DiamondRock Hospitality Co. has acquired two coastal Florida resorts: the 170-room Henderson Beach Resort in Destin and the 103-unit (231-bedroom) Tranquility Bay Beachfront Resort in Marathon. The total investment for the two separate transactions was $175.5 million.
These investments conclude a year of capital recycling for DiamondRock that shifted the real estate investment trust's portfolio to almost two-thirds leisure hotels and resorts. "The six transactions we successfully completed over the last year solidify DiamondRock's strategic initiative to curate a pre-eminent portfolio of leisure-oriented, lifestyle hotels and resorts," said Mark W. Brugger, DiamondRock president and CEO. "These investments cap off an active year where DiamondRock recycled $220 million from low-yield, encumbered, capital-intensive properties into $293 million of high-quality, unencumbered, independent hotels and resorts. We project our recycling initiative will immediately and meaningfully increase our investment yield and drive long-term cash flow growth."
Henderson Beach Resort
The company purchased the 170-room Henderson Beach Resort in Destin, Florida for $112.5 million in an off-market transaction on Dec. 23, 2021. The recently constructed luxury oceanfront resort has 40,000 square feet of meeting space, a "lazy river" pool, separate family and adult pools, a spa and numerous restaurant and bar outlets, including Destin's only rooftop bar. The acquisition also includes income from 46 residences adjacent to the hotel currently participating in the hotel's rental-management program.
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The Henderson Beach Resort is adjacent to the oceanfront Henderson Park Inn, which was acquired by DiamondRock in July 2021 for $27.5 million. DiamondRock expects consolidated ownership and management of the adjacent resorts to create “beneficial” revenue and expense synergies. The purchase price of the Henderson Beach Resort represents a 6.4 percent yield on 2021 forecasted hotel net operating income and is expected to stabilize above an 8 percent yield. The Henderson Park Inn alone is generating over a 9 percent yield on 2021 forecasted NOI.
Tranquility Bay Beachfront Resort
The company also purchased the 103-unit Tranquility Bay Beachfront Resort, a property with 1,000 feet of shoreline located on 12 acres in Marathon, Fla., for $63 million on Jan. 6. The resort has a total of 231 bedrooms in 87 two-bedroom and three-bedroom beach houses, as well as 16 garden guestrooms. Guest accommodations at Tranquility Bay average more than 950 square feet, and the market commands one of the highest ADRs ($650 in 2021) in the Florida Keys. The purchase price represents an 11.5 percent yield on 2021 forecasted NOI.
DiamondRock's investment in Tranquility Bay is comprised of: (1) ownership of 16 tropical garden guestrooms, plus all resort amenities and infrastructure including the lobby, restaurants, back-of-house facilities, as well as the trademark and exclusive use of the name "Tranquility Bay," (2) exclusive room revenue-sharing agreements for all of the 84 third-party-owned beach houses and (3) a majority of the intervals in three beach houses structured as vacation ownership.
All beach houses participate in the rental-management program. The typical RMA has a 15-year term that automatically and perpetually renews for additional 15-year terms. No units have ever been rented outside of the rental program, and the RMAs provide DiamondRock with an exclusive right of first refusal to purchase upon sale. Third-party unit owners bear 100 percent of the maintenance and capital costs associated with their unit.
Over the five years from 2015-2019, Tranquility Bay generated an average annual NOI of approximately $4.5 million, representing a capitalization rate of 7 percent on the company's purchase price.