JV Forms to Run, Renovate Boutique Hotel

HHM, an affiliated management company of hotel REIT Hersha Hospitality Trust, was brought on as operating partner for the Independent—Philadelphia, a restored Georgian-Revival at 1234 Locust St. in Center City. AFC had acquired the defaulted mortgage on the hotel property several years ago and looked into several alternative use options, including conversion to residential and disposing of the asset, according to a release. Renovations on the Independent will cost an estimated $1 million, Sonnabend tells GlobeSt.com, adding, "that's a substantial amount for 24 rooms." According to the release, the renovations will add modern conveniences and technological innovations to the guest rooms while retaining a residential character with hardwood floors and local art throughout the property.

Sonnabend says this is the first JV between the two companies, but adds that AFC has arranged financing on many deals for HHM. "We've had a relationship with them going back to the late 1990s," he tells GlobeSt.com. This track record made HHM an appropriate choice to manage the hotel, Sonnabend says in the release. HHM currently manages 56 properties from Boston to Williamsburg, VA. Locally, they include the Hampton Inn Center City in Philadelphia along with eight suburban locations and another 15 in the Lehigh Valley and Harrisburg markets. Calls to HHM seeking additional information were not returned by deadline.

AFC opted to create a partnership with HHM based on the demand for high-end, boutique hotels in Philadelphia, according to the release. That assessment of the lodging market here is borne out by an informational report delivered last Tuesday to the Philadelphia City Planning Commission by David Schaaf of the commission's urban design staff, in which Schaaf noted that the city attracts small-sized and mid-sized boutique hotels. According to the report, the largest of the three hotels now under construction, the Hotel Palomar at 117 S. 17th St., is 235 rooms.

Key development trends identified in Schaaf's report include: choice within a variety of Center City districts, proximity to public transit, adaptive reuse and infill potential, high-end hotels by celebrated designers; hotels within mixed-use projects; and sustainable building practices.

In related news, HHT's Q1 operating income grew 34% to $7.5 million from $5.6 million for the same period in 2007, according to a news release. It followed a 75% jump in HHT's Q4 '07 operating income compared to the same period in 2006. The growth in Q1 operating income was attributed to HHT's larger portfolio, increased operating margins from rate-led hotel revenue growth and improved expense efficiency.

For the three-month period that ended March 31, consolidated total hotel operating revenues increased 15.9% to $51.9 million from $44.8 million in Q1 '07, while RevPAR increased 9.7% year-over-year to $85.46, according to the release. The increase was driven by an average daily rate increase of 8.7% to $130.12 and an improvement in occupancy, which grew 63 basis points to 65.7% as compared to nearly 65.1% in Q1 '07. Adjusted funds from operations for the first quarter increased 66.7% to $0.15 per diluted common share compared to Q1 '07.

In a statement, Jay Shah, CEO at HHT, says that "while this is our slowest quarter seasonally, we are extremely pleased with the solid growth in RevPAR and AFFO. We continue to experience RevPAR benefits and superb performance from young hotels located in several of the best insulated urban locations in the Northeast corridor. Our joint-venture assets have also continued to mature with six of the nine hotels jointly-owned with the Waterford Hotel Group having increased occupancy during the quarter. In addition, the continued dislocation in the debt markets has enabled us to take advantage of select opportunities to increase our profitability by expanding our development loan program."