CoStar
10/08/19

Investors to Pay $249 Million, Just Below Luxury Price, for Midprice West Coast Hotels
REIT, Singapore Sovereign Wealth Fund Partner on Hotels That Can Withstand a Slow Economy
By Clare Kennedy

https://product.costar.com/home/news/7587818

Real estate investment trust Summit Hotel Properties Inc. is paying top dollar for four West Coast hotels that are relatively modest size rather than large-scale, full-service luxury hotels popular recently with investors, a move that could signal demand for budget-friendly brands that may hold up in any economic downturn.

Summit, based in Austin, Texas, said that it has agreed to pay $249 million for two hotels in California’s San Francisco Bay Area and two in Portland, Oregon, through its recently formed joint venture with GIC, the sovereign wealth fund of Singapore. Half the portfolio is run under the Residence Inn by Marriott flag, and the other half are Hilton Garden Inns, both of which are limited service brands.

According to CoStar records, the present owner of the portfolio is BRE Select Hotels Corp., a Brooklyn, New York-based real estate investment trust that focuses on upscale hotels that are run under either Hilton or Marriott brands. The REIT is controlled by Blackstone, a New York-based private equity giant, and run by William Stein, Blackstone’s senior managing director of real estate, and Brian Kim, managing director in Blackstone’s real estate group. BRE Select acquired the four hotels in a much larger 2012 transaction, when it merged with Richmond, Virginia-based Apple REIT Six, a $1.2 million deal that brought 66 hotels into BRE’s fold.

The new sale price works out to about $351,000 per key, which is only about $2,000 less than price-per-room paid in California’s most expensive hotel deal of 2019, the $147 million sale of the 417-room Hyatt Regency La Jolla hotel in San Diego.

The sale hints at further confidence in the viability of the West Coast hospitality industry, though revenues have been softening a bit and a lot of new supply is in the pipeline, said Alan X. Reay, president of Atlas Hospitality Group in Irvine, California.

“People are still very bullish on the West Coast, especially hotels like these, which are very well-established hotels, run under very good brands in very good locations,” Reay said.

The sale also speaks to the strength of the limited-service model. Though these properties are not glamorous, they are money makers even when the chips are down, which could explain the price Summit is paying for them. From a consumer standpoint, they are well within the average person’s budget and they also cost less to run.

“Residence Inn is one of the most profitable brands around,” Reay said. “Assets like these require less labor than a full-service hotel, which are very reliant on food and beverage service. That’s a tight margin business even without the pressure from labor costs, which are rapidly increasing. Extended stay hotels don’t involve any of that, and since people are there for longer, you don’t even have to send house cleaning to the rooms every day necessarily.”

Summit and GIC’s new acquisitions are planned to include:

• The Residence Inn by Marriott Portland Downtown-RiverPlace at 2115 SW River Parkway, a 258-room hotel built in 2001. The hotel has six meeting rooms, with a total of 5,475 square-feet of meeting space, a library, business center, fitness center and indoor pool and spa. It sits in a district densely studded with bars, restaurants and entertainment and is also within easy range of Portland State University, Oregon Health & Science University, the Oregon Convention Center and more than 28 million square feet of office space.
• Hilton Garden Inn San Francisco Airport North at 670 Gateway Blvd. in South San Francisco, a 169-room hotel built in 1999. The area around the hotel is a hub for biotech companies, as well as major locations for YouTube, FedEx, General Electric, and Hitachi.
• Hilton Garden Inn San Jose-Milpitas at 30 Ranch Drive in Milpitas, a 161-room hotel built in 1999. The hotel falls into what is known as the “Golden Triangle” of Silicon Valley, bounded by highways 101, 880 and 237 and home to long-standing blue chip tech companies like Cisco Systems.
• Residence Inn by Marriott Portland Hillsboro at 18855 NW Tanasbourne Drive in Hillsboro, a suburb west of Portland, a 122-room hotel built in 1994.

The transaction is scheduled to close in the fourth quarter of this year. Once the deal clears, Summit’s portfolio will include 72 hotels with a total of 11,288 guestrooms spread over 23 states.

The joint venture expects to invest about $23 million into capital improvements on the four hotels during the first three years of ownership.

Neither Summit nor BRE Select immediately responded to a request for comment from CoStar.