It seems the REIT natives are growing restive.
Concurrent with CommonWealth REIT's (CWH) February 25th release of lackluster 4Q12 earnings, announcement of a huge, dilutive (some have aptly described as value destroying) equity offering and share price plunge to $15.85, private equity/hedge fund investors Corvex Management and Related Fund Management submitted a conditional offer to throw the RMR bums out and take the company private at $25, then $27/share. Anyone seeking justice-for-all has to cheer for Corvex/Related and their effort to end the abuse of shareholders, but RMR's intransigent posture makes for a Herculean task.
Then there's Strategic Hotels & Resorts (BEE). In late February, New York based Orange Capital analyzed the luxury hotel company, determined that an open market sale of its properties would generate proceeds north of $11/share (vs. then prices in the $7.30/share range), bought almost 4% of the common outstanding, and encouraged management to pursue liquidation. Many sector experts have weighed in and, if not endorsed, have not refuted Orange Capital's valuations.
Investor activism, leveraged buy-outs, mergers and acquisition, or whatever these efforts are ultimately labeled, have often presented at least a small margin of arbitrage opportunity for the late arriving investor. In the realm of CWH, I don't see any safe, predictable, time-considerate valuation for any of their issues. While I also find BEE's near to intermediate term valuations hard to peg, their preferred series offer predictably strong results.
| Strategic Hotels & Resorts, Inc. | |||||
| Preferred Equity | |||||
| LIQUIDATION | |||||
| SHARES | MARKET | ANNUAL | RECENT | CURRENT | |
| OUTSTANDING | CAPITALIZATION | DIVIDEND | PRICE | YIELD | |
| BEE-A | 4,148,141 | $103,703,525 | $2.1250 | $ 24.70 | 8.60% |
| BEE-B | 3,615,375 | $90,384,375 | $2.0625 | $ 24.57 | 8.39% |
| BEE-C | 3,827,727 | $95,693,175 | $2.0625 | $ 24.55 | 8.40% |
The opportunity here is a byproduct of the whole portfolio liquidation/buyout scenario. At this time all of the preferred series are redeemable. In the 4th quarter of 2012 BEE-A traded as high $26.05 (a 4.2% premium over redemption for a currently callable, high yield preferred). Ex-dividend on 3/14, each of the preferreds now trades at a discount to redemption for yields of 8.4%+.
This is a $300MM market cap opportunity for those whining about the absence of yield. If the company is merged or liquidated, you'll be redeemed at a slight premium to market costs. If the company is not liquidated or merged, you'll receive outsized dividends until they do the right thing, refinance for a lower cost of capital and redeem shares at a slight premium.
At 2nd Market Capital we're pretty bullish on the lodging sector's near term prospects. However, we remain value investors, so we own low price/ffo names like AHT or MDH. BEE trades at a significant premium to sector FFO multiples and we don't know what management will do in response to investor pressure.
The REIT market is becoming fully valued. We'll take an 8% dividend yield and a small premium when the preferreds are ultimately redeemed. We're long all of the BEE preferreds.
Disclosure: 2nd Market Capital and its affiliated accounts are long BEE-A, BEE-B, and BEE-C. This article is for informational purposes only. It is not a recommendation to buy or sell any security and is strictly the opinion of the writer. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
