- The Washington Times - Tuesday, May 22, 2007

In its three years of existence, DiamondRock Hospitality Co. has quickly built a portfolio of hotels in some of the toughest hotel markets in the country: Chicago, New York, Boston, Los Angeles.

But the Bethesda real estate investment trust has one noticeable open space on the map: its own back yard.

DiamondRock owns the Bethesda Marriott Suites, located on Democracy Boulevard around the corner from its headquarters, but it doesn’t have a major downtown flagship hotel in the District.

“We view it as a gap in our portfolio,” said William W. McCarten, chairman and chief executive officer, recounting a failed bid for the Renaissance Mayflower hotel on Connecticut Avenue.

“Historically, [D.C.] has been one of the strongest hotel markets in the country,” said Mark W. Brugger, DiamondRock’s executive vice president and chief financial officer. “We are, as a team, bullish on the future of the Washington, D.C., hotel market.”

DiamondRock has plenty of accolades on its mantel as the company observes its third anniversary this month.

The company has acquired about $2.6 billion in assets, including properties in top-tier markets, and now owns nearly 10,000 rooms in 21 hotels.

Earlier this month, DiamondRock reported strong first-quarter results: Net income from continuing operations rose 55 percent to $6.8 million (7 cents per share) from $4.4 million (8 cents) a year ago.

Last year, DiamondRock beat all other hotel real estate investment trusts with a total shareholder return of 58 percent.

DiamondRock went public in May 2005 at $10.50 per share. Its stock hit a 52-week high of $19.71 on April 17. Yesterday, DiamondRock shares rose 80 cents to close at $19 on the New York Stock Exchange.

DiamondRock attributes much of its success to its relationships: both its executives’ relationships within the hotel industry and DiamondRock’s relationship with Marriott International Inc.

Mr. McCarten, Mr. Brugger and President John L. Williams have about 60 years of Marriott experience among them concentrated in operations, finance and development, respectively.

“They generally don’t win auctions,” said David Loeb, senior real estate research analyst at Robert W. Baird & Co. Inc. “They find opportunities through their relationships and put deals together.”

One such deal was the spring 2005 purchase of four hotels in Los Angeles; Fort Worth, Texas; Alpharetta, Ga., and the U.S. Virgin Islands. The deal came about on a hunch. While at Marriott in 2000, Mr. Brugger sold the four hotels to a private equity firm. The group, recalling the sale and knowing how private equity firms like to flip properties quickly, approached the firm with an unsolicited bid. The purchase played a significant role in DiamondRock’s initial public offering, Mr. McCarten said.

One of DiamondRock’s most important assets is its relationship with Marriott, which spun off DiamondRock with $30 million and hopes of having a friendly owner to work with. Marriott, whose headquarters is just around the block from DiamondRock in a Bethesda business park, operates hotels but doesn’t own many of them.

DiamondRock attributes nearly half of its acquisitions to this relationship, under which Marriott gives DiamondRock the first look at hotels it knows are up for sale. It is probably not a coincidence that Marriott operates 18 of DiamondRock’s 21 hotels.

DiamondRock also has been able to secure exclusive agreements for Marriott to operate a hotel — a useful tool in negotiations to purchase a property.

Marriott President and Chief Operating Officer William J. Shaw considers DiamondRock a success.

“In just a short while, they have become a major player in our industry and we have benefited from their growth, as we have grown ourselves,” he said.

The companies’ close relationship raised fears among early investors that DiamondRock would simply be a Marriott puppet and not look out for its shareholders. Today, analysts see the relationship as positive for DiamondRock.

“The environment to acquire hotels has become very competitive because of the liquidity in the market,” said Gustavo Sarago, vice president for real estate equity research at Friedman, Billings Ramsey & Co. Inc. in Arlington. “That relationship gave them some kind of uniqueness, a distinction among peers that it is able to leverage to acquire properties.”

The three-year-old company continues to take steps to establish its independence.

Since last May, DiamondRock reached beyond Marriott and bought hotels run by other operators, such as Starwood Hotel and Resorts’ Westin (in Atlanta and Boston) and Hilton Hotels’ Conrad (in Chicago).

DiamondRock is positioned for continued growth. In its last earnings conference call, the company said it can invest another $300 million in hotel properties.

“We have great infrastructure to grow,” Mr. Brugger said. “We have a really conservative balance sheet and a lot of dry powder to expand.”

Today, however, the company is facing a more challenging market.

When DiamondRock started out in 2004, it was buoyed by a hotel market recovering from a downturn induced by the September 11, 2001, terror attacks. After peaking in 2006, the market is settling down, making acquisitions more difficult.

“It’s a challenging environment because cap rates are low,” Mr. McCarten said, referring to a measure of how long it takes for a property’s income to cover its costs. “Finding the assets that are really in the quality segments that we’re looking for and meet our financial requirements, it’s a difficult challenge. But … we said the same thing a year ago and we still did about $750 million in acquisitions that worked for us.”

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