Skift Take

Strategic holds one of the most impressive collection of properties in the industry, especially for a public company, but a negative cash flow and lack of profitability may make it a hard sale in the end.

Strategic Hotels & Resorts Inc., the owner of luxury lodgings from New York’s Essex House to the Ritz-Carlton Half Moon Bay in California, is turning into a takeover candidate after its founder’s abrupt exit.

Strategic Hotels said this month that Chief Executive Officer Laurence Geller was leaving after leading the $1.2 billion company since its formation in 1997. Geller’s departure from the Chicago-based owner of resorts run by the Four Seasons and Ritz-Carlton chains could open the door for potential acquirers, according to KBW Inc. The announcement sent the stock up 13 percent, the most in 31 months.

“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, said in a telephone interview. “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.”

Strategic Hotels commands the highest average daily rate of any U.S. hotel real estate investment trust valued at more than $500 million, according to data compiled by Bloomberg. A buyer could offer $8 a share, a 32 percent premium, and still obtain the company’s luxury hotels at a discount to their net asset value, according to JMP Securities LLC. Potential acquirers could include private-equity firms or Host Hotels & Resorts Inc., another REIT, said Raymond James Financial Inc.

Buyer interest

Raymond “Rip” Gellein, Strategic Hotels’s chairman who will also succeed Geller as CEO, declined to comment when asked on a Nov. 2 conference call whether the company had received expressions of interest from potential buyers. On a separate call last week, Gellein said that while Geller is gone, “nothing else about our team, our strategy or our vision is changing.”

Megan Hakes, a spokeswoman for Strategic Hotels, declined to comment further.

Strategic Hotels owns or holds stakes in luxury hotels and resorts in the U.S. and Europe, including Essex House, the 80- year-old Manhattan hotel on Central Park South that it acquired in September. The properties are run by management companies including Four Seasons Hotels and Resorts, Loews Corp., Marriott International Inc. and Ritz-Carlton Hotel Co.

Shares of Strategic Hotels peaked in July 2007 at $24.27, only to plunge to as low as 61 cents by March 2009 as the company posted record losses amid the fallout from the real estate slump and financial crisis. While the hotel operator has since narrowed losses under a turnaround plan, the stock has never fully recovered, reaching only as high as $7.54 last year.

Stepping down

Geller stepped down immediately as CEO and president and relinquished his board seat on Nov. 2. He will serve as an adviser to Gellein until year-end.

On Nov. 5, the first trading day after the news, shares of Strategic Hotels surged 13 percent, the most since March 2010.

Will Marks, a San Francisco-based analyst at JMP Securities, said potential buyers may view Geller’s departure as removing a hurdle to a deal for the company. Geller himself is barred under the terms of his separation agreement from making his own bid for the company for 18 months.

“Now investors — whether it’s opportunity funds, foreign investors, private equity — would consider making a bid or chasing the company, whereas before no one would have thought of making an offer for this company with Laurence Geller running it,” Marks said in a phone interview. “It was his company and it would have taken him actively marketing the company.”

Asset value

Acquirers may be lured by the chance to snap up Strategic Hotels’s luxury properties for a bargain, Marks said.

He estimates the net asset value of the company’s hotels, which include the InterContinental Miami, to be about $10 a share, 65 percent more than the company’s closing share price of $6.05 last week. Bids are more likely to come in at about $8 a share, Marks said.

“A buyer would just see it as an undervalued company,” he said.

Today, Strategic Hotels’s shares climbed 0.7 percent to $6.09 at 9:56 a.m. in New York.

A rise in takeover attempts for urban and luxury hotel properties, including Indian Hotels Co.’s rebuffed offer for Orient-Express Hotels Ltd., should highlight the attractiveness of Strategic Hotels’s net asset value for potential acquirers, Jonathan Mohraz, an analyst at New York-based JPMorgan Chase & Co., wrote in a Nov. 8 note to clients.

Prime properties

KBW’s Rose said Strategic Hotels’s properties could attract bids from private-equity firms.

“It’s a unique portfolio,” Rose said. “It’s one of the best in public hands” and “private-equity entities would like to own that portfolio.”

Strategic Hotels charged customers an average of $260 per day at its hotels and resorts in the second quarter, the most of any U.S. hotel ownership REIT valued at more than $500 million and more than 50 percent higher than the group’s $172 median, according to data compiled by Bloomberg. The company’s average daily rate climbed to $271.50 in the third quarter.

Host Hotels, a REIT with a market value of $10.3 billion, could also be interested in acquiring Strategic Hotels, according to Bill Crow, a St. Petersburg, Florida-based analyst at Raymond James. Host Hotels’s roster of properties includes the Four Seasons Hotel in Atlanta and the Ritz-Carlton in Amelia Island, Florida.

Gee Lingberg, vice president of investor relations at Host Hotels, did not return a message and e-mail seeking comment on whether the company would be interested in acquiring Strategic Hotels.

Cash outflow

While Strategic Hotels’ valuation is attractive, the company is still losing money and its volatile cash flow generation may deter buyers, according to Rob Van Bergen, a Chicago-based analyst and money manager at Harrison Street Securities LLC. Analysts don’t project a return to profitability until 2014.

“People are very reticent to buying the companies at sort of trough cash flow valuations,” Van Bergen, whose firm oversees about $525 million and recently sold its Strategic Hotels shares, said in a phone interview. “On a cash flow basis, I’m not sure that anyone could make it immediately accretive.”

Management may also prefer to try to restore the company’s stalling stock price on its own, Van Bergen said.

‘Old magic’

“This used to be a pretty high-valued name in hotels,” he said. Legacy members of management “probably look at that and say, ‘The market has in the past given us a lot of respect, and so it might make sense to try to recapture some of that old magic.’”

Gellein, when asked if he would consider alternatives including a sale, said that “the CEO has to look at all strategic alternatives.”

“The strategy is the same,” he said on the Nov. 2 call. “There’s not another shoe to drop. The management team is in place, and I, as the new CEO, feel really good about all those points.”

Still, for shareholders, a sale may be the surest path to unlocking the value of Strategic Hotels’s assets, said Raymond James’ Crow.

“The best way for them to close the valuation gap that exists between the public valuation and the private valuation, or what the collection of assets are worth, ultimately is the sale of the company,” no matter who is at the helm, he said. “The portfolio is one of the best portfolios of hotel assets that has ever been put together. We think there are groups out there that would love to own the assets.”

With assistance from Nadja Brandt in Los Angeles. Editors: Beth Williams, and Sarah Rabil. To contact the reporter on this story: Brooke Sutherland in New York at [email protected]. To contact the editor responsible for this story: Sarah Rabil at [email protected].

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Tags: four seasons, nyc, ritz-carlton

Photo credit: A photographer in Central Park takes a picture of Essex House, which Strategic Hotels acquired in September. Pete Jelliffe /

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