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Strategic Hotels & Resorts Inc. (NYSE:BEE)

Strategic Hotels & Resorts to Discuss Management change - Conference Call

November 2, 2012 5:00 pm ET

Executives

Diane Morefield - Executive Vice President/Chief Financial Officer

Rip Gellein - President and Chief Executive Officer

Analysts

Jeff Donnelly - Wells Fargo

Andrew Didora - Bank of America

Ryan Meliker - MLV & Company,

Ian Weissman - ISI Group

Will Marks - JMP Securities

Michael Bilerman - Citi

Jonathan Mohraz - J.P. Morgan

Smedes Rose - KBW

Enrique Torres - Green Street Advisors

Operator

Good day, ladies and gentlemen. Welcome to the Strategic Hotels & Resorts Investor Conference Call. My name is Chanel and I will be your operator for today.

At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Ms. Diane Morefield, Chief Financial Officer. Please proceed.

Diane Morefield

Thank you everyone for joining us this afternoon. We realize this was really very short notice, but we did want to give you an opportunity to hear from Rip Gellein, our new CEO and continuing Chairman of Strategic Hotels before the weekend regarding the announcement we just released related to Laurence Geller.

Before we get underway and you are usually hearing Jon Stanner read the statement, but I would like to state that. This conference call will contain forward-looking statements under federal securities laws. These statements are based on our current expectations, estimates, and projections about the market and the industry in which the company operates in addition to management's beliefs and assumptions.

Forward-looking statements are not guarantees of performance and actual operating results may be affected by a wide variety of factors. For a list of these factors, please refer to the forward-looking statement notice included within our SEC filings.

With that, I'll now turn the call over to Rip.

Rip Gellein

Thanks, Diane, and good afternoon everybody and thank you for joining us. As you saw, we just announced that Laurence Geller is stepping down as President and CEO of Strategic Hotels & Resorts. Over the years, Laurence and the team of Strategic have led the creation of an outstanding hotel ownership company. We created one of the most unique portfolios of upper upscale and luxury hotel properties in the world.

Our hotel operations are profitable and have significant embedded growth potential. In addition, we dramatically restructured our balance sheet, which is terrific shape today. On behalf of the entire board of directors, I want to thank Laurence for his many contributions and wish him the very best.

I appreciate that this news maybe surprising, but Laurence's employment contract set to expire in the next couple of months, both he and the board mutually agreed that now would be a natural time for him to step down, but as you also read, Laurence will work with me as an advisory until the end of the year to ensure a smooth transition.

Laurence leaves the company in excellent shape and as our press release stated, we will be releasing four quarter results on schedule this coming Wednesday and hosting our call on Thursday, but as preview we can share we can share with you that we are reaffirming our full year guidance.

You also may be wondering, why this guy. As Chairman of the Board since 2010 and a member of the board since 2009, I have been closely involved in all important company matters. A couple of years ago, the board Laurence put together a succession plan that designated that I would become CEO in the event that Laurence left. I am very excited to become CEO. I love the team and I am committed to the company and to the Job.

We will have many opportunities to get to know each other through the coming years, so I won't bore you with my resume now. But as a highlight, let me assure that I understand the hospitality business. I know hotels, I am passionate about Strategic, and I understand who I work for; our shareholders.

So, while Laurence moves onto his next chapter, the company remains in excellent hands. You already know two of our key players Diane Morefield, our CFO and Richard Moreau, our COO. I am very pleased to say that both will remain committed to their respective roles as does our entire senior management team. They are among the most the most outstanding professionals I have had the privilege to work with. Between our board and our broader management team, I am convinced we are the most impressive collection of leading hotel, real estate and REIT executives in the country.

Moving forward, our strategy remains the same. We remain focused on continuing to deleverage our balance sheet. We'll selectively seeking opportunities to grow our portfolio like we just acquired the Essex House, and we have an unwavering focus on asset management and extracting ongoing value from our properties.

In the coming weeks, I am going to do my best to get out and meet as many as you as possible. Please don't hesitate to reach out to me as well. I look forward to being the strong steward of your ongoing confidence in Strategic Hotels.

