March 13th, 2013 | David Eisen

In game of cat and mouse, Strategic shareholder repeats its urging of REIT to sell assets

13 Mar, 2013 By: David Eisen


The Ritz-Carlton, Half Moon Bay, one of 18 hotels owned by Strategic Hotels & Resorts.

It all started back in early November. That's when then president and CEO of Strategic Hotels & Resorts, Laurence Geller, announced he was stepping down from the real estate investment trust he founded in 1997.

At the time, Geller said he was leaving the company with an "immense source of pride," after the REIT, which owns mostly luxury properties, including the Four Seasons in Jackson Hotel, Wyo., and The Ritz-Carlton, Laguna Niguel in Dana Point, Calif. (in all, 18 hotels with 8,271 rooms), "emerged from the recession a strong company with great assets well-positioned for sustained growth in a virtually no-supply environment."

But only days later reports surfaced that the compnay was a prime takeover target. "There's always been this kind of backdrop of, 'Is Strategic a takeout?,' and it's always because it just has a unique portfolio of these kind of Ritz-Carlton assets," Smedes Rose, a New York-based analyst at KBW, told Blomberg. "Laurence Geller being replaced sort of suddenly and by surprise, some investors are looking at that as a catalyst to the company now being sold."

And why not? According to Bloomberg data, Strategic Hotels commands the highest average daily rate of any U.S. hotel REIT valued at more than $500 million.

Geller's successor, Raymond "Rip" Gellein, also Strategic Hotels' chairman, declined to comment when asked on a November 2 conference call whether the company had received interest from potential buyers.

February Shiver
Then February came, and there were more rumblings, this time from Strategic shareholder Orange Capital, which owns 6.25 million shares of Strategic stock. The New York-based investment firm sent a letter to Strategic's board saying it believed the sale of the company's properties would likely result in proceeds of $11 to $14 per share, a 40-percent to 79-percent premium over the most recent closing price.

Boiled down: sell your properties; they are worth more than the REIT. This did not sit well with Gellein, who reiterated that the portfolio was not for sale.

Saying the letter did not constitute an offer to acquire the REIT, Strategic Hotels issued this response to its shareholders. "The board of directors of Strategic Hotels & Resorts acknowledges receipt of a letter dated Feb. 1, 2013, from Orange Capital, a shareholder who only recently acquired shares in the company. The board carefully reviewed the letter in its entirety and strongly disagrees with certain assumptions and conclusions outlined in the communication. While we are disappointed Orange Capital released its letter publicly to advance its short-term trading interest, we remain focused on maximizing the longer-term interests of our shareholders."

But Strategic's fourth quarter did not help matters one bit. It posted a deeper fourth-quarter loss, again prompting Orange Capital to call for an overhaul of the company's management and a sale of the company. The REIT posted a fourth-quarter loss of $36.4 million, or 18 cents per share, compared with a loss of $15.9 million, or 9 cents per share, a year earlier.

Orange Capital said in a statement that, "One key consideration in our urging for a sale is Strategic's poor corporate governance. The company has made numerous arrangements that have entrenched and enriched management at the expense of shareholders."

Numbers Game
A recent Wall Street Journal article tackles the subject, reporting that Orange Capital's urging of Strategic to liquidate its assets is merely a function of math.

According to the Journal, shares of Strategic have been trading between $5.44 and $8.11 over the past 52 weeks. Orange Capital, as mentioned prior, believes that selling all the properties would produce proceeds of $11 to $14 a share—and many analysts agree.

"Their job is to ensure that the stock price matches the net asset value, otherwise, you don't have a reason to live," said Daniel Lewis, managing partner at Orange Capital, in a recent interview with The Wall Street Journal. "They don't have a concrete plan to close the gap between the current share price and the company's private-market value."

Strategic's management, however, said it does have a plan to boost the company's value. Gellein said the company "can boost its stock as its conference business improves, its nightly rates increase, its net operating income rises and as it whittles its $2.4 billion of debt."

"We do not believe, nor do our major shareholders to the best of our knowledge, that putting the company up for sale is the way to get that value," Gellein told The Journal.

The drama underscores the attractiveness, or unattractiveness, of buying luxury hotels. They are not the highest yielding asset class because of their high operating costs, which includes large staffs and high-end amenities and servcies.

However, there is an appettite to buy, particularly from high net-worth individuals and private investors. Many of these hotels are considered trophy properties and owners of them are more willing to accept lower yields in return for an overall rise in property value.

Consider the Four Seasons Hotel New York. Not owned by Strategic, but Beanie Baby founder Ty Warner, in November, an unidentified buyer offered $900 million for the hotel. Warner bought the 368-room hotel, on East 57th Street, in 1999 for $275 million.

The Wall Street Journal writes that Orange Capital doesn't have much leverage to force Strategic to sell. So far, no other Strategic shareholders, which includes Bill Gates' Cascade Investment, have publicly joined Orange Capital's cause.



Topic : Strategic Hotels and Resorts, Orange Capital
External Source : Bloomberg, Chicago Business, CoStar Group, The Wall Street Journal

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