I have vivd memories of a certain consulting engagement where I resided at a one-star motel (having put off making my reservations until the last minute). While the staff was excellent, the motel was a bit lacking in terms of ironing boards and conditioner -- nothing the nearby CVS couldn't solve.
The mid-cap REIT that I bring to Fool Nation today is also in the hotel business, and while I have never stayed in one of their properties, I am guessing that they are all set in terms of ironing boards and conditioner. DiamondRock Hospitality Company (NYSE:DRH) owns, acquires, and invests in upscale hotel properties located in North America. Its portfolio is comprised of 14 premium full-service hotels and three premium urban select-service hotels, a mix heavily concentrated in the premier markets of Los Angeles, Manhattan, and Chicago. Their properties include the Chicago Marriott Downtown and the Los Angeles Airport Marriott.
The stock brandishes a 4.5% dividend yield and has plenty of growth potential. DiamondRock had its IPO last June and has seen its stock climb 55% since then. This run is certainly justified by the REIT's financial performance; the company reported net income of $13.9 million for its second quarter ended June 16, 2006, versus a $5.8 million loss for the year-ago quarter. The company's FFO (funds from operations) rose to $26 million from a $1.5 million loss in its 2005 second quarter, and its EPS went from -$0.20 to $0.20. It should also be noted that the REIT only had seven properties in its portfolio at the end of Q2 2005.
DiamondRock has maintained a total occupancy rate of around 75% for the past eighteen months, and the red that the company experienced in the second quarter of 2005 has turned around dramatically. Revenue per available room and profit margins have increased in each subsequent quarter and have put the company well into the black. Competitors Ashford Hospitality Trust (NYSE:AHT), FelCor Lodging Trust (NYSE:FCH), and Starwood Hotels & Resorts Worldwide (NYSE:HOT) have also seen their stock prices rise over this time period -- thanks to the industry's rebound -- and presently sustain similar occupancy rates of 78%, 73%, and 73%, respectively.
Another positive aspect for DiamondRock investors is management's commitment to not only adding value to its curent properties, but also expanding its fledgling empire. Management has budgeted to spend approximately $89 million in 2006 on identified capital investment opportunities for its existing hotels, including a total renovation of its Torrance Marriott. In May, the company acquired the 369-room Westin Atlanta North at a purchase price of $61.5 million. All 17 of its properties have been acquired since October 2004, and DiamondRock intends to continue to remain in the acquisition mode.
With a current average trading volume of only around 340,000 shares, DiamondRock presents Fools with an opportunity to buy into an under-publicized REIT at the ground level, relative to what could be an extended charge if the company keeps on its upward path.
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Fool contributor Billy Fisher does not own shares of any of the companies mentioned.
