Hedge Fund Does the Math on Hotel Owner

ditulis oleh : Jomblo Terhormat 14 Juli 2013
Shares of Strategic—which owns 18 luxury hotels, including four Four Seasons, two Ritz-Carltons and the J.W. Marriott Essex House Hotel in Manhattan—have been trading between $5.44 and $8.11 over the past 52 weeks. New York-based Orange Capital believes that selling all the properties would produce proceeds of $11 to $14 a share. Analysts agree that it could fetch at least that, if not more.

The gap spurred Orange Capital in February to send a letter to Strategic's board urging a sale. The hedge fund, which owns 6.6 million Strategic shares, or 3.6% of the company, also released the letter publicly.
"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 New York-based Orange Capital, in a recent interview. "They don't have a concrete plan to close the gap between the current share price and the company's private-market value."
But Strategic's management, which along with the company's board has rejected Orange Capital's suggestion, says it does have a plan to boost the company's value. Chief Executive Raymond Gellein Jr. 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 $1.4 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," Mr. Gellein said in an interview earlier this month.
The fight over Strategic highlights the difference between how private investors and public markets value luxury hotels. In most cases, public markets value companies, including hotel owners, in terms of multiples of their cash flow or earnings.
But luxury hotels typically don't produce much profit relative to the high costs of buying them and maintaining their white-glove, labor-intensive service, said Ryan Meliker, an analyst at investment bank MLV & Co. Private owners are willing to accept those lower yields in hopes that the property values will rise.

Some large shareholders agreed with Orange Capital's arguments but added that Strategic's value likely will be even greater in a sale a year or two from now after Mr. Gellein has made more improvements.
Takeover speculation long has surrounded Strategic. It is a relatively small real-estate investment trust with hotels that seem a good fit for private buyers. But the speculation has ramped up since November, when Strategic announced the departure of its CEO, Laurence Geller, a colorful, lifelong hotelier who founded Strategic's predecessor in 1996. Neither the company nor Mr. Geller have given a reason for his departure.
Mr. Gellein, who already was Strategic's chairman, succeeded Mr. Geller as CEO four months ago. Investors, bankers and analysts since have speculated that Mr. Gellein is less personally attached to Strategic and its hotels than was Mr. Geller, so the new CEO should be more likely to consider a sale.

Mr. Gellein said that the U.S. hotel industry likely still has at least two more years left of improvements before the next downturn. "We think there is a fair amount of upside here," he said.
Strategic showed progress in late February when reporting 2012 results, which included a 6.9% increase in revenue per room in North America, to $181.18, from 2011. The gain exceeded that of many of Strategic's peers.
There are signs that Mr. Gellein is keeping options open for an eventual sale of part or all of Strategic.
The company has ensured as it refinanced mortgages on some of its properties of late that those debts can be assumed by any new owner.
In addition, Strategic has yet to call, or buy back at face value, $290 million of preferred shares that pay dividends of 8.25% to 8.5%.
Some analysts say those preferred shares could be bought and replaced with cheaper debt, such as new preferred shares. However, any such new shares likely couldn't be called, or bought back, for at least five years.
Keeping the old preferred shares in place gives any eventual buyer of Strategic the flexibility to make that call for itself.

Source : http://online.wsj.com/article/SB10001424127887324034804578348332732848070.html

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