DiamondRock Hospitality Company today announced that it has acquired L’Auberge de Sedona (“L’Auberge”), an award winning luxury resort, and the Orchards Inn Sedona (“Orchards Inn”), an adjacent hotel, each located in the heart of Sedona, Arizona (collectively, the “Resorts”) in an off-market transaction. The contractual purchase price of $97 million represents an approximately 8% yield and 12.6 multiple on the Resorts’ forecasted 2017 Hotel earnings before interest, taxes, depreciation and amortization (“EBITDA”).
“This acquisition represents a rare opportunity to own two high-quality resort properties in a coveted, high barrier-to-entry resort market,” said Mark W. Brugger, President and Chief Executive Officer of DiamondRock Hospitality Company. “While we believe the initial pricing of the deal is attractive, we have identified significant opportunities to increase profitability through the implementation of our well-proven asset management practices and thoughtful capital enhancements.”
Ranked as the number one hotel in the Southwest by Condé Nast in 2016, the 88-room L’Auberge and the adjacent 70-room Orchards Inn are situated within the heart of Uptown Sedona. Combined, the Resorts include 158 guest rooms, 5,000 square feet of premium meeting space, including some of the Southwest’s most unique outdoor wedding venues, and two restaurants. Since 2015, over $14 million has been invested into the Resorts, focusing on the guest rooms and a re-concepting of the two restaurants.
The Company plans to position the Resorts to capture additional revenue and market share through a $5 million capital investment plan that will enhance the luxury cottages at L’Auberge and reposition the Orchards Inn to capture additional room revenue. These renovations are expected to be minimally disruptive and completed in the off-seasons over the next two years. The Company has a number of asset management initiatives it plans to implement in order to increase cash flow, including labor productivity initiatives, lowering food & beverage costs and creating additional revenue sources. The Company expects these initiatives will drive a stabilized EBITDA of approximately $9.5 million over the next two to three years.
The Sedona market is one of the highest-growth markets in the US, with RevPAR increasing 11.3% in 2016. The market’s RevPAR grew at a 5.7% CAGR over the last 10 years, over 200bps greater than the long-run US average. Sedona has no new hotel supply under development in the near-term.
Sedona’s climate and unique natural landscape consistently generate strong hotel demand and make it one of the top resort markets in the country with annual RevPAR similar to Napa, CA. Proximity to Phoenix and the Grand Canyon make Sedona an ideal destination for visitors to the greater Southwest region. The Resorts are located within two hours of multiple cities and National Parks, including Phoenix, Flagstaff and the Grand Canyon. The recently completed Arizona highway improvement project has improved accessibility to Sedona and ease of travel throughout the state.
Sedona benefits from a vibrant outdoor and artistic climate. Located within the 1.8 million acre Coconino National Forest, the massive Red Rock formations and 100 hiking trails attract hikers, mountain bikers, and Jeep enthusiasts year round. Downtown Sedona is home to nearly 100 eclectic art galleries, primarily located in artfocused retail developments. Additionally, Sedona has hosted several annual art festivals a year, including the Sedona International Film Festival, the Illuminate Film Festival and the Sedona Arts Festival.
The Company funded the acquisition with existing corporate cash and currently maintains over $100 million in unrestricted corporate cash. Updated Guidance The Company is updating its guidance for 2017 to reflect the acquisitions of the Resorts. There are no other updates to the Company’s guidance. Achievement of the anticipated results is subject to the risks disclosed in the Company’s filings with the U.S. Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2016. Refer to pages 5 and 6 of this press release for a reconciliation of the below non-GAAP financial measures to the most directly comparable GAAP financial measure.