• Strategic exits London – at the wrong time?

Strategic Hotels has sold its last significant European hotel interest, the Marriott Grosvenor Square in London. The deal saw the hotel sold for GBP125m, giving Strategic a net GBP58.1m after costs, to help reduce its debts. Marriott will continue to operate the hotel for its new owners, a consortium led by Chinese private equity investor Joint Treasure, who have bought a property with 43 years remaining on the lease.
Strategic has long expressed its intentions to extract itself from Europe, having decided instead to concentrate its efforts in its home US market. “By closing on the sale of the Marriott Grosvenor Square, we are finalising our exit of the European market, as previously committed,” said Strategic chairman Rip Gellein. The company’s sole remaining interest is in the Marriott Hamburg, where it has a leasehold interest in the property.

Concurrently with the London sale, Gellein announced Strategic was spending USD90.6m to buy the 50% it did not already own of the Fairmont Scottsdale Princess resort, representing a USD444,000 per key valuation.
The sell-off in Europe has had to continue, despite the improving performance of the London Marriott recently, as Strategic is under pressure from activist shareholder Orange Capital. Strategic declared European revpar showing a 1.7% drop in full year 2013, but in the final quarter looked to have turned positive, delivering a 4.4% increase, with both rate and occupancy higher.
“The formal sale process attracted over a dozen offers from investors who are still seeking to place capital into London hotel real estate,” said George Nicholas of JLL, who handled the sale. “Both Asian and Middle Eastern investors remain the most eager.” The deal works out at around GBP528,000 a room for the 237 room property, making it the second most expensive per room deal in London this year.
The new owners have no qualms about holding a hotel on a lease; the property’s freehold is held by central London landlord the Grosvenor Estate, which owns many of the properties in the area and does not sell its land. Daniel Yiu of Joint Treasure told the South China Morning Post that hotels in China have only 40 year land tenure, while the private equity investor and its partners in the deal are optimistic about the market outlook, and the UK’s tax regime is more attractive than US investments.
The sell-off of properties at Strategic has continued under the watchful eye of activist shareholder Orange Capital. February 2013 saw Orange Capital buy a stake in Strategic, and start agitating for decisive management action, based on the reasoning that the company – which has made regular losses since 2007 – would be worth more if broken up. The break-up sale would, it said “likely result in proceeds of USD11-14 a share, a 40-79% premium over the most recent closing price”. It noted the company’s corporate overhead consumes USD30m a year, while high debt levels compromise any chance of paying dividends in the near term.
The presence of Orange forced Strategic to hire an investment bank to look at all options, it was rumoured, including a break-up, and meantime re-focus its efforts on selling out of properties delivering less impressive returns.
But the immediate steps in the sell-off also attracted Orange’s criticism. In December it was revealed that the USD200m buyer for the Four Seasons Punta Mita and an adjacent land plot was Cascade Investment, a Strategic shareholder, in a deal that had been privately agreed. “Why would the company enter into a sale agreement of a trophy asset….without a formal, competitive sale process?” asked Orange, in an open letter to management. It called the transaction “yet another example of what we believe are value-destroying governance practices”.
Orange continues to agitate, and recently achieved at least one objective with the news that a representative from Orange has been admitted to the board. Meanwhile, steps to improve the company’s debt position have including the redeeming of a series of 8.5% coupon preference shares.

HA Perspective [by Katherine Doggrell]: Strategic has been able to distract Orange for a time with the resurgent hotel transactions market, which has allowed it to pursue its strategy of exiting Europe while also meeting the hedge fund’s urge to sell, at least in part.
But now the deal has been done and, if Gellein wants Strategic to stay intact, he must explain why, in a rising market with a taste for luxury hotels, a full-scale sell-off is not the best move. The departure of Lawrence Geller as president & CEO, after founding the company in 1997, was seen by many as the beginning of the end for the group, with the decision to appoint the 68-year-old Gellein rather than a younger executive taken as a winding down move.
There will be no rescue from the group from Geller himself, who is reportedly barred under the terms of his separation agreement from making a bid for the company for 18 months. According to the local Chicago press the hotelier told the British-American Business Council that he planned “new chapter buying hotels in the city” and rumours have linked him to a site.
While the recession proved harsh for Strategic, the company resisted the wholesale disposals at a time when bargains could have been had by buyers. After reporting what Gellein called a “terrific year” last year, with revpar up 9% and Ebitda and FFO metrics coming in ahead of consensus, the bargains are no longer there and the Reit can afford to wait for those with deep pockets.
At the group’s last conference call, Gellein side-stepped questions on a sale of the company and instead defended the group against accusations that it would be unable to compete with bidders for luxury assets, given the cost of capital. Gellein maintained that the company would be able to find suitable assets in its chosen locations, but that “we don’t feel some huge requirement to do it”.
He added: “We’ve got a strong balance sheet, we trade at a relatively high multiple. All of those are assets for us to buy as long as we buy it at the appropriate price.” The company was, at the time of writing, trading on a P/E ratio of 23.72, on 2013 figures, against fellow Reit Host Hotels & Resorts, last trading at 15.73.
The concept of ‘appropriate price’, which the publicly-listed Strategic must adhere to, is not something which has been holding back the buyers of luxury assets of late.
With Strategic being told it cannot compete for trophy assets with the likes of the sovereign wealth funds or high-net-worth individuals who are regularly shocking with their luxury deals, it may be time for Gellein to stop protesting and feed the eager buyers the trophies it holds, rather than trying to fight them. If not, it risks selling sites one by one, replacing them with affordable hotels which must be renovated to reach their potential – ramping-up time which Orange is unlikely to stand for.
If you can’t get in, better get out.

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