New REIT Grabs San Francisco’s Sir Francis Drake Hotel in $90M Deal

June 24, 2010
By Barbra Murray, Contributing Editor

Pebblebrook Hotel Trust has wasted precious little time snapping up properties following its December 2009 initial public offering. The Bethesda, Md.-based REIT has just plunked down $90 million for the ritzy Sir Francis Drake Hotel in San Francisco. Pebblebrook acquired the 416-room hotel from a partnership spearheaded by The Chartres Lodging Group L.L.C. in San Francisco, which acquired the property in 2005 for $65 million.

Located downtown in the center of San Francisco’s bustling Union Square, the 23-story Sir Francis Drake was originally developed in 1928. The upper upscale hotel features 18,000 square feet of meeting space and is home to a famed bistro, a Starbucks store, a bar and a nightclub. Chartres had invested approximately $23 million in the property during the five years that it owned the property. Eastdil Secured marketed the hotel on Chartres’ behalf, and brought the seller more than a few interested buyers.

“We considered numerous offers,” Robert Kline, president and co-founder of Chartres Lodging said in a prepared statement, “but chose to transact the property with Pebblebrook because they recognized the property’s significant potential given its strong location.”

Aside from plans to invest about $7 million in various upgrades over the next 12 to 24 months, there are no fixed changes in store for the hotel; the property’s manager, Kimpton Hotels & Restaurants, will continue in its role.

The Sir Francis Drake’s location in the midst of a bevy of chic restaurants and retail stores, and its close proximity to the city’s Financial District and the 2 million-square-foot Moscone Center convention facility have long made it a magnet for the tony leisure and business traveler sets. The global financial crisis thinned both crowds, but the hotel has managed to fare far better than many other luxury lodging properties. In 2009, the occupancy rate at the Sir Francis Drake was approximately 76 percent. The figure surpasses San Francisco’s current average occupancy rate, which, at 61.9 percent, is still respectable enough to place the city at number five on the list of the nation’s largest 13 hotel markets, excluding Las Vegas, according to a first quarter report by Marcus & Millichap Real Estate Investment Services. The average U.S. hotel occupancy rate is 48.8 percent.

The U.S. hotel market, however, is looking up and Pebblebrook has been combing the top cities–major coastal markets, in particular–for upscale full-service properties that have an upside. Since May, the REIT has entered into agreements to acquire an Atlanta-area hotel for $105 million, a property in the Washington D.C./Baltimore region at a cost of $74 million, and a hotel in the Minneapolis-St. Paul area for $74 million.

But Pebblebrook is not alone in its pursuit of such assets at a time when price tags are about as low as they’re going to go for the foreseeable future. Earlier this month, Chesapeake Lodging Trust made use of proceeds from its January IPO by acquiring the renowned 188-room Hilton Checkers Los Angeles, and in April, hotel impresario Ian Schrager became the proud new owner of the landmark 285-room Ambassador East Hotel in Chicago.