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October 29, 2012

Pebblebrook Grabs Hotel Palomar San Francisco for $58M

By Barbra Murray, Contributing Editor

Pebblebrook Hotel Trust has added a fourth San Francisco hotel to its portfolio with the acquisition of Hotel Palomar San Francisco. The lodging REIT paid $58 million for the 196-room, upper upscale hotel, shelling out $30.8 million in cash and assuming an existing mortgage loan of $27.2 million.

Pebblebrook has closed its share of off-market acquisitions, but the 196-room Palomar had been openly marketed. The REIT was not the only one interested in the 105-year-old property, which made its debut as the Palomar in 1999.

“Quality hotels like Palomar–there are few opportunities like those out there currently so certainly it is a challenge,” Raymond D. Martz, Pebblebrook CFO, told Commercial Property Executive.

However, on the upside, Martz explained, the pool of hopeful investors in such properties is presently not a large one. “Although there is not a lot of inventory, there are not a lot of buyers,” he said. “The primary competition we’ve seen throughout the year has been the other public REITs, but it’s pretty limited.”

Chesapeake Lodging Trust, which acquired the 429-room Hyatt Regency Mission Bay Spa and Marina in San Diego and the 520-room W Chicago over the summer, is among the small group of REITs that frequently throw their hat in the ring when a high-end hotel asset becomes available. Pebblebrook, however, doesn’t compete for the sake of competing. “We’re very picky,” Martz added.

Palomar certainly ticks off all the requisite boxes for a Pebblebrook acquisition. “Clearly we love San Francisco,” he said. “It’s a great market; the demand is pretty solid, the tech industry right now is really on fire and there’s been a lot of job growth in that area, and tourism is great so San Francisco is hitting on all cylinders.”

The fact that demand is flat in the city is of neither short- nor long-term concern to the REIT, particularly since RevPAR is up more than 10 percent. “You don’t have to have demand growth, but you can still have revenue growth, so cash flow is increasing,” according to Martz. “When we select our target markets, they’re markets that have high-barriers to entry and markets that have high demand growth, so when you have slower growth in the economy, they can still do well.”

Other properties that have fit the bill and joined Pebblebrook’s portfolio this year are the W Hotel Los Angeles, which the REIT purchased for $125 million, in addition to the Hotel Vintage Park Seattle and the Hotel Vintage Plaza Portland, picked up for $32.5 million and $30.5 million, respectively. And in July, Pebblebrook spent $30 million to buy the Hotel Milano, which became the REIT’s third San Francisco property.

“We have the capacity on our balance sheet and we have cash as well, and we’ll continue to be active in our targets markets,” Martz said. ”

And the year is not over yet. As for the possibility of adding more hotels to its collection before the close of 2012, he added, “There’s always a chance.”

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