Pebblebrook Buys Argonaut Hotel for $84M

February 24, 2011
By Barbra Murray, Contributing Editor

Pebblebrook Hotel Trust has been on a steady buying binge since the completion of its December 2009 initial public offering and 2011 brings no hint of a slowdown in the REIT’s acquisition pace. Pebblebrook recently acquired the Argonaut Hotel, a 252-room upper-upscale property in San Francisco, from Maritime Hotel Associates L.P. for $84 million.

The historic building that is currently home to the Argonaut did not start out as a lodging facility. The brick structure first opened its doors in 1907 as the Haslett Warehouse; its reinvention as a hotel occurred in 2003. Carrying the address of 495 Jefferson St., the property sits just across from the San Francisco Bay in the middle of the city’s Fisherman’s Wharf submarket, surrounded by dining, shopping and entertainment destinations. In addition to its luxury guestrooms, the boutique hotel features 8,000 square feet of meeting space, retail outlets and a 170-seat restaurant, and it is the site of the San Francisco Maritime National Historical Park Visitors Center.

The purchase price consisted of half cash and half debt assumption. Pebblebrook took on responsibility for a $42 million secured loan from Wachovia Bank N.A. with a 5.67 percent, fixed interest rate and a scheduled maturity date in March 2012. Additionally, in conjunction with the purchase, Pebblebrook assumed the property’s ground lease with the U.S. Department of the Interior’s National Park Service. The lease agreement, which calls for an annual rent payment of $1.2 million, expires at the end of 2059.

Kimpton Hotels & Restaurants, which manages Pebblebrook’s 416-room Sir Francis Drake Hotel downtown, as well as two other Pebblebrook-owned properties, has managed the Argonaut since 2003 and the company will continue to do so.

San Francisco’s hotel market did not escape the damage brought on by the economic downturn, but it faired better than most. “San Francisco’s strong commercial base, first-tier convention market, and leisure attractions have allowed the hotel market to sustain occupancy levels in the mid-70 to low-80 percent range, even during the recent economic recession,” HVS Consulting & Valuation reports in a recently released study. The Argonaut pulled off an even better performance, recording an average occupancy level of 87 percent in 2010. Improvement is on tap for the entire city, and the Argonaut will likely further benefit from the upswing. “Currently, the San Francisco hotel market is in a recovery mode and the general expectation is for modest growth in 2011.”

Clearly, investor interest in the city’s lodging offerings has returned. As per the HVS report, “At the current time lodging REITs are aggressively pursuing hotel assets, creating a competitive acquisition environment.” Transactions during the last half of 2010 included Chesapeake Lodging Trust’s acquisition of the 360-room Le Meridien San Francisco from HEI Hotels & Resorts L.L.C. for $143 million or $397,222 per-key. Additionally, La Salle Hotel Properties snapped up the 201-room Hotel Monaco from Kimpton for $68.5 million, or $ 340,796 per-key. And Pebblebrook made its entrée into the San Francisco market with the with the purchase of the Sir Francis Drake Hotel from a partnership led by The Chartres Lodging Group L.L.C. for $90 million, or $ 216,346 per-key.