SAN FRANCISCO-Starwood Hotels & Resorts Worldwide Inc. is under contract to sell the 404-room W San Francisco hotel for $90 million or $220,000 per key, far below what luxury hotels in San Francisco were selling for in 2006. The agreement with Keck Seng Investments Ltd., which owns three other Starwood hotels and is listed on the Hong Kong stock market, calls for Starwood to retain the long-term management agreement and to continue operating the hotel under the W flag. The sale is expected to close on July 30, 2009.

Starwood, which opened the hotel amid a strong economy in 1999, says the sale price is 14 times the property’s anticipated 2009 EBITDA. Atlas Hospitality Group president Alan Reay tells that translates to a 7.1% cap rate at a time when most hotel investors are seeking a double-digit cap rate.

“Starwood is getting a very, very good cap rate based on other deals,” Reay says. “What we see is most buyers are underwriting to a 10% cap or above, so must be someone from Hong Kong that sees this as a real opportunity relative to ’06-’07 pricing.”

The value of hotels in San Francisco has fallen between 50% and 80% from their peak values in 2006 and 2007, when new or newly renovated full-service upscale properties were trading for between $360,000 and $520,000 per key. Keck Seng’s purchase price of $220,000 per key is closer to what investors were paying at that time for San Francisco hotels like the Stanford Court that were in need of tens of millions of dollars in renovations to make them upscale again. Not coincidentally, the owner of the renovated Renaissance Stanford Court recently agreed to deed the asset back to the note holder in lieu of foreclosure because the asset is now worth less than the debt.

Instead of a “project” property, however, Keck Seng is getting a hotel that is more than ready to take advantage of any market recovery. “If [Keck Seng] is paying all cash and has a long-term horizon, it will do well,” Reay says. “When the market comes back you don’t get any better location than Downtown San Francisco.”