|By Tom Stieghorst, South Florida
Knight Ridder/Tribune Business News
Jun. 11, 2006 -- If a hurricane wallops Florida this year, Blackstone Group may need some blue tarps.
Over the past 18 months, the New York private equity firm has spent at least $1.5 billion to buy 17 waterfront hotels in the state.
It now owns the biggest hotel in Palm Beach County, four resorts in Fort Lauderdale, two trophy properties in vulnerable Key West and a half-dozen hotels in Sanibel and Captiva that have barely rebounded from Hurricane Charley in 2004.
Blackstone was buying even as hurricane scientists predicted a cycle of more intense storms that could span decades.
John Ford, a vice president for communications at Blackstone, said the firm wouldn't comment on how hurricanes figure into its investment strategy.
Although it is more vulnerable than most hotel owners, Blackstone's situation is shared by much of the area's lodging industry. A severe hurricane could put hotels out of business for weeks or months, damaging the local economy.
Insurance is expensive or impossible to find for some older mom-and-pop hotels. "These people have their whole life's savings in their properties and they can't get coverage," said Ron Zimmerer, a broker in Fort Lauderdale.
But real estate signals -- like cheap interest rates and rising land values -- are prompting investors to buy hotels in South Florida, rather than pull back. They are betting that tourists will pay more for a room in the future than today.
"They're hoping to buy at 50 cents on the dollar and sell eight years later for $1.50," said Scott Smith, a consultant at PKF Hospitality in Atlanta. "That's where the opportunity is."
Blackstone has been an aggressive buyer of hotels since 2004. With an address on Park Avenue, the firm founded by Wall Street bankers caters to wealthy private and institutional investors who expect big returns.
Its Florida shopping spree started last year when it bought five hotels from Boca Resorts Inc. for $1.25 billion. It bought Wyndham International for $3.2 billion later that year, bringing 21 resort hotels into the portfolio, including four in Florida.
This year it picked up a 579-room Fort Lauderdale hotel from Host Marriott Corp., before swallowing Meristar Hospitality Corp. for $2.6 billion.
And Blackstone has a stake in dozens of extended-stay and economy hotels in Florida because it owns the Extended Stay America, LaQuinta Inn, Baymont Inn and Wellesley Inn brands, all of them acquired since 2004.
Many of those Florida hotels face a higher risk of catastrophic damage than if they were elsewhere in the United States.
Analysts said that Blackstone is responding to strong demand, reflected in rising room rates in Florida. In Fort Lauderdale, for example, the average daily rate in April was $129.45, a 19.7 percent increase from a year earlier.
"Some of the strongest growth in the hotel industry is coming from beachfront resort-type destinations," said Gregory Rumpel, executive vice president at Jones Lang LaSalle, a hotel brokerage firm. "The demand has been very, very strong,"
Contributing to the rates increases are hotels that have been partly or fully closed by hurricane damage, reducing supply.
At Blackstone's 579-room Fort Lauderdale Grande resort, more than 200 rooms are still out of commission from Hurricane Wilma last October. A spokeswoman said the rooms in the resort's tallest building are being redone and should be ready by early fall.
That could come just in time for trouble. The National Oceanic and Atmospheric Administration predicted in May that there would be eight to 10 Atlantic hurricanes this season, including four to six "major" ones.
Insurers, who have been swamped with claims from the past two seasons, are aware of the risks. "For beachfront, premiums have gone up anywhere from 400 to 800 percent," said Zimmerer, of Brown & Brown Inc.'s Fort Lauderdale office.
That increase is driving the prices for hotels higher as insurance gets factored into the transaction, analysts said. And for some small hotels, the cost of insurance is the last straw, forcing them to sell to condo developers.
While hotel occupancy in April in Fort Lauderdale averaged more than 80 percent, a severe hurricane could depress that for some time. Ten months after Hurricane Katrina, hotels in New Orleans on average are only half full. "The New Orleans market has changed, certainly for the foreseeable future," said Scott Berman, analyst at PricewaterhouseCoopers in Miami.
A few hotels in Broward County still have no guests at all.
That has been the case since last October at the 230-room Oceanfront Hotel, just south of Las Olas Boulevard on Fort Lauderdale beach. The pink, 13-story hotel took substantial damage from Hurricane Wilma.
Only a few months before, Pyramid Advisors of Boston had acquired the hotel with plans to convert it to a Courtyard by Marriott. Now a more comprehensive renovation is under way for completion in January 2007.
"We're still waiting for the owners to identify what our brand is going to be," said general manager Bill Cunningham. The hotel's employees are either working on the upgrade or have been sent to other hotels owned by Pyramid.
Likewise, in Hollywood, the 47-room Greenbriar Beach Club has been shut down since Wilma. "We had extreme roof damage," said owner Luis Stabinski, who had to cancel 500 reservations and lay off his housekeepers and manager.
Stabinski said he's evaluating his rebuilding options, but said hurricane season has become an ordeal.
"We were evacuated three times last year," he said. "It takes a toll on you."
Examples like those haven't deterred Blackstone Group, which is now pouring money into renovations at many of the 17 Florida resorts it owns. At the Fort Lauderdale Grande, the company has budgeted $50 million for improvements.
The 40-year-old Hyatt Regency Pier 66 Resort just completed a $14 million project to update the rooms, reconfigure the pool and add a new light sculpture to its signature tower.
With close to 650 employees between them, the Fort Lauderdale Grande and Pier 66 are pillars of the local economy. A hurricane like the one that hit New Orleans could change tourist perceptions of the area and give hotel owners long-term headaches.
That would be bad for everyone said Zimmerer, the insurance broker, who said the state Legislature should take steps to make insurance more available.
"Hotels keep our taxes down," Zimmerer said. "It's in all of our best interests that that they survive."
Tom Stieghorst can be reached at email@example.com or 305-810-5008.
Copyright (c) 2006, South Florida Sun-Sentinel
Distributed by Knight Ridder/Tribune Business News. For reprints, email firstname.lastname@example.org, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA. NYSE:JLL, NYSE:BRO, NYSE:MAR,