BETHESDA, Md., July 15, 2015 — DiamondRock Hospitality Company (the “Company”) (NYSE:DRH) today announced that it recently acquired the fee simple interest in the 184-suite Sheraton Suites Key West (“Hotel”) in Key West, Florida, for $94.0 million (or $511,000 per guest room). The purchase price represents a 12.8 multiple on forecasted 2015 Hotel earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $7.3 million and a 7.1% capitalization rate on the Hotel’s 2015 forecasted net operating income.
“We are very excited about our acquisition of this all-suites hotel, which represents our second acquisition in the highest RevPAR market in the United States,” said Mark W. Brugger, President and Chief Executive Officer of DiamondRock Hospitality Company. “With 480 square foot guestrooms, the Hotel features some of the largest rooms in the market. The Hotel is in excellent condition and features direct access to Smathers Beach, the largest and most popular beach in Key West.”
The Company is finalizing its plans to reposition and re-launch the Hotel as an independent lifestyle resort, leveraging the Hotel’s high quality, superior room size, and beachfront location. As part of the repositioning plan, the Company is developing a $5 million capital plan to improve the arrival experience, lobby, pool, and guest rooms. These renovations are expected to be minimally disruptive and will primarily be completed in the offseason. The conversion to an independent hotel is expected to take place in late 2016 after initial upgrades are completed. Upon stabilization, the Company expects to improve the Hotel’s profit margins by approximately 500 basis points and expects the Hotel to generate approximately $9.5 to $10.0 million of Hotel Adjusted EBITDA. By comparison, the Hotel’s profit margins are currently almost 1,000 basis points lower than the Company’s other independent hotel in Key West.
The Hotel will continue to be managed by Ocean Properties, a leading operator of over 100 branded and independent hotels, including six Key West hotels. “We are thrilled to establish a relationship with Ocean Properties, a proven leader in managing both branded and high-end, independent hotels,” added Mark W. Brugger. Ocean Properties is the Company’s 10th independent manager, and this hotel will be the Company’s 15th third-party managed hotel. Over 50% of the Company’s portfolio is now managed by leading third-party operators. “We are so pleased to be partnering with DiamondRock Hospitality Company, one of the top leaders in the hospitality industry in the United States,” said Mike Walsh, President of Ocean Properties. “This is an exceptional hotel with significant upside opportunities in a high-growth market that we know extremely well.”
In the twelve-month period ended June 30, 2015, the Hotel achieved a RevPAR of $221 from a combination of 90% occupancy and an ADR of nearly $245. The Hotel’s 2015 RevPAR is forecasted to be approximately $50 higher than the Company’s 2015 portfolio average RevPAR. Additionally, the Hotel generated RevPAR growth of 11% for the six-month period ended June 30, 2015. The Hotel is expected to contribute approximately $2.5M of EBITDA for the Company’s ownership period in 2015.
Key West is one of the most robust and consistent hotel markets in the United States. Development of additional hotel rooms on the island is prohibited by a Rate of Growth Ordinance which limits occupancy growth on the island, whether residential or transient. The combination of strong demand and capped supply has allowed Key West to become the highest RevPAR market in the country. As a testament to Key West’s stability, the market has also outperformed the United States average in each of the last two downturns.
The acquisition of the Hotel brings the pro forma representation of resorts within the Company’s portfolio to 24%. Post-acquisition, South Florida will represent approximately 9% of the Company’s portfolio EBITDA concentration.
The Company funded the acquisition with existing corporate cash and a draw on its line of credit. The Company expects to end the year with nothing outstanding on its line of credit and approximately $250M in corporate cash after completing our refinancing initiatives.
