DiamondRock Acquires L’Auberge de Sedona, Orchards Inn Sedona for $97M

BETHESDA, MD—In an off-market transaction, DiamondRock Hospitality Co. has acquired two Arizona properties, L’Auberge de Sedona and Orchards Inn Sedona, for $97 million ($614,000 per key) from IMH Financial.

The purchase price represents an approximately 8% yield and 12.6 multiple on the properties’ projected 2017 hotel EBITDA, according to the company.

“This acquisition represents a rare opportunity to own two high-quality resort properties in a coveted, high barrier-to-entry resort market,” said Mark Brugger, president/CEO of DiamondRock Hospitality Co. “While we believe the initial pricing of the deal is attractive, we have identified significant opportunities to increase profitability….”

The 88-room L’Auberge and the adjacent 70-room Orchards Inn are situated in Uptown Sedona. Combined, the properties include 158 guestrooms, two restaurants and 5,000 sq. ft. of meeting space.

Since 2015, more than $14 million has been invested into the properties, focusing on the guestrooms and reconcepting the two restaurants.

DiamondRock plans to position the properties to capture additional revenue and market share through a $5 million capital investment plan that will enhance the luxury cottages at L’Auberge and reposition the Orchards Inn to capture additional room revenue. These renovations are expected to be minimally disruptive and completed in the off-seasons over the next two years.

The company indicated it has a number of asset-management initiatives it plans to implement to increase cash flow, including labor productivity initiatives, lowering F&B costs and creating additional revenue sources. The company expects these initiatives will drive a stabilized EBITDA of approximately $9.5 million over the next two-to-three years.

The acquisition was funded with existing corporate cash, according to the company, which currently maintains more than $100 million in unrestricted corporate cash.

According to analyst Michael J. Bellisario at Robert W. Baird, “This acquisition fits with our view that many of the full-service hotel REITs have an increased focus on potential acquisition opportunities given balance-sheet capacity and recently improved costs of capital. We expect many of the hotel REITs active in the acquisition market to look for opportunities in destination/resort markets (similar to this transaction) given attractive relative growth prospects and potentially lower competition for deals.”