San Diego Business Journal

In 2004, the biggest hotel sale in San Diego was the 192-room Residence Inn Mission Valley, which went for $37.2 million. The fact that the total dollar volume of all San Diego hotel sales slumped last year prompted brokers to accuse owners of having an inflated idea of what their properties were worth.

Today, with two hotel sales already on the books for a total of $131 million, four others reportedly on the market worth at least $240 million and an additional one that was refinanced for $100 million, last year's deals are chump change by comparison.

Since the cost of borrowing money in the long term is low and more lending capital for buying hotels is available, brokers are singing a different tune. They're saying San Diego's hotel market is red hot.

On the heels of two transactions in the first quarter, several sources say at least four more high-profile hotels are on the market , the Hyatt Islandia on Mission Bay, Shelter Pointe Hotel on Shelter Island, Downtown's trendy W Hotel San Diego and the Marriott Del Mar in Carmel Valley.

In January, the 282-room Hilton San Diego Gaslamp Quarter, which sold for $85 million, or $301,000 per room, fetched more than it would have cost to build it from scratch, analysts said. Two months later, the 351-room Hilton Mission Valley sold as a fixer-upper to Connecticut-based HEI Hospitality for a reported $46 million. HEI wouldn't reveal the price tag, but said it plans to invest some $9 million on upgrades.

Location, Location And Capital

"There is debt and equity (financing) and well-located hospitality assets are in high demand now all throughout the U.S., and San Diego is at the top of everybody's list," said Bob Kaplan, a senior vice president based in the Irvine office of Colliers International Hotels, which is the broker for the Marriott Del Mar.

Hotel consultant Bob Rauch, who also is a co-owner of the Homewood Suites by Hilton San Diego/Del Mar, agrees.

"There's plenty of debt and equity (financing) available right now," Rauch said. "There are more lenders now interested in making loans at a higher loan-to-cost rate."

Last year, financial institutions weren't willing to lend buyers more than 60 percent of the appraised value of lodging properties. However, this year, they'll lend as much 70 percent, Rauch added.

Prompting the sale of the 284-room Marriott Del Mar on El Camino Real are "cap rates that are at an all-time low" in the range of 6 percent to 7 percent, Kaplan said. (Expressed as a percentage, a "cap," or capitalization rate, is a property's net operating income divided by its sales price. The rule of thumb is that property sellers will try to get the highest price at the lowest cap rate possible, while buyers try to purchase properties at the lowest price, which translates into a higher cap rate.)

The Marriott Del Mar opened in January 2002. Its owner and developer, JMI Realty, which is headed by San Diego Padres owner John Moores, did not return phone calls. However, Kaplan said that JMI has a history of developing, owning and quickly selling its real estate assets.

"JMI typically does not own properties for a long period of time," Kaplan said.

He wouldn't speculate on when the hotel might be sold, nor did he cite the asking price. But he said the Marriott management contract, as well as the brand, would continue after a sale. He also stressed that a sale would not jeopardize the jobs of the hotel's employees.

Industry sources said the Marriott Del Mar is valued between $65 million and $70 million.

Upside Potential

Bernie Murphy, who is a broker for the Southern California regional office of the Florida-based Plasencia Group, said it is representing the Hyatt Islandia, which is under a contract for sale. He said the deal could be finalized in late July or early August, but he declined to give the buyer's name or the purchase price.

According to industry sources, the Hyatt Islandia is valued at about $50 million.

Murphy did allow, however, that the prospective buyer plans to spend an additional $20 million renovating the facility.

Built in phases beginning in the mid-1960s, the 422-room property "is in a good location with great upside potential," Rauch said.

According to Murphy, San Diego's "hotel values have just skyrocketed."

"There's a belief that there is a remaining upside in rates for the next two years," he added.

A condition of the pending sale of the Hyatt Islandia is renegotiating the term of the lease with the property's landowner, the city of San Diego, Murphy said.

"The city has indicated it would approve resetting the lease for another 50 years," he said. But if the rent is raised beyond the going market rate, the prospective buyer might balk, he added.

"It's a question of economics," Murphy said.

Since the Hyatt's "long-term" management contract would continue after the sale, "nothing would change," he said, referring to the job security of the hotel's employees.

According to public records, the property is owned by Islandia Associates, Ltd., of which Jerald Greenstein is a partner. Greenstein, who heads JG Management, a real estate investments and property asset management firm in Westlake Village, did not return phone calls seeking comment for this story.

A Top Performer

Rich Hass, a senior vice president of Kennedy Associates Real Estate Council Inc. of Seattle, confirmed that the 261-room W San Diego in Downtown's Marina District is for sale. Hass said Kennedy Associates is an investment adviser for a group of AFL-CIO labor unions that own a 90 percent share of the hotel. New York-based Starwood Hotels and Resorts Worldwide, which owns the W brand and manages the W San Diego, has a 10 percent stake in its ownership.

Hass declined to elaborate on the sales offer, saying only that Secured Capital of Los Angeles is the broker for the property. The company did not return phone calls seeking comment for this story.

The price tag to build and open the 261-room W on West B Street in late 2002 was $62 million, or $237,547 per room. However, industry sources say it could bring as much as $91.35 million, or $350,000 per room in a sale this year.

"It's one of the best performing hotels in Downtown San Diego," said Michael Gallegos, the president and chief executive officer of San Diego-based American Property Management Corp., which owns and manages hotels throughout the country. "Its average occupancy is 76 percent and the room rate averages $265."

The owner of the Shelter Pointe Hotel, the Pacifica Hotel Co. of Santa Barbara, would not comment on whether the 206-room Point Loma property is on the market. But Gallegos, whose privately held company owns and operates 42 hotels across the country, said he has made a bid on it and expects to hear whether it was accepted before the end of this month.

Industry sources said the facility is valued between $20 million and $25 million.

The Shelter Pointe Hotel, which occupies 12.02 acres , leased to it by the San Diego Unified Port District , offers space for the construction of an additional 150 hotel rooms and more retail, Gallegos added.

At the same time, the 59-room Prava Hotel, one of two hotels that American Property Management owns in San Diego, is under contract to be sold. Gallegos said that a confidentiality agreement bars him from giving specifics about the transaction.

In addition to the Prava, American Property Management owns the 333-room Radisson Hotel Harbor View in Downtown.

Anticipating Higher Returns

Meanwhile, hotelier Doug Manchester recently pulled $100 million out of the 1,625-room Manchester Grand Hyatt Hotel by refinancing the property.

"We've been able to create additional equity," said Ted Eldredge, the president of San Diego-based Manchester Resorts.

The money would be applied to the purchase of other real estate assets and to the construction of the $150 million Grand Del Mar, a combination 260-room resort and golf course the firm is building on 300 acres on Grand Del Mar Way in San Diego. But no properties have been pinpointed for acquisition as yet.

"We are looking at additional commercial property in and outside of San Diego," Eldredge said. "By taking advantage of low interest rates, we will be able to deploy it into additional projects that have a higher rate of return than the interest rate on the $100 million."

Eldredge did not reveal the interest rate that Manchester Resorts secured, but said that long-term rates are at a historically low rate of 6 percent.

"Institutional lenders and money managers are looking favorably at the hospitality market in Southern California and San Diego in particular, because it rebounded so quickly after 9/11," he said.