Virgin Hotels searching for Washington foothold

By Danielle Douglas
Monday, January 31, 2011

SAN DIEGO -- Virgin Hotels has identified a few sites for its foray into the Washington lodging market, but is at least two years away from launching a property under its new flag, according to owner Richard Branson.

Speaking at the American Lodging and Investment Summit here last week, Branson, founder of the Virgin Group empire, would not say where in the area he is looking but assured that the Washington market was a prime target.

"You can't really be a hotel chain in America without Washington," he told conference attendees. Still, he said, "it's not easy getting sites at the moment."

When Branson announced the formation of Virgin Hotels in September, he said the company would seek direct buys, team with owners or act as a third-party manager. To start, the new subsidiary is partnering with investors Diego Lowenstein and Alberto Beeck to spend up to $500 million acquiring hotels over the next three years. Virgin is targeting urban properties with 150 to 400 rooms, a restaurant and ample communal space to be transformed into modish, luxury hotels to attract high-income, well-educated travelers.

"A lot of hotels are quite boring," Branson said. "We don't want to have a Virgin stamp on our hotels, where you think that's a typical Virgin hotel. Each of our hotels will be unique and of great quality."

There is a limited pool of available hotels in the local market, competition is fierce and prices are edging up. Earlier this month, Hersha Hospitality Trust paid $312,500 a unit for the 152-room Capitol Hill Suites on C Street SE, while the 200-room Westin Embassy Row on Massachusetts Avenue NW traded to Westbrook in October for $234,045 a unit. Those prices represent more than twice the going rate for many District hotels last year.

Virgin could rescue a property worth less than its mortgage, such as the St. Regis at 16th and K streets NW, but other, less-distressed options may surface. A number of owners needing to refinance mortgages on their hotels this year may feel pressure to sell, as the capital markets, though more liquid than in recent years, will likely fall short of demand. Declines in property value may also mean that loans are refinanced at lesser amounts, leaving a gap of financing.

Chesapeake Lodging Trust president and chief executive James L. Francis anticipates that scenario will prove fruitful for companies, such as his Annapolis-based real estate investment trust, wanting to acquire high-end assets in core markets like Washington.

"The bid-ask spread [between buyers and sellers] has narrowed to a point where owners of healthy, quality assets can give consideration to purchase offers," he said during an interview at the conference. "That's likely to create more buying opportunities down the road."

Branson has enlisted the expertise of Paul Whetsell, president and chief executive of investment firm CapStar Hotel in Arlington, who will head up Virgin Hotels, along with Anthony Marino and Raul Leal, formerly of Desires Hotels. Whetsell headed MeriStar Hospitality, once the third largest hotel real estate investment trust, owning more than 110 hotels and managing more than 200 hotels before it sold to the Blackstone in 2006.

Even with that kind of hospitality experience backing the venture, Washington's lodging market is fairly saturated with established high-end brands such as Ritz-Carlton and W. Branson does, however, have the brand recognition of Virgin, with its airline and vacation packages, to lure travelers.

"I think we can fill our hotels and make our shareholders a reasonable return," Branson said. "My attitude in life is . . . just do it, but if we fall flat on our face we'll move on to something else. But I have a feeling we will make a success of it."

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