NEW YORK CITY — Denihan Hospitality Group and Pebblebrook Hotel Trust (NYSE: PEB) have entered into agreements wherein Pebblebrook will invest in a joint venture with affiliates of Denihan that own six upper upscale hotels in Manhattan. The transaction values the six hotels at approximately $910 million.
Denihan will continue to manage the hotels, which include the following six upper upscale properties: Affinia Manhattan, Affinia Shelburne, Affinia Dumont, Affinia 50, Affinia Gardens and The Benjamin (pictured below, right). The properties currently comprise 1,640 guestrooms, but that number will increase to 1,730 rooms following the completion of a renovation at the Affinia Manhattan this fall.
“Jon Bortz [chairman and chief executive officer of Pebblebrook] said this is the first time in a long time he’s invested in a partnership, and he’s done it with us due to our relationship. That’s a great vote of confidence for our company,” says David Duncan, chief financial officer for Denihan Hospitality Group. “We’re perfectly aligned here, and we look forward to Pebblebrook’s insight to add best practices. Both partners in this deal have a clear understanding of how we’ll add value to our hotels.”
The hotels are currently subject to approximately $600 million in existing first mortgage and mezzanine debt, and Pebblebrook will make an approximate $152 million equity investment in the joint venture in exchange for its 49 percent interest. Affiliates of Denihan will continue to own the remaining 51 percent interest in the joint venture. Pebblebrook and Denihan will share joint control of all operating and financial decisions for the joint venture. Citigroup acted as the exclusive financial advisor to Denihan in the transaction, which is expected to close within 90 days.
Pebblebrook expects to fund its investment with available cash and borrowings from its credit facility. The hotels will be leased to a joint venture lessee owned by Pebblebrook and Denihan.
“We couldn’t have asked for a better or more like-minded partner,” said Patrick Denihan, owner and co-CEO of Denihan Hospiality Group. “We are delighted to be collaborating with Pebblebrook, a company whose growth strategy and operational philosophy is very much aligned with our own.”
Utilizing proceeds from the equity partnership, Denihan plans to accelerate its aggressive hotel growth strategy into key U.S. urban markets. The company’s long-term strategy is to expand its capital relationships to help fuel growth of its upper upscale and luxury hotel portfolio.
After consolidating ownership in 2006, the company executed a growth plan that has included acquiring The James Chicago and The James hotel brand, as well as expanding its presence into top U.S. markets, including New York City, Chicago, Washington, D.C. and Miami. Most recently, Denihan has announced the opening of The James New York – SoHo, as well as the addition of the Royal Palm Miami to its collection.
“We’re looking to double the size of the company in next 3 to 5 years, and we wanted to add equity to make sure that happens,” says Duncan. “That’s what we tried to accomplish in seeking a partner for this portfolio, and it went as well as we could have planned.”
Duncan adds that the company has spent around $300 million to renovate and reposition assets to drive real estate value within its portfolio, and its growth plan is to continue looking for quality assets at a measured pace.
“Our objective is to buy well located boutique hotels in top markets and add value through our operating platform, whether that’s through another REIT partnership or otherwise,” he says. “When we bring on our solutions, it provides us opportunities to grow. We want to grow rationally depending on the market; since each asset is a different story, we want to polish our portfolio appropriately.”
— Dan Marcec