AMERICAS NEWS: Forcible closure

RLJ Development was forced to close on the purchase of a New York Hilton Garden Inn after negotiating a discounted price of $125 million, down from north of $150 million.

“It was a take-out,” RLJ president and co-founder Thomas Baltimore explained to PERE. “It was a development deal and we were required to close upon completion. Obviously market conditions changed and we worked with the developer and agreed to a price reduction.”

The limited service hotel located near Herald Square on West 35th Street was developed by Amsterdam-based real estate investment company Brack Capital Real Estate. Brack purchased the site, then occupied by a six-story parking garage, in March 2007 from Icon Parking for $31 million. The 110,000-square-foot Hilton constructed on the site opened in March with 298 rooms across 31 floors.

RLJ had been working on the deal since 2007 and made the investment from its RLJ Real Estate Fund III, which closed on $1.2 billion in January 2008. The lack of available financing led RLJ to use its own credit facility to fund the deal.

“We'll hold it in our credit facility and let it season for a bit before we go into the debt market,” said Baltimore.

The immediate outlook for hotels is poor and RLJ's latest purchase is likely to be in for a tough time. According to The Blackstone Group chief executive Stephen Schwarzman, weakness in the hotel market became “increasingly evident in the fourth quarter and we expect it to continue during [2009]”. He said in an investor call in February it was “remarkable” that its portfolio company Hilton Hotels produced even flat EBITDA in the fourth quarter of 2008. “We do however expect 2009 to be much more challenging,” Schwarzman added.

Despite the difficult market for hotels, Baltimore expressed some optimism for the purchase. “It's compliant with our investment strategy and we think over the long term that it's going to be an outstanding investment … in terms of it being a Hilton Garden Inn, an upper mid-market product, we think that kind of asset is never out of favour.”

With leverage, RLJ Real Estate Fund III has a purchasing power of nearly $4 billion and has closed one additional transaction. In July 2008, RLJ purchased a portfolio of six Hyatt Summerfield Suites hotels, five in Texas and one in Colorado, for more than $90 million, according to Real Capital Analytics. The portfolio was sold by a joint venture between defunct financial services firm Lehman Brothers and Miami-based real estate investment and development firm Gencom Group.