Orange Capital, LLC (“Orange Capital”), a New York-based investment firm, today announced that on February 1st it issued a letter to the Board of Directors of Strategic Hotels & Resorts (NYSE:BEE)(“Strategic” or the “Company”) urging for an immediate sale of the Company. Orange Capital is making this letter public after failing to receive an adequate response from Strategic’s Board of Directors. As of the date of this release, Orange Capital, LLC is the beneficial owner of 6.25 million shares of Strategic common stock.
Orange Capital believes the sale of Strategic’s unique and highly attractive properties would likely result in proceeds of $11-14 per share, a 40-79% premium over the most recent closing price. Orange’s valuation is based upon a property level analysis using capitalization rates, replacement cost and comparable M&A transactions. It also takes into consideration qualitative variables such as the scarcity value of luxury hotel assets and conditions in the capital markets.
Orange Capital reached this conclusion after a careful evaluation of other possible alternatives, including Strategic continuing on its present course, or a partial sale of the Company’s portfolio with proceeds used to retire debt.
Strategic’s hotel portfolio consists of 18 high profile properties, including the Four Seasons in Washington, DC, Silicon Valley and Punta Mita; the Ritz Carlton Half Moon Bay and Laguna Nigel; the Intercontinental in Chicago and Miami; and the Marriott Essex House in New York, among others.
The full text of the letter follows:
Board of Directors
c/o Mr. Raymond Gellein
Strategic Hotels & Resorts, Inc.
200 West Madison Street
Chicago, IL 60606
February 1, 2013
Dear Mr. Gellein:
Orange Capital, LLC ("Orange Capital" or "we") is a research driven investment firm based in New York. As of the date of this letter, we beneficially own 4,500,000 shares in the aggregate of Strategic Hotels &Resorts, Inc. (“Strategic” or the "Company”) common stock.
Orange Capital has carefully studied Strategic’s ongoing operations, growth prospects, and capital structure. We analyzed a variety of strategic alternatives for the Company’s unique portfolio of luxury hotel properties, taking into account the cyclical nature of the lodging industry, the scarcity value of the Company's portfolio, possible changes in interest rates, private versus public market valuations for luxury hotel properties and the M&A environment for luxury real estate.
In our view, the best alternative for the Company to maximize shareholder value is an immediate sale of the Company (with 100% of the net proceeds distributed to or otherwise being received by shareholders).
The Company should retain a financial advisor to facilitate the sale process and publicly announce its intention to review strategic alternatives, including a potential sale, as soon as possible.
We believe a sale of Strategic Hotels would likely result in proceeds in excess of $11 per share, or more than 49% above your last closing price. Our analysis is based on a property level valuation using cap rates, per key valuation metrics, and comparable M&A transactions. Our analysis suggests that on a weighted average basis, the portfolio is worth $590k-$675k per key. We believe that a sale for that price is achievable and represents the best path to maximizing value for Strategic's shareholders for the following reasons:
- Private market values for luxury hotel properties far exceed public
The demand for luxury real estate has never been greater and recent private market transactions for hotels are near to or above their previous highs. Private market buyers rely on value per key/replacement cost and discounted cash flows rather than current year EV/EBITDA multiples. We believe it is highly unlikely that Strategic’s replacement cost value would be reflected in the public markets, particularly given that the Company’s private market EV/EBITDA multiple would be higher than any publicly traded peers. Strategic’s public market valuation is also impaired by the lack of any comparable pure-play luxury hotels peer group.
- There is a large pool of well capitalized buyers for the Company’s
Sovereign wealth, pension, endowment, and insurance funds are natural owners and active buyers of luxury real estate. These buyers have outstanding access to global capital markets. In addition, absolute financing costs for highly rated real estate owners are at all-time lows. This is evidenced by low long-term interest rates and the tight credit spreads of well capitalized REITs.
- Strategic is burdened with material corporate overhead diluting
Strategic’s corporate overhead is approximately $30 million per year. There are meaningful synergies associated with a sale to an existing owner of hotel properties. In the event of a portfolio sale, the vast majority of this overhead would be eliminated. We assume $20 million of cost savings in a sale at 15-18x EBITDA. This would be worth $1.50 - $1.75 of value per share, or approximately 25% of your current market capitalization.
- Strategic’s large portfolio of luxury hotels is unique and has
outstanding scarcity value.
We believe the bulk sale of Strategic’s hotel portfolio presents a rare opportunity for buyers of luxury properties. According to our industry research, it might take up to five years to accumulate a similar portfolio of trophy assets. As a result, we would expect a substantial premium in the event of a sale.
- The Company has a material cost of capital disadvantage compared to
other owners of luxury hotels.
Strategic’s access to the capital markets is limited by the Company’s high leverage ratios relative to current cash flows. In addition, there is strong evidence that REIT stocks with high financial leverage trade at lower multiples of AFFO1 relative to their peers. As a listed owner of property assets, Strategic’s value as a going concern rests on its ability to finance accretive acquisitions or pay dividends from current cash flows. Neither is likely in the near term in any meaningful amount. Strategic’s share price remains well below its intrinsic value, so any equity issuance would be highly dilutive for shareholders.
- Strategic’s leveraged balance sheet offers few prospects for a
return of capital to shareholders for the foreseeable future.
The Company’s credit facility limits Strategic’s ability to repurchase common stock or pay dividends to common shareholders. Strategic’s high leverage impairs the Company’s access to new or amended financing agreements.
- Strategic lacks brand value.
There is no unique value associated with the “Strategic Hotels” brand. The Company is simply a listed fund with the highest cost of capital in the luxury hotel industry.
- Management lacks a credible plan for creating shareholder value.
Following the recent departure of your CEO, Strategic has failed to articulate a strategy to increase shareholder value. We do not believe wagering that EBITDA will return to its previous cyclical highs is a credible deleveraging strategy. Given the Company’s weak balance sheet and limited access to low cost capital, we see no viable alternative to a sale.
We did not arrive at this conclusion without evaluating other possible alternatives. We also considered Strategic continuing on its present course with the expectation of improving industry conditions as well as a partial sale of the Company’s portfolio with proceeds used to retire debt.
We do not believe that the status quo is in the best interests of shareholders. There are significant risks associated with the hotel cycle, changes in property values, capital markets conditions, and interest rates. This is especially the case when many prospective buyers of luxury assets are currently willing to buy assets at prices already reflecting a positive cyclical outlook.
While a partial sale of the Company in a deleveraging transaction would likely allow for renewed access to the equity capital markets on more reasonable terms, we see this is as a poor alternative to a full sale. Strategic’s smaller pro-forma asset base would be sub-optimal for REIT investors in the public markets. In addition, there may be costs associated with the early repayment of indebtedness and the Company's stock would remain one of the less liquid names in the public REIT space.
We would be pleased to discuss our views as expressed in this letter with you at your earliest convenience.
Orange Capital LLC
About Orange Capital LLC
Orange Capital, LLC (“Orange Capital”) is a New York based investment firm. The firm is a value oriented investor in event-driven securities. The firm allocates across the capital structure on an opportunistic basis. Orange Capital was co-founded in 2005 by Daniel Lewis and Russell Hoffman. Prior to founding the firm, Orange Capital's portfolio manager, Daniel Lewis, was a director with Citigroup's Global Special Situations Group.
1 Adjusted Funds from Operations