With that I would like to ask the operator to open up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Jeff Donnelly, Wells Fargo.

Jeff Donnelly - Wells Fargo

Good afternoon, guys, and thank you for hosting your call. I guess, Rip, to start off, can you tell us when this came to light and I guess whether it was previously planned transition that feel sudden to people and I think everyone want to understand what ultimately was the driver for that.

Rip Gellein

Sure, Jeff. As I think most of you know the Laurence's employment contract was due to expire at the end of the year. We extended it for a short period of time. We were in the middle of the Essex House transaction, and so we waited until after that and then the board and Laurence entered into the discussions on his contract and thought that this was a good time for him to go on to his next adventures, and so the board and Laurence unanimously agreed on that, so that's what happened.

Jeff Donnelly - Wells Fargo

Could you talk a little bit about your thinking or maybe the Board's thinking is on a pursuit of strategic alternatives and I recognized that alluded question, but I speak on the behalf of a lot of shareholders when I say that I think people have ultimately perceived that end game here at some point was this portfolio was re-monetized in the next cycle and I guess people are going to want to know what the thinking is and does Laurence's departure kind of relate to that?

Rip Gellein

I was involved in a very detailed way with the strategy that we've put together a couple of years ago and was approved at the board in September I think of 2010, and we've been very successful with that strategy. You know, we've restructured the balance sheet, we've added hotels. I mean, I think it's been a very solid strategy and that strategy continues.

We think we are on the right track, we got the strong team, we've got a great collection of hotels, and so we are going to keep on keeping on.

Jeff Donnelly - Wells Fargo

Okay. And then just one last question and I don't know if it's been set yet, but are you going to talk about maybe the financial terms of Laurence's. I mean his severance or does he still have his incentive units for this program and as part of his departure is he precluded from participating in any I guess as an action around the company.

Diane Morefield

There is a separation agreement that has been signed. It will be filed as an 8-K by next Thursday, and all the terms will be disclosed in that, so you can review the separation agreement. We don't think there is anything highly unusual in it. It's fairly standard, so again, basically by time we release earnings, the separation agreement should be filed as well.

Jeff Donnelly - Wells Fargo

Thanks. I yield the floor again. There's other people. Thanks.

Diane Morefield

Thanks, Jeff.

Operator

Our next question comes from the line of Andrew Didora, Bank of America.

Andrew Didora - Bank of America

Hi. Good afternoon. Thanks for hosting the call on short notice. I guess, Rip, just based on your prepared remarks, it seems like you are going to be staying on much longer term as CEO here. Do you have any future plans in terms of separating the Chairman and CEO roles in the future?

Rip Gellein

That's a good question. The answer at this point in time is no. I'll remain the Chairman and I am the permanent CEO, not an Interim CEO, and that's absolutely on purpose. I intend to help the company grow and do this for an extended period of time and I believe at the moment the board is comfortable with the Chairman and CEO role in my hands, but that is something we can address over time.

Andrew Didora - Bank of America

Got it, and then just in terms of Laurence's departure as the announcement took people a little bit by surprise here, can you maybe give us any commentary in terms of why of course the board and Laurence decided that right now is the best time for him to move on?

Rip Gellein

As I said, this was a mutual decision of the board and Laurence's. This was a great time for him to launch off to do other things he is interested in and a good time for me to step in, because we are in the fourth quarter, we are looking for the next year where we are reviewing our strategy which we believe will continue to be quite consistent. So, that's the story.

Andrew Didora - Bank of America

Okay. Thank you.

Rip Gellein

You bet.

Diane Morefield

Thanks, Andrew.

Operator

Our next question comes from the line of Ryan Meliker, MLV & Company.

Ryan Meliker - MLV & Company,

Hi, good afternoon. Thanks for hosting the call. I don't mean to beat the dead horse here, but maybe if I ask in a different way. It's on East Coast 5 O'clock on Friday afternoon; press release came out at 4 o'clock on Friday afternoon East Coast time. Seems like a bizarre time to announce something that didn't necessary need to be announced at 4 pm on Friday. Was there any reason why it specifically had to happen this afternoon and it couldn't wait until earnings week or couldn't been announced maybe even earlier this week?

