Valuation Real Estate Essay

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Diamond Rock Hospitality Valuation
Ticket symbol: NYSE:DRH

1. Diamond Rock hospitality is a lodging-focused Maryland corporation operating as a REIT that focuses on high quality hotel in North America and owns a portfolio of 26 premium hotels and resorts. They also hold senior note on mortgage loan secured by another hotel and obtain all of the operating profits or losses produced by their hotels after paying fee to the hotel managers. 2. Diamond Rock hospitality’ strategy today is to fully utilize capital allocation and focus on acquiring, owning high quality, branded, full serviced lodging properties in North America with superior long-term growths prospects in markets with high barriers-to-entry for new supply. They focus on three basic principles to implement their strategy: 1) high-quality urban-and destination resort-focused branded hotel real estate 2) Innovative asset management 3) Conservative capital structure.
The past strategy wasn’t successful. The growth in net income doesn’t relatively reflect the increase in assets. The return on asset is only 4% in 2011(($40,407,000-$25,778,000)/$370,522,000=4%). The company has a negative cash flow since 2010. The projection of all cash flow for the next 5 years is also negative. The investments are not making enough return. The company isn’t earning enough to cover their investment activities. DRH is liquefying its equity by issuing more stock to pay out their debt. There isn’t any P/E ratio because the company is not earning. The acquisitions aren’t effectively raising enough revenue to make a profit. By looking at the annual report for 2005, the company used the same strategy. Yet, their ROA is only 1.8%. The investment activities didn’t bring enough return. 3. See Appendix A
Enterprise Value: $-1,338,695,012 (-$1.33 B)
Market Cap. $1.88 B (Reference: Google Finance)
In my opinion, DRH is extremely overvalued. The company has a negative enterprise value. The difference between the calculated value and the market cap is $3.21B. The projection of future cash flow for the next 5 years is negative. The ROA is just 4%. The return on acquisition is low that the company isn’t making profit form the investment. The company keeps on issuing more stock to raise money in order to pay out its debt. 4. Discount rate: I choose 8% for discount rate. Most real estate rate of return is
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