BETHESDA, MD—DiamondRock Hospitality Company recently acquired the fee simple interest in the 184-suite Sheraton Suites Key West in Key West, FL, for $94 million (or $511,000 per guestroom). The purchase price represents a 12.8 multiple on forecasted 2015 hotel EBITDA of $7.3 million and a 7.1% capitalization rate on the property’s 2015 forecasted net operating income.
“We are very excited about our acquisition of this all-suite hotel, which represents our second acquisition in the highest RevPAR market in the United States,” said Mark W. Brugger, president and CEO of DiamondRock Hospitality Company. “With 480-sq.-ft. 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 relaunch the hotel as an independent lifestyle resort, leveraging its 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 guestrooms. 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 it to generate approximately $9.5 million to $10.0 million of hotel adjusted EBITDA.
The hotel will continue to be managed by Ocean Properties, an operator of more than 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 Brugger. Ocean Properties is the company’s 10th independent manager, and this hotel will be its 15th third-party managed hotel. More than 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 12-month period ended June 30, the hotel achieved a RevPAR of $221 from a combination of 90% occupancy and an ADR of nearly $245. Its 2015 RevPAR is forecasted to be approximately $50 higher than the company’s 2015 portfolio average RevPAR. Additionally, the property generated RevPAR growth of 11% for the six-month period ended June 30. 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%. Post-acquisition, South Florida will represent approximately 9% of the company’s portfolio EBITDA concentration.
DiamondRock funded the acquisition with existing corporate cash and a draw on its line of credit. It 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.