Strategic Hotels & Resorts: A Five Star Hotel REIT on the Cheap

Strategic Hotels & Resorts (BEE) is a REIT that has stopped paying dividends of late but still holds one of the most remarkable portfolios of luxury hotels in the world. The five most prominent hotels include:

• Hotel Del Coronado (site of "Some Like it Hot" with Marilyn Monroe)
• Ritz-Carlton Half Moon Bay
• Ritz-Carlton Laguna Niguel
• Fairmont Chicago
• Four Seasons Washington D.C.

With an enterprise valuation of 2.07B and with a 2% projected increase in luxury hotels over the next 3-years, any recovery in the economy will present ample opportunity for revenue growth. Their 19 hotels with 8,358 rooms are situated in the most posh Western European and North American cities. With no debt maturities until 2011/2012, there's ample time for the economy to recover over the next two years, plus for many of the people who stay at such exquisite hotels of this nature the prospect of paying $250 p/n for a room is quite feasible, there are just fewer-and-fewer of these people to go around. Its directorship includes British knights and American financiers. Further Warren Buffett keeps a home in Dana Point as does Bill Gross of Pimco, within minutes of the Ritz-Carlton Laguna Niguel and its remarkable golf course nestled against the Pacific. A full 38% of its EBIDTA comes from oceanfront hotels.

Key Q1 numbers:

• 24.1% RevPar (revenue per available room) decrease
• 10.1% decrease in occupancy

A decrease of about 20% in the headcount has decreased the fixed operated costs from ~175MM in 2008 to 150MM in 2009.

Analyst estimates have the 2010 revenue numbers to hit 2006 levels of 750MM but with continued cost cutting measures--cutting staff in percentage parity with RevPar of ~20% as has already taken place--the rest of 2009 could achieve 2006 historical cost of revenue of 600MM--with the 150MM per quarter fixed costs being the model moving forward--allowing them to get into the black perhaps by the holiday season of 2009 or more safety by 2010. The feasibility of a dividend being paid anywhere near the magnatude of previous years is suspect but the stock price should appreciate handsomely nonetheless. Despite presense of the preferred shares eating up most of the enterprise value there's still 600MM worth of net tangle assets which should pull the <100MM market cap up, as it did to the tune of 11% today.

Disclosure: Long BEE.

Comments

[malach hamo...:]

if you believe the company can survive, buy the preferred. for 4.50 you get a shot at a return to $20-25 including dividends, even if they have to sell some common equity to delever.

Don't forget - if the common survives, the preferred thrives!!

Jun 03 09:03 PM

[reitmedia:]

Thanks for the positive coverage. I agree with your comments. Great properties and 2011 will be a much better time to refi that debt that matures then. This is a buy.

Jun 06 12:15 AM

[REIT Wrecks:]

BEE has no debt maturities until 2011. Sounds good, except that commercial mortgage maturities peak in 2011 ($250 billion) and 2012 (roughly $275 billion), and BEE has $1 billion in debt maturities in 2011, followed by $600 million in 2012. Location? Who cares. The Stanford Court Hotel on Nob Hill in San Francisco just went into receivership. Adam, be careful with this stock. BEE is soon to become WAS.

Jun 24 04:54 AM

[doubleeagle:]

BOB,

What are you updated thoughts on BEE?

Jul 23 11:02 AM

[Bob Mowry:]

Of late the demand is certainly there for the stock, high money flow index. I think the following title summed it up nicely:

"Lodging Industry RevPAR Declines Worst Ever: All Segments Down Significantly and No Upturn Until 2011"

The article goes on to talk about how the W Hotel in San Fran sold at around 5 Cap, even in this market. This bodes well for top-notch properties, and BEE has them-a-plenty. If headcounts are reduced, as BEE has been committing to doing, then they should be able to find buyers should the RevPAR still be low enough not to meet the debt service schedule by 2011/12 crunch time.


On Jul 23 11:02 AM doubleeagle wrote:

> BOB,
>
> What are you updated thoughts on BEE?

Jul 28 11:24 AM