Pebblebrook to Sell 2 Luxury Hotels for $331M

One of the properties reportedly traded for the highest price per key in Atlanta's Buckhead district.
InterContinental Buckhead Atlanta. Image courtesy of Pebblebrook Hotel Trust

Pebblebrook Hotel Trust, of Bethesda, Md., has executed a contract to sell two hotels in Atlanta and Washington, D.C, to a third party for $331 million. The properties include the 422-key InterContinental Buckhead Atlanta and the 237-key Sofitel Washington DC Lafayette Square.

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For the InterContinental Buckhead Atlanta, according to Pebblebrook, the contracted sale price reflects a 6.4 percent net operating income capitalization rate based on the hotel’s operating performance for 2018 and a 6.8 percent NOI cap rate based on an estimated 2019 operating performance. The parallel figures for the Sofitel Washington DC Lafayette Square reportedly are 5.7 percent for 2018 and an estimated 5.7 percent for 2019. For the two properties combined, the NOI cap rates are 6.1 percent for 2018 and an estimated 6.4 percent for 2019.

Sofitel Washington DC Lafayette Square. Image courtesy of Pebblebrook Hotel Trust

Both sales are subject to normal closing conditions. Pebblebrook is aiming to complete the closings in the first quarter of 2020. As to the InterContinental, the transaction could represent the highest price per key of any hotel sale in Buckhead, even topping Xenia Hotels & Resorts’ December 2018 purchase of the then Mandarin Oriental Atlanta (now the Waldorf Astoria Atlanta Buckhead) for about $420,000 per key.

At this late stage in the business cycle, Pebblebrook CFO Raymond Martz told Commercial Property Executive, the public markets are trading commercial real estate at a substantial discount, so it makes sense for a public REIT like Pebblebrook to sell some assets and de-lever.

Pebblebrook bought the InterContinental in mid-2010 for $105 million (a discount to its 2004 development price). The acquisition followed the REIT’s December 2009 IPO.

Faltering at the high end

As a percentage of the overall hospitality market, luxury properties appear to be increasing, according to a December forecast from CBRE Hotels. Citing figures from STR, the forecast states that only 0.7 percent of hotels (2.3 percent of guestrooms) in the U.S. are chain-affiliated luxury hotels. In the construction/development pipeline, however, luxury properties account for 1.2 percent of hotels and 2.9 percent of guestrooms.

This expansion could be coming at the wrong time, however, because CBRE Hotels predicts that overall U.S. lodging demand growth in 2020 will decline to 1.3 percent. The luxury segment is expected to take a hit sooner, with year-end 2019 demand growth at only 0.4 percent.