Pebblebrook Picks Up Two Pacific Coast Hotels for $161.2M

In a matter of just two days, Pebblebrook Hotel Trust has plumped up its portfolio with two upper-upscale hotels encompassing a combined 639 guestrooms. In separate all-cash deals, the REIT shelled out $110 million for the Westin Gaslamp Quarter in San Diego and $51.2 million for the Hotel Monaco Seattle.

April 8, 2011
By Barbra Murray, Contributing Editor

In a matter of just two days, Pebblebrook Hotel Trust has plumped up its portfolio with two upper-upscale hotels encompassing a combined 639 guestrooms. In separate all-cash deals, the REIT shelled out $110 million for the Westin Gaslamp Quarter in San Diego and $51.2 million for the Hotel Monaco Seattle.

“Our goal is to buy a hotel a day,” Jon Bortz, president and CEO of Pebblebrook, joked with CPE.

Pebblebrook purchased the 450-room Westin Gaslamp, located in San Diego’s historic 16-block Gaslamp Quarter, from Starwood Hotels & Resorts Worldwide Inc. Starwood has managed the property since 1996, and the company will continue to do so under a 20-year agreement featuring two 10-year extension options. Simon Turner, president of global development at Starwood, noted that Starwood’s choice to sell the Westin reflects its asset-light strategy. He added that the firm continues to pursue opportunities to sell at the right time to the right owners.

Westin Gaslamp first opened its doors in 1987, and is now in the midst of a makeover. The first phase of a capital improvement program recently reached completion at a cost of $12 million, and as part of the sales transaction, Pebblebrook will contribute an aggregate $23 million to continue the renovation process.

The Westin Gaslamp’s occupancy level was 72 percent in 2010, quite admirable compared to the national average of 57.6 percent, according to hotel research provider STR. Pebblebrook expects the figure to increase with the economy’s improvement and a boost from surrounding destinations like the 615,000 square-foot San Diego Convention Center–the hotel has 32,000 square feet of meeting space–and nearby tourist attractions.

One acquisition this week simply was not enough for Pebblebrook. The REIT also shelled out $51.2 million for the 189-room Hotel Monaco Seattle. Pebblebrook did not disclose the name of the seller; however, according to the King County Department of Assessments’ records, the last owner was Fourth Seattle Hotel Associates L.P. The downtown Seattle structure that is now home to the Monaco Seattle made its original debut as an office building for Pacific Northwest Bell in 1969. In 1997, Kimpton Hotels & Restaurants transformed the building into the boutique hotel, which has a bevy of accoutrements including 6,000 square feet of meeting space.

Kimpton has managed the property since day one and the company will stay on in that capacity under Pebblebrook, which relies on Kimpton to oversee four other lodging facilities in its rapidly expanding portfolio. There is one change on tap for the Monaco Seattle; its guestrooms will undergo a $3 million upgrade beginning in the fourth quarter.

Like the Westin Gaslamp, the Monaco Seattle’s 2010 occupancy level, which was 81 percent, exceeded the national average. And just like the Westin, the Monaco Seattle is expected to see improvement this year. With a premier location in the midst of the city’s bustling central business district, the hotel can depend on a wealth of drivers to provide the extra boost as the economy moves toward recovery. A low level of new deliveries and high barriers-to-entry benefit the property, as do its close proximity to the 726,000 square-foot Washington State Trade & Convention Center and location in the near a plethora of popular tourist attraction like Pike Place Market.

With the closing of this week’s mini-buying binge, Pebblebrook has amassed a portfolio of 11 assets since its December 2009 initial public offering, spending a total $860 million in predominantly all-cash deals. “Yes, we’re writing checks to buy hotels, but in some cases, we do assume debt,” Bortz said. The company is on the verge of closing another transaction; it will pay $89.5 million for Sawyer Enterprises’ 235-room W Hotel in Boston, pending bankruptcy court approval.

As for the company’s 2011 shopping agenda, there appears to be no end in sight. “It is a very robust acquisitions market. There are numerous opportunities in our target markets and the number of opportunities continues to grow.” Pebblebrook focuses on markets with high barriers-to-entry in urban centers. The company does not expect to have to fight tooth and nail to get its hands on properties this year. “Right now, there is a limited number of companies that are buying,” he noted. “It’s mostly us and the other hotel REITs. They are our competition, but there is only a handful that are really being active right now, so we have a distinctive position in the marketplace.”

Competition among investors in the hotel market is modest, as are the price tags. Pebblebrook acquired the Westin Gaslamp at a 25 to 30 percent discount to replacement cost and grabbed the Monaco Seattle at a 30 to 35 percent discount to replacement cost. “There’s been some talk about the market overheating, but we don’t see it,” Bortz said.