FLORIDA KEYS, Florida—High barriers to entry, strong leisure demand and high rates have made hotels in the Florida Keys investment targets. Since May, two public real estate investment trusts and one private REIT have purchased nearly $425 million in hotel assets in the market.
“Up until two or three years ago, hotel investors were looking at primary markets only,” said Mark Lunt, principal of real estate and hospitality transaction advisory services at Ernst & Young. “Since then many of them are looking at secondary markets, and Key West is at the top of the list because of its robust occupancies, high (revenue per available room) and limited seasonality factors for the market.”
Both Key West and the rest of the Keys have posted strong RevPAR growth in recent years, according to data from STR, parent company of Hotel News Now. Occupancy in Key West year-to-date through September was 87.9% with an average daily rate of $247.60. ADR was up 10.3%, and RevPAR rose 14.6% over the same period last year. In 2012 and 2011, the city’s hotels recorded RevPAR increases of 8.5% and 14.9%, respectively.
In the rest of the Keys, year-to-date occupancy through September was 80.8% with an ADR of $233.13, which was up 8.3% over 2012. RevPAR increased 12.7% through September.
This operating performance spurred three major transactions this year:
- In May, Ashford Hospitality Trust paid $90 million, or $634,000 per room, for the 142-room Pier House Resort and Caribbean Spa in Key West. The transaction represented a 12-month capitalization rate of 6.2% on net operating income. Ashford also owns the Crowne Plaza La Concha Hotel in the city.
- In August, LaSalle Hotel Properties acquired the Southernmost Hotel Collection, a combination of three properties with 260 rooms on the southern end of Key West’s Duval Street. LaSalle paid $184.5 million, or $708,000 room.
- Last month, Carey Watermark Investors bought Hawks Cay Resort, a property with 177 rooms and 250-plus villas in Duck Key, which is 60 miles northeast of Key West. Carey Watermark paid $149.4 million for the resort.
Limits on supply
Executives at the REITs said in addition to high occupancies and RevPARs, local environment ordinances inhibiting new supply growth in the market make the Keys an attractive market for investors.
“It is the highest barrier to entry market in the United States,” said Monty Bennett, chairman and CEO of Ashford. “One is legally prohibited from building new hotel rooms there because (the region doesn’t) have the infrastructure to support more hotel development.”
According to STR, supply in both Key West and the rest of the Keys increased 0.4% in 2012. In 2011, supply grew 1.4% in Key West and 1.9% in the rest of the Keys.
“The supply and demand fundamentals are great, and the barriers to entry against new competition are as pronounced as you’ll see anywhere in the country,” said Michael Medzigian, CEO of Carey Watermark. “And the limits on new supply are a Keys-wide issue, not just a Key West issue.”
Investor interest in assets in the Keys is part of a wider industry trend. Year-to-date through August, $2.5 billion in resort transactions have taken place globally, the highest amount since 2007. And resorts have accounted for 18.4% of total hotel investment transactions.
“It’s a broader strategy I’m seeing across the industry that resorts are back in favor,” said Scott Berman, principal and U.S. industry leader for hospitality and leisure at PricewaterhouseCoopers. “A lot of companies are in the laboratory right now trying to figure out the next generation of the resort business model, and Key West is definitely in that lab.”
Calculating risks
Like many resort locations, investing and operating in the Keys poses risks and challenges, sources said.
“An obvious risk is that (the Keys) are prone to hurricanes, as is the rest of south Florida,” Lunt said. “It’s not only susceptible to actual storms but also the heightened sense of the potential for storms. Because it’s connected by a series of bridges to each of the small keys, (the region) shuts down when there is a stiff breeze. You can’t take a chance that tourists could be trapped in the event of a major storm.”
Employee staffing and cost containment are other significant issues investors need to consider as they underwrite potential acquisitions in the Keys.
“It’s never been about achieving satisfactory revenue results,” Berman said. “The Keys have always been a front runner from a revenue perspective. It’s managing costs. Hoteliers who are making these investments must believe they can manage the cost side of it. If they can overcome the stigma attached to the Keys—and that’s the cost of operating the business—they will be fine.”
Ashford justified its high purchase price for the Pier House because company executives believe they can control costs and add value to the asset. An affiliate, Remington Hotel Corporation, manages both of Ashford’s properties in Key West.
According to an Ashford investor presentation, in the first three months of operating the Pier House, Remington was able to increase earnings before interest, taxes, depreciation and amortization by 70.8% compared to the same period last year. RevPAR increased by 12%; revenues were up 9.5%; and cost-cutting initiatives should yield $1.9 million in annualized cost savings. Ashford Hospitality Prime, a new REIT spun off earlier this month from Ashford Hospitality, has an option to buy the Pier House within the next 18 months.
Access is another issue for hotel operators in the Keys, Berman said. Most goods and services and leisure travelers come to the Keys via the 125-mile highway from south of Miami to Key West.
“If we had this discussion 15 years ago, I would tell you almost all the access to the Keys is by car. Today, it’s still true that most resort guests leave from south Florida and drive down, and it’s not an easy drive,” Berman said.
Air service is improving as carriers add flights from additional cities. The Key West airport recorded double-digit increases in arrivals in the past three years, and arrivals are up 4.6% this year through September.