It’s not often that a company’s management tells you the company is grossly undervalued and it’s looking to sell itself, effectively giving investors a chance to jump into the stock before it takes off.
This is a form of pre-emptive merger-arbitrage investing. However, when a company has retained an investment bank to help with the sale, it’s even less speculative than the usual merger-arb investing.
This potential buyout opportunity gets even better when the stock also has downside protection, where the company is trading below replacement cost.
Well, that’s exactly the case with Strategic Hotels and Resorts Inc (NYSE:BEE), the only publicly traded real estate investment trust (REIT) that focuses exclusively on the luxury hotel and resort markets.
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| Flickr/SD Dirk | ||
| Strategic Hotels owns a stake in the world-famous Hotel del Coronado in San Diego. |
There are several catalysts that could help expedite a sale of Strategic Hotels and Resorts Inc (NYSE:BEE), and not just the fact that the REIT has hired investment bank Eastdil Secured to explore the possibility.
First, Strategic Hotels and Resorts Inc (NYSE:BEE)’s founder, Laurence Geller, abruptly left the company in November. Geller still owns 2.2 million shares of his company, but he would like to buy other properties. A sale of Strategic might allow him to get the most value out of his shares so he could put that money to work.
The second catalyst is that Geller and other insiders with notable ownership (more than 5% of the company) have a combined 23% stake. These shareholders are aligned in looking to create the most value for themselves, and a sale of the company may be the best way to do so.
Third, activist investor Orange Capital has a 3.7% stake in the company. Orange Capital started pressuring the company earlier this year to hire an advisor and explore all options, including a sale. It appears that pressure has worked so far, and I don’t expect Orange to ease up until the company is sold.
The great thing about Strategic Hotels and Resorts Inc (NYSE:BEE) is that its portfolio doesn’t contain run-of-the-mill hotels, but high-end hotels and luxury resorts. The company owns or has interests in properties under top brands such as the Four Seasons, JW Marriott, Hyatt, Westin, Intercontinental, Fairmont and Ritz-Carlton, among others. The company’s 18 hotels and resorts are found in markets with high barriers to entry in the U.S., Mexico and Europe. Strategic also owns several parcels of prime land for development.
Strategic Hotels and Resorts Inc (NYSE:BEE) does not manage any of its properties directly but instead uses hotel management companies. Thus, the company looks to grow through asset management and maximizing the value of each property, and does this all with only 35 full-time and four part-time employees.
Industry Tailwinds
The luxury hotel segment was hit hard during 2008 and 2009. Strategic was one of the companies hardest hit as it lost hundreds of millions from low occupancy. The company was seen as being on the verge of bankruptcy, and its stock plunged to as low as $0.61 a share in March 2009. It’s still more than 60% off its 2007 high.
But the companies that survived the crisis now enjoy reduced competition. The Great Recession led major hotel builders to put the brakes on new buildings. There are fewer competitors as a result of a slowdown in the construction of luxury hotel properties. Three years ago, 23 luxury hotels opened in the U.S. Last year, that number dropped to only six. This decreased supply is actually a tailwind for the company, as demand continues to outpace supply, which is a positive for pricing.
Overall, the luxury hotel industry in the U.S. has seen positive growth in revenue per available room (RevPAR) growth since February 2010. Prior to that week, the industry saw 96 consecutive weeks of negative RevPAR growth.
