Pebblebrook’s $90M San Francisco Buy Heats Up Trophy Hotel Chase

Courtesy Flickr Creative Commons user Frank Tobia

By: Barbra Murray, Contributing Editor

Pebblebrook Hotel Trust has wasted precious little time snapping up properties following its December 2009 initial public offering. The Bethesda, Md.-based REIT has just plunked down $90 million for the ritzy Sir Francis Drake Hotel in San Francisco. Pebblebrook bought the 416-key property from a partnership spearheaded by The Chartres Lodging Group L.L.C. in San Francisco, which acquired the property in 2005 for $65 million.

Located downtown in the center of San Francisco’s bustling Union Square, the 23-story Sir Francis Drake opened in 1928. The hotel features 18,000 square feet of meeting space and is home to a famed bistro, a Starbucks store, a bar and a nightclub. Chartres had invested approximately $23 million in the property during five years of ownership. Eastdil Secured marketed the hotel on Chartres’ behalf, and brought the seller a sizeable pool of interested buyers. “We considered numerous offers,” Robert Kline, president and co-founder of Chartres Lodging said in a statement, “but chose to transact the property with Pebblebrook because they recognized the property’s significant potential given its strong location.” Aside from plans to invest about $7 million in upgrades over the next 12 to 24 months, no major changes appear to be in store; for instance, Kimpton Hotels & Restaurants will stay on as property manager.

The Sir Francis Drake’s location in the midst of a bevy of chic restaurants and retail stores, and its close proximity to the city’s Financial District and the 2 million-square-foot Moscone Center convention facility have long made it a magnet for the tony leisure and business traveler sets. The global financial crisis thinned both crowds, but the hotel has still fared far better than many other luxury lodging properties. In 2009, the occupancy rate at the Sir Francis Drake was approximately 76 percent, far exceeding the 48.8 percent national average. The Sir Francis Drake’s performance also surpasses San Francisco’s 61.9 percent average occupancy. That rate is good enough to place the city fifth on the list of the 13 largest U.S. hotel markets, excluding Las Vegas, according to a first-quarter report by Marcus & Millichap Real Estate Investment Services Inc.

The U.S. hotel market, however, is looking up, and Pebblebrook is combing the top cities–major coastal markets, in particular–for upscale full-service properties that offer upside. Since May, the REIT has entered into agreements to acquire an Atlanta-area hotel for $105 million, a property in the Washington D.C./Baltimore region at a cost of $74 million, and a hotel in the Minneapolis-St. Paul area for $74 million.

Pebblebrook is not alone in its pursuit of such assets at a time when price tags are as low as they’re expected to go for some time to come. Earlier this month, Chesapeake Lodging Trust used proceeds from its January initial public offering to acquire the renowned 188-room Hilton Checkers Los Angeles. And in April, hotel impresario Ian Schrager became the owner of the landmark 285-room Ambassador East Hotel in Chicago.