Brugger: We are seeing a better flow
of quality assets in our target markets.

BETHESDA, MD-DiamondRock Hospitality Co. has acquired the fee simple interest in Hotel Rex, a full-service boutique property in San Francisco, for $29.5 million. The 94-key hotel is located in the Union Square district of the city and is managed by Joie de Vivre Hospitality LLC. The hotel was built in 1907 and is fashioned after the San Francisco art and literary salons of the 1920-30s.

This trade is the REIT‘s first acquisition in San Francisco, according to CEO Mark W. Brugger. The property is moving at an attractive initial yield and a significant discount to replacement cost, he says in a prepared statement.

“With no supply on the horizon, we believe San Francisco can achieve several years of outsized growth,” he notes. “This acquisition, combined with the recent disposition of the Westin Atlanta, continues the company’s strategy of disposing of non-core hotels and reallocating proceeds into faster growing markets at comparable or better returns,” Brugger says. San Francisco’s hotel market has posted RevPAR growth of 14% year to date.

Besides its capital recycling activities, DiamondRock has plans to redevelop a few of its key properties including in the Washington, DC market, the Westin, for mid-2013. The hotel was affected by the pause in activity in DC before the election, Brugger said during the REIT’s recent earnings call, as well as group business cancellations due to the federal government’s recent travel restrictions.

“Going forward, this hotel should benefit the most from our capital investment,” he says, “as groups are holding off from booking until after the renovation, and from comparisons to this year, with its short-term loss of government business.”