KEY WEST, FLA. — DiamondRock Hospitality Co. (NYSE: DRH) has acquired the fee simple interest in the 184-suite Sheraton Suites Key West hotel in Key West for $94 million, or $511,000 per guestroom.
“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,” says Mark Brugger, president and CEO of DiamondRock. “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.”
DiamondRock 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 guestrooms. Renovations are expected to be minimally disruptive.
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. By comparison, the Sheraton’s profit margins are currently almost 1,000 basis points lower than DiamondRock’s other independent hotel in Key West.
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,” says Brugger.
Ocean Properties is DiamondRock’s 10th independent manager, and this hotel will be the company’s 15th third-party managed hotel. More than 50 percent of the company’s portfolio is now managed by leading third-party operators.
“We are so pleased to be partnering with DiamondRock Hospitality Co., one of the top leaders in the hospitality industry in the United States,” says 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.”
Development of additional hotel rooms in Key West is prohibited by a rate of growth ordinance. The combination of strong demand and capped supply has allowed Key West to become the highest RevPAR market in the country. The market has outperformed the United States average in each of the last two economic downturns.
DiamondRock 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.
DiamondRock Hospitality Co. is a self-advised real estate investment trust (REIT) that owns 29 hotels spanning 10,900 rooms. DRH’s stock price closed at $13.53 per share on July 14, up from $12.87 per share one year ago.
Ocean Properties Ltd. is a privately held hotel management and development company. The company operates brands such as Marriott International, Hilton Worldwide, Starwood Hotels and Resorts and InterContinental Hotels & Resorts, as well as several independent hotels and resorts including Edgewater Beach Hotel, Sand Pearl Resort Clearwater Beach and Jupiter Beach Resort.
— Haisten Willis