 2009

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HREC Investment Advisors

On the one-year anniversary of the bankruptcy of Lehman Brothers – one of the most active lenders on hotels over the previous five years – HREC Investment Advisors (HREC) and Sexton Realty Advisors (SRA) have jointly completed the first comprehensive analysis of the effect of the financial crisis on Florida’s hotel real estate market.

The full results of the study can be found in the October 2009 edition of the HREC Newsletter.

“From a performance perspective, Florida’s hotel market is experiencing a significant downturn; however, investors continue to show interest in Florida due to a long-term positive outlook for the market,” said Scott Stephens, a Tampa-based partner of HREC, one of the nation’s largest hotel investment banking firms.

“If one applies the projected national rate of hotel loan defaults – which are anticipated to reach as high as 15% - 20% by the time it is all said and done – we can anticipate that between 500 and 700 hotels in Florida will end up in foreclosure or being refinanced at a much lower value basis with significant losses to both borrower and lender,” added Paul Sexton, President of Sexton Realty Advisors, an Orlando-area boutique advisory firm focused on buy-side advisory services for private equity and institutional investors clients.

Significant findings of the HREC/SRA study include:

• Although the supply of hotel rooms across the nation has grown by 8% since 2003 – the beginning of the last “up-market” -- the lodging base in Florida grew by just 2% over the same period.
• Although Florida has seen relatively limited supply growth over the last six years, there are still roughly 20,000 hotel rooms under development throughout the state, including several large projects that have either just opened or are still under construction.
• By midyear 2009, there were approximately 79 distressed hotels in Florida’s seven major markets, representing some $1.2 billion in value, which represented roughly 10% of all distressed assets throughout the state’s large markets. By comparison, in six other comparative tourism markets across the Sunbelt, hotels accounted for 18% of all distressed commercial real estate assets.
• From the market’s peak in 2007, average revenues per available room (RevPAR) have plummeted by 20% in Florida and by 17% across the country, with additional declines predicted by the various industry prognosticators. By comparison, “peak-to-trough” RevPAR declines after the high-tech bust and the events of 9/11 were just 6.5% for the state and 9.6% for the nation.
• Based on national data provided by various ratings agencies, it is estimated that 11% of hotels financed by CMBS loans are not currently able to cover their debt service and that another 19% percent have debt service coverage ratios so low that the borrowers are in technical default of their loans. That the Florida market has been one of the worst performing markets in the country over the last year suggests these rates of default are useful indicators for CMBS back properties throughout the state.
• Twenty-six percent of CMBS-backed hotels in Florida have their debt coming due by 2012, with another 54% maturing between 2015 and 2017.
• Notable distressed lodging assets across the state include the Bray & Gillespie Management (Daytona Beach) portfolio, the Fountainebleau (Miami Beach), The Coconut Grove (f/k/a Grand Bay) hotel, the Sheraton Orlando Downtown and the Royal Palm (Miami Beach).
• Year-to-date in Florida, there has been just 13 hotel transactions representing $170 million in asset value. By comparison there were 180 hotel transactions, representing over $4.8 billion in value during the market’s peak year of 2007.  
• About Sexton Realty Advisors, Inc.: Based in Winter Garden, FL, Sexton Realty Advisors, Inc. specializes in acquisition advisory services to private equity and institutional clients with a focus on hotels, resorts, timeshare resorts and other vacation real estate.