BETHESDA, Md.—DiamondRock Hospitality Company has announced that it recently acquired the fee simple interest in the 184-suite Sheraton Suites Key West in Key West, Fla., for $94 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 percent 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.
The company is finalizing its plans to reposition and re-launch the hotel as an independent lifestyle resort. 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 off-season. 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. Ocean Properties is the company’s 10th independent manager, and this hotel will be the company’s 15th third-party managed hotel. Over 50 percent of the company’s portfolio is now managed by leading third-party operators.
In the twelve-month period ended June 30, 2015, the hotel achieved a RevPAR of $221 from a combination of 90 percent 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 percent for the six-month period ended June 30, 2015. The Hotel is expected to contribute approximately $2.5 million of EBITDA for the Company’s ownership period in 2015.
The acquisition of the hotel brings the pro forma representation of resorts within the Company’s portfolio to 24 percent. Post-acquisition, South Florida will represent approximately 9 percent 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 $250 million in corporate cash after completing our refinancing initiatives.
