RLJ Lodging Trust (RLJ - Snapshot Report) recently purchased a hotel – Vantaggio Suites Cosmo – in San Francisco, California for $29.5 million. The move marks the lodging real estate investment trusts’ (REITs), strategy of acquiring off-market upscale service hotels in vibrant urban markets.
Founded in 1930, Vantaggio Suites Cosmo is three blocks away from Union Square. Positioned in urban vicinity, the property enjoys access to a wide variety of leisure and corporate demand generators. Moreover, it is in close proximity to several tourist attractions and shopping, restaurant, hotel, as well as entertainment offerings of San Francisco. The 150-room property mainly caters to short-term stay rentals.
The deal was funded with available cash and RLJ Lodging plans to renovate the asset by undertaking multi-phase conversion, with an estimated investment of $13.0 million. Following the renovation that is likely to be completed by the end of 2014, the property would reopen as 150-room Courtyard by Marriott – a renowned brand Marriott International Inc. (MAR - Analyst Report).
Additionally, RLJ Lodging expects total investment (including capital expenditures) to represent a forward capitalization rate of roughly 7.8%, based on the hotel’s projected 2015 net operating income.
With the acquisition of the above-mentioned property, RLJ Lodging now owns 150 properties, including 2 planned hotel conversions, located across 22 states and the District of Columbia.
Blooming Leisure Market
San Francisco has a blooming tourism industry, and is one of the leading tourist destinations and corporate hubs of technology, finance and biotechnology in the U.S. As per the San Francisco Travel Association, the year 2012 witnessed visits by 16.5 million tourists. The estimated spending by these travelers was almost $9 billion – the highest spending level ever recorded.
Additionally, according to Smith Travel Research (STR), in 2012, the greater San Francisco area hotel market enjoyed the third highest revenue per available room (RevPAR) of 12.8% in the U.S. Moreover, year-to-date through Apr 2013, the market continues to experience double-digit RevPAR growth.
We expect the acquired property’s RevPAR to gain from the impetus in the leisure and hospitality sectors and high number of tourist visits. We view the above-mentioned transaction as a strategic fit for RLJ Lodging as the property’s strong brand connection and prime location would help RLJ Lodging in experiencing significant growth in San Francisco.
Currently, RLJ Lodging carries a Zacks Rank #3 (Hold). Better performing lodging REITs include Sunstone Hotel Investors, Inc. (SHO - Snapshot Report) – with a Zacks Rank #1 (Strong Buy), and Host Hotels & Resorts Inc. (HST - Analyst Report) – with a Zacks Rank #2 (Buy).