Pebblebrook sees opportunity

Pebblebrook Hotel Trust's latest acquisition target is the Argonaut Hotel in San Francisco.
Pebblebrook Hotel Trust's latest acquisition target is the Argonaut Hotel in San Francisco.
By Danielle Douglas
Capital Business Staff Writer
Monday, January 3, 2011

Gearing up for what promises to be a year ripe with acquisition opportunities, Pebblebrook Hotel Trust of Bethesda is considering the sale of common shares and debt securities, according to a recent regulatory filing with the Securities and Exchange Commission.

The shelf registration will allow the lodging real estate investment trust to sell up to $500 million of its securities at any time. Proceeds would be used for general corporate purposes, including funding investment activity, repayment of debt and working capital.

Pebblebrook, one of the most active lodging REITs in the country, has purchased eight hotels in the past year, striking as the hotel sector rose from the ashes of the recession. The company now has its sights set on a ninth property, the 252-room Argonaut Hotel in San Francisco, according to Raymond D. Martz, Pebblebrook chief financial officer. The $84 million acquisition, he said, is expected to be completed in February.

"We continue to see a lot of acquisition opportunities in the marketplace," Martz said. He noted that Pebblebrook has more than $200 million in cash on its balance sheet, meaning a capital raise is always an option but not a necessity.

Jon Bortz, the former LaSalle Hotel Properties chief executive, formed Pebblebrook in December 2009 to take advantage of dislocation in the lodging market. Since then, the company has been stockpiling cash, much like its peers in the REIT space, to tuck quality assets into its portfolio.

Hotel acquisitions nationwide topped $12.1 billion at the close of November, more than four times the sales volume for the same period in 2009, according to real estate research firm Real Capital Analytics. By mid-December, about $780 million worth of lodging deals had closed or were under contract.

This buying frenzy underscores improving fundamentals in the hotel sector, with year-over-year occupancy up 9 percent and room revenue up 11.8 percent in November, according to Smith Travel Research.

Hospitality is battling back from a dismal 2009, when occupancy fell 8.8 percent and room revenue plunged 16.7 percent. With lukewarm demand making it difficult for some property owners to repay loans, the total value of distressed hotels reached $31 billion in 2009.

In many cases, buyers, eager to snatch assets for cents on the dollar, clashed with owners, who choose to hold out for better pricing. Now that fundamentals have begun to shore up, the gulf between offers and what sellers would accept has narrowed.

Pending debt maturities will probably fuel further activity in the coming year, though distressed sales made up a small fraction of hotel transactions last year. Investors have strongly favored high-quality full-service hotels in core markets, which has pushed pricing up, according to Real Capital Analytics. That bias might hem up transactions, if trophy assets don't come to market. Most forecasts, however, anticipate a flurry of sales in 2011.

"We think right now we are in a long and protracted period of recovery in the hotel cycle, so it's always good to have capital to take advantage of that," Martz said.

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