A Vermont firm owned by David Leatherwood recently took an 85-room Homewood Suites and a 121-room Hampton Inn, located next to each other on U.S. Route 1 in Peabody, off the sales market, opting instead to retain the assets.

David Leatherwood is, once again, bucking a trend when it comes to the hotel business.

After pushing forward with a new hotel in Peabody at a time when suburban hospitality construction is at a virtual standstill, Leatherwood also recently exhibited confidence in downtown Boston when his company broke ground on a 112-room inn in the North Station district. Now, Leatherwood’s Vermont-based operation is one of a handful of investment groups chasing hotel properties, with a particular interest in Boston, New York City and oceanfront resort properties.

“They are strong markets that are only going to get stronger,” Leatherwood said last week, marveling at how quickly Boston and New York City rebounded from the Sept. 11 attacks. After being brutalized immediately following the incidents, the Hub and New York City have performed “head and shoulders above the rest of the country” in the subsequent months, Leatherwood said.

To date, his company has not made any firm commitments, but Leatherwood said he is entertaining offers in the three core markets he is pursuing, both for buying existing assets and on new construction deals. “We’re well funded, we have good financing and we’re looking for the right opportunities,” he said. “For folks who want to sell or [enter into a] joint venture, we are certainly entertaining offers.”

One of the biggest challenges to date, Leatherwood said, has been a bid/ask gap among potential sellers and buyers, with many of those who do have hotels on the sales block basing their pricing on the period when activity was strongest, between 1999 and 2000.

“They are taking the best years of the last 10 and using that as their baseline, and that’s just not realistic,” Leatherwood said. Some sellers may also misunderstand how thin the investor pool is, he said, estimating that any deal will require upward of 40 percent equity in order to obtain satisfactory financing. Although his company has the cash and desire necessary to do deals, Leatherwood said a purchase must make fiscal sense to proceed.

“All of the pieces of the puzzle have to be in place, and there aren’t many who have all the pieces like we do,” he said. “We do have cash, but we might not be right for some [sellers], because we will not overpay.”

The bid/ask gap has had an impact on hotel investment sales, agreed David McElroy, a broker with Insignia Hotel Partners in Boston. Although sellers believe that 2001 was an aberration, McElroy said most investors remain wary of market fundamentals, with few willing to step from the sidelines. “I don’t think anyone has the sense that the numbers are stabilized, or that operating performance has stabilized,” said McElroy. “It might improve long-term, but right now, people are reacting to the uncertainty.”

The volume of sales has been off dramatically since the mid-1990s, said McElroy, recalling a time when hotels were the darling of the investment world. That has changed dramatically, he said, with only a few significant deals completed thus far in 2002. McElroy did broker one major New England transaction, representing Harper Hotels of Indiana in the $9.5 million sale of the Holiday Inn in Burlington, Vt. The sale to Larkin Hotels included $3 million in financing to upgrade the 38-year-old hotel, which has 173 rooms. The rooms traded for $55,000 per unit when the renovation cost is included, or $37,500 without that element factored into the price.

‘As Good as It Gets’

Leatherwood’s group recently did test the investment market on the sales side, offering up an 85-room Homewood Suites and a 121-room Hampton Inn located next to each other on U.S. Route 1 in Peabody. Leatherwood maintained the assets were made available largely because of investor interest, but said his company ultimately decided to take them off the market.

“We considered [selling] briefly, but it didn’t make much sense to do it,” he said. “They are going to be good to hold onto, and that’s what we decided to do.” Leatherwood’s Peabody fiefdom has since been added to, with his group this summer opening a 164-room SpringHill Suites adjacent to the Hampton Inn and Homewood Suites. In some respects, the timing could have been better considering the Sept. 11 difficulties and the continued economic woes of the region. Leatherwood acknowledged business has been slow, but said occupancy levels have already recovered and room rates are continuing to improve.

For the most part, however, Leatherwood said his company will concentrate on the urban markets and resort properties that will attract leisure automobile traffic. The firm already owns a hotel on the Gulf of Mexico, but Leatherwood said the new focus would be on New England, from Maine to Cape Cod.

Meanwhile, Leatherwood remains upbeat about the prospects for the North Station hotel, which is slated for completion next year. In order to get the $22 million project moving, Leatherwood’s Portland Street Hotel LP required both personal guarantees and more than 30 percent equity, but Leatherwood said there was no hesitation in making such a leap of faith.

“We could not be more excited about that project,” he said. “It is going to be a grand slam.”

Not only has the Hub been resilient in its hotel sector, Leatherwood said he believes the North Station location will attract a range of users, from tourists and business travelers to those associated with such nearby institutions as Massachusetts General Hospital and Spaulding Rehabilitation Hospital. North Station is also poised to fare well from the depression of the Central Artery, allowing for a reconnection to the North End that Leatherwood said will be a boon for the leisure traveler. “To me, that project is as good as it gets,” he said, predicting the management by Kimpton Hotels will also enhance the operation.

Leatherwood Active in Market Despite Hotel Industry Troubles

by Banker & Tradesman time to read: 4 min