DiamondRock Hospitality Company continues to grow its hotel and resort portfolio with assets primed as leaders in experiential leisure demand.
Just days ahead of a conference call to discuss the company's second quarter earnings, DiamondRock executives announced the Bethesda, Maryland-based real estate investment trust had acquired two hotels for $108.6 million: the 220-room, lifestyle boutique Bourbon Orleans Hotel in New Orleans' French Quarter, and the 37-room Henderson Park Inn, a beachfront property located in Destin, Florida.
In a separate news release announcing the acquisition of the two properties, DiamondRock President and CEO Mark Brugger said both hotels checked the boxes to grow the company's "leisure-oriented, experiential" portfolio.
“Finding off-market acquisitions in unique markets allows DiamondRock to purchase higher-quality real estate at better pricing than many others," Brugger said in the release. "Moreover, these two deals have numerous attractive attributes we target, including proven cash flow, significant [return on investment] opportunities, irreplaceable locations, high-barrier-to-entry markets, fee-simple and fully unencumbered by brand and management.”
During Friday's earnings conference call, Brugger said the Bourbon Orleans Hotel is an iconic independent hotel in the French Quarter.
"The Bourbon Orleans is located at the best street corner in the historic French Quarter," Brugger said. "The number of hotels in the French Quarter that are large, fee-simple and unencumbered can be counted on one hand, and they rarely become available. The moratorium on new-construction means there will not be another hotel built in the French Quarter."
As a market, New Orleans is poised for jumps in demand generated by the Jazz Festival in October of this year and the 2022 return of Mardi Gras festivities in the first quarter of next year. New Orleans also hosts the NCAA Division I Men's Basketball Final Four in April 2022 and hosts the Super Bowl in 2025.
Regarding the deal to acquire the Henderson Park Inn in Destin, Florida, Brugger said the property had the top rating on TripAdvisor in its market and comes with room to improve its revenue-management strategy.
"It's been owner-operated with a fairly unsophisticated revenue strategy, where they just set one rate for the entire month," Brugger said. "We'll be implementing best-in-class practices in revenue management and so we think that we'll be able to — without too much effort — be able to move the rate, just by putting in our usual revenue-management strategies there."
Analysts questioned why DiamondRock would acquire a hotel such as Henderson Park Inn with fewer than 50 guest rooms. Among the REIT's portfolio of 31 hotels, DiamondRock has just four other hotels with fewer than 100 guest rooms: The Landing Resort & Spa in Lake Tahoe, California; L'Auberge de Sedona and Orchards Inn, both in Sedona, Arizona; and the Hotel Emblem San Francisco.
"It is a relatively small deal for us; although in proportion to enterprise value, we've seen some other companies doing things that are relatively similar-sized," Brugger said. "I think the way we view it is it was an off-market deal, it gives us a foothold in a market that we think is one of the better markets in the United States. The Destin/Rosemary Beach area we think has terrific fundamentals. It has incredibly high barriers to entry and we believe probably nothing else will be built on that strip of beach."
The acquisition of both the Bourbon Orleans Hotel and Henderson Park Inn were funded with proceeds from the REIT's prior sales, executives said. During the quarter, DiamondRock closed on the sale of The Lexington Hotel New York for $185.3 million to an unnamed buyer on June 30. REIT executives announced the sale during the company's first quarter earnings call in May. Earlier in the second quarter, DiamondRock sold the 502-room Frenchman's Reef & Morning Star Marriott Beach Resort on St. Thomas on April 30 to an affiliate of Fortress Investment Group for $35 million.
Brugger said DiamondRock will continue to look for acquisition opportunities in experiential drive-to leisure markets.
"We have sufficient [presence] in New York, Chicago and Boston, so we're not going to be additive in those markets," he said. "San Francisco is redlined in our opinion for the next several years, and markets that we're likely to expand in that are not called 'true resorts' are going to be more markets like Charleston. ... We think that travel trends that are going to outperform are going to tend to be more experiential whether that's urban or pure resorts."
DiamondRock reopened its remaining closed hotels in the second quarter, and its entire portfolio was open as of June 1, when the Courtyard New York Manhattan/Fifth Avenue reopened. In May, DiamondRock reopened the Hilton Garden Inn New York/Times Square Central and reopened the Chicago Marriott Downtown Magnificent Mile on April 15.
Quarterly Performance
In the second quarter, DiamondRock reported a net loss of $19.1 million. Adjusted earnings before interest, taxes, depreciation and amortization was $19.8 million, down $29.4 million from the first quarter of the year, according to the company's second quarter financial release.
DiamondRock's portfolio reported hotel occupancy was 48.5% in the quarter, down 33.8% from the second quarter of 2019. Average daily rate was $221.79, down 10.7% from the same quarter two years ago. Revenue per available room was $107.56 in the second quarter of 2021, down 47.4% from the same quarter in 2019.
As of press time, DiamondRock's stock price was trading at $8.81 per share, up 6.8% year to date. The New York Stock Exchange composite was up 16% for the same period.