DiamondRock Acquires Asset - Analyst Blog

DiamondRock Hospitality Co. (DRH), a real estate investment trust (REIT) that owns premium hotel properties, recently acquired Hilton Garden Inn Chelsea, New York City, for $68.4 million. With this acquisition, DiamondRock currently owns three hotels in New York City, one of the best hotel markets in the U.S.

 

Developed in 2007, the 169-room hotel is located in one of the most in-demand 24-hour addresses in Manhattan due to its abundance of restaurants, nightlife, and shopping opportunities. The hotel is also located in close proximity to prime travel destinations such as Times Square, the Empire State Building, and Madison Square Garden, and has easy access to Midtown and Downtown tourist spots.

 

Furthermore, the hotel charges full-service room rates with a more profitable limited service cost structure due to its strong Hilton Garden Inn branding, access to Hilton Worldwide's powerful reservations system, and traveler loyalty generated from the Hilton guest rewards program. Consequently, the acquired property offers a considerable upmarket potential for DiamondRock.

 

The U.S. lodging market was adversely affected by the global financial crisis in 2008 and 2009, and is currently in the early stages of a recovery backed by a consistent surge in demand primarily in Manhattan. New York City has recorded the highest long-term RevPAR (revenue per available room) growth in the U.S. and is regarded as one of the most lucrative hotel markets in the country. Hotel occupancy in the region has presently increased to 80%, with average daily room rates of over $200 recorded in the first seven months of 2010.

 

The hotel is anticipated to generate approximately $2.5 million of EBITDA (earnings before interest, tax, depreciation, and amortization) in the remainder of 2010 and approximately $6.0 million in 2011. DiamondRock also expects the property to record a RevPAR growth of over 20% in 2010 with an EBITDA margin of approximately 45%.

 

DiamondRock has funded the acquisition by utilizing available cash. The company expects to have an unrestricted cash balance of approximately $90 million at year-end 2010, with no near-term debt maturities and $200 million available under its revolving credit facility.

 

We maintain our Neutral recommendation on DiamondRock, which currently has a Zacks #2 Rank that translates into a short-term “Buy” rating and indicates that the stock is expected to outperform the overall U.S. equity market for the next 1–3 months.