BETHESDA, MD—Locally-based DiamondRock Hospitality Co. has had a busy week. The REIT has acquired the fee simple interest in a hotel in Key West, FL, for $94 million, or $511,000 per key, and refinanced a $65 million loan on a hotel in Denver.
The hotel, the 184-suite Sheraton Suites Key West represents a 12.8 multiple on forecasted 2015 hotel earnings before EBITDA of $7.3 million and a 7.1% capitalization rate on the DiamondRock's 2015 forecasted net operating income. In a prepared statement, CEO Mark Brugger noted that Key West is the highest RevRAP market in the US.
DiamondRock will invest $5 million in upgrades, after which it will reposition it as an independent hotel.
When it's stabilized, it projects that the hotel's profit margins will increase by approximately 500 basis points. By comparison, currently the Sheraton Suites Key West's profit margins are almost 1,000 basis points lower than DiamondRock's other independent hotel in the market.
Ocean Properties will continue to manage the hotel when it coverts.
DiamondRock also announced this week that it repaid the remaining $38.1 million mortgage loan secured by the JW Marriott Denver at Cherry Creek in Denver, securing a new $65 million 10-year mortgage. The new loan has a 4.22% fixed interest rate and amortizes on a 30-year schedule after a one-year interest only period.
The new interest rate is 214 basis points lower than the rate of the prior mortgage loan, reducing DiamondRock's weighted average interest rate to 4.6%. The REIT plans to use the remaining proceeds from the $65 million to pay off near-term debt maturities.
In its last earnings call held at the start of May to discuss the first quarter earnings, CFO Sean Mahoney said the REIT was considering refinancing this particular asset. The 6.5% interest rate on that previous loan was significantly above current rates, he noted.
In general, the REIT has been drilling down into its balance sheet to lower its interest rate expenses as much as possible. Its full-year guidance for 2015 included more than $5.5 million in lower interest rate expenses compared to the previous year.
"In addition," he told listeners, "we have formulated an action plan to refinance our remaining debt maturities over the next 12 months." When all is said and done, the REIT expects to reduce its 2016 interest expenses by an additional $8 million, or $0.04 of incremental FFO per share.
Presumably the company will discuss its transactions on its next earnings call for the second quarter, which is scheduled for August 7.
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