BETHESDA, Maryland—Portfolio investment and sale of non-core hotels are in the offing for DiamondRock Hospitality Company, executives said during the company’s fourth-quarter earnings call on Friday.
Mark W. Brugger, the real estate investment trust’s president and CEO, said the company’s near-term focus is on investing in renovation projects as the economy continues to improve.
“We are taking a long-term approach to investing in our properties,” he said.
Executives said the projects will help DiamondRock ride the wave of economic recovery. Brugger said he’s encouraged by the current macroeconomic environment, citing an increase in corporate profits and other positive metrics.
“We believe this lodging cycle will be an extended one,” Brugger said, noting the widely cited 4% to 6% overall revenue-per-available-room growth expected in the industry during 2013.
CFO Sean M. Mahoney said the company will invest $140 million in its portfolio during 2013 and 2014. The REIT invested $49 million in its portfolio during 2012. He said the company expects to see performance begin to lift at the renovated properties beginning in the second half of this year.
The renovations will, however, have a significant effect on DiamondRock’s 2013 results. Pre-renovation pro forma RevPAR was expected to be up by 4% to 6% during 2013. Ongoing renovation projects will decrease that guidance by 3 percentage points, leaving expected RevPAR growth of between 1% to 3%.
Brugger said the company is willing to endure the short-term performance disruptions.
“2014 to 2017 will be peak profitability years for the hotel industry, so we’re trying to position the portfolio for those peak cash flow years,” he said.
Mahoney said much of the disruption stems from renovation projects in the New York market, which should be completed during the first half of 2013. The company is investing between $40 million and $45 million in a renovation of the Radisson Lexington as well as spending $12 million to upgrade its Courtyard by Marriott hotels in New York.
The New York market has shown itself to be a hotel market that has absorbed additional demand well, Mahoney said. “We’re confident the New York market will perform very well over the next several years,” he said.
The company will increase its New York presence once construction finishes on its planned 282-room Times Square Hilton Garden Inn. The project should be complete by mid-2014, Brugger said.
“When complete, I believe this will be the single best located select-service hotel in Manhattan,” he said.
Hotel sales
Brugger said DiamondRock will also look at selling some of the non-core assets in its 27-hotel portfolio. “The bottom 10% to 15% by RevPAR are the ones we are continually looking to monetize,” he said.
He said at least three hotels will be sold during the “next couple of years.”
“We believe this positions us for significant future earnings growth,” Brugger said of potential hotel sales.
DiamondRock will likely not be an active participant in hotel acquisitions in the near term, Brugger said. “We will focus on value creation,” he said.
