Hurricanes Keep Ruining Beach Hotels. Investors Like Them Anyway

September 25, 2019 Updated: September 25, 2019

Frenchman’s Reef, the largest resort on St. Thomas, was smashed by Hurricane Irma, which breached roofs, caved-in walls, and felled trees across the oceanfront property. Two years later, the hotel remains closed as its owner quarrels with insurers over millions in damages.

It sounds bad, but it’s business as usual in the Caribbean, where resort owners balance room rates against insurance premiums and brace for the next disaster. Frenchman’s Reef is a good example. It closed for extensive repairs in 1997 after hurricanes battered the property in previous years.

Despite the risk, hotel owners continue to justify investing in the region, tapping insurance markets to offset risk and paying asset prices that reflect the likelihood of future hurricanes. That rationale is getting tested as the recent run of destructive storms makes it harder and more expensive for beach resorts to get insurance.

“My concern as a broker is that people are starting to think about this as is it the new norm?” said Michael Rouse, U.S. property practice leader for Marsh LLC, the insurance brokerage unit of Marsh & McLennan Cos. “How much does climate change have to do with the severity and frequency that we’re seeing of hurricanes that are making landfall?”

Beyond property damages, beach hotels from Puerto Rico to the Florida Keys struggled to attract tourists following the 2017 hurricane season, even long after airports and hotels had reopened. The mega-resorts of the Bahamas, which were mostly untouched by this year’s Hurricane Dorian, have to remind vacationers that they’re still in business after the Category 5 monster wiped out parts of the country.

Real estate investment trusts that own hotels have seen portfolio-wide insurance premiums increase by as much as 50% since 2017, said Michael Bellisario, an analyst at Robert W. Baird & Co. Vacationers already pay richly for ocean views and warm weather, limiting owners’ ability to raise prices.

“You try to maximize rates as much as you can,” said Bellisario. “At some point you’re going to try to pass it on, but it’s easier said than done.”

When things go right, insurance can work wonders for hotel owners. Braemar Hotels & Resorts, a REIT that owns the Ritz-Carlton St. Thomas, used business-interruption coverage to make up for lost revenue, Chief Executive Officer Richard Stockton said in an interview. At the same time, the company used the rebuilding process to update guest rooms and build a new family pool for the resort, which is slated to reopen in November.

“It’s no different if a hurricane hit the property or it didn’t,” Stockton said. “The reality is it’s inconsequential to us from a financial perspective.”

It helps that beach resorts are often important parts of their local economies, and can tap different forms of government aid to get back in business. Before it closed, Frenchman’s Reef was the U.S. Virgin Islands’ largest private employer, owner DiamondRock Hospitality Co. said in a court filing. The company would stand to benefit from pending legislation that would use tourism taxes to help fund property improvements.

DiamondRock is also asking its insurers to pay. The Bethesda, Maryland-based company submitted a preliminary claim of more than $300 million to cover business interruption and rebuild the property in compliance with a new building code that was implemented after Irma. Its insurers have paid about $100 million, arguing in court filings that some of the repairs DiamondRock wants to make aren’t covered.

DiamondRock didn’t respond to requests for comment. The company has said it expects to reopen the resort next year, and that a trial to contest the insurance dispute is set to begin in January.

Recent hurricanes haven’t radically changed the desirability of owning or insuring beach hotels, Hilton Worldwide Holdings Inc. CEO Christopher Nassetta said at a travel industry conference last week.

“I do not think anytime soon you’re going to see people say that they’re going to pull out,” he said. “I do not think these are going to become uninsurable risks.”

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