Rip Gellein

Well, as we've said, this was a result of discussions between the board and Laurence, when those discussions were complete; we felt that that was not only a good thing, but the right thing to do to announce it when they were completed. They were completed this morning and we made the announcement.

Diane Morefield

Ryan, we want to keep on the same earnings announcement schedule that already were on, because our external auditors review and everything is tied to those date, and we thought it was important to keep to the original schedule for that, so next week we can address earnings and this announcement will be behind us.

Ryan Meliker - MLV & Company,

Okay. That makes sense. And then one other question was, is there any particular reason why Laurence isn't on the call now. I mean he is still involved with the company I would imagine that this might be a situation for him to speak his point of view and/or…

Rip Gellein

Well, Laurence is no longer an officer or a director of the company, so he didn't really that it was appropriate for him to be on the phone and it was appropriate for me to be on the phone, so that was our thought.

Ryan Meliker - MLV & Company,

Okay. Fair enough. I'll leave the floor to others. Thanks a lot.

Diane Morefield

Thanks, Ryan.

Operator

Our next question comes from the line of Ian Weissman, ISI Group.

Ian Weissman - ISI Group

Yes. Good evening. Two questions. Number one maybe you can give a little bit of color on the discussions between Laurence and the board. Was it a disagreement over strategy or coming to terms on a comp package?

Rip Gellein

As we said, this was a discussion that the board and Laurence reached jointly and we believe that it's in the best interest of both parties and that was the result.

Ian Weissman - ISI Group

Okay. Maybe just following up on earlier questions, it just seems very sudden. Where there any discussions about a formal CEO search process? I just want to understand how long you've been in the wings waiting for this position and sort of what the structure that transition has been?

Rip Gellein

I think we said the company put in place with the board two years ago a succession plan that would have named me as the CEO when Laurence left, and so the board made that selection some two years ago in case Laurence was to leave, and so this was really the natural transition.

One of the things that Laurence was really quiet good about was to say that he wanted me as the Chairman to have both, access to his direct reports as well as a little bit more granular experience I have been out to see the assets. I have travelled with our asset management team, I have looked at key assets. I was in the Essex House before we bought it, so this was sort of a planful process I guess is the best way you can talk about it, and so as the decision was made the board felt comfortable that they had made the right choice some number of months ago and so that's what happened.

Ian Weissman - ISI Group

Okay. Great. Thank you very much.

Operator

Our next question comes from the line of Will Marks, JMP Securities.

Will Marks - JMP Securities

Thank you. I want to ask first, you mentioned that he is going to do other things, that Laurence is going to do other things, but does he have any kind of non-compete. I may have missed or could he potentially do anything [factor] by your company?

Diane Morefield

The terms of his separation agreement, it will be made public within the next four business days.

Will Marks - JMP Securities

Okay. And one other thing I was going to ask and you may have mentioned this in just the beginning of the call, but has he been fully paid his cost from the package a couple of years ago?

Diane Morefield

The VCP?

Rip Gellein

The VCP has been paid out through the early part of the year. There was a true up of the VCP depending on the final stock price that will happen in the fourth quarter depending on how the market moves, so there are some true-ups there, but essentially the answer to your question is yes.

Will Marks - JMP Securities

Okay. Thank you.

Rip Gellein

You bet.

Operator

Our next question comes from Bill Crow, Raymond James & Associates.

Bill Crow - Raymond James & Associates

Good evening. Just the reason we keep asking the same question is because we know the passion that Laurence put into this, so let me try the different way. Was it a financial disagreement on the new employment agreement that couldn't be worked out? Was it a strategic difference on asset sales or acquisitions? Was there anything like that going on?

Rip Gellein

As we said those discussions with the board and Laurence, we ended in a mutually agreed agreement, and so that's what we are going to continue tell you.

Bill Crow - Raymond James & Associates

Diane, I got to ask you maybe you can give us preview what we are going to read in four days. Is there anything in the separation agreement that would Laurence from finding the capital partner and making the bid for the company?

Diane Morefield

Bill, you will see the full agreement when we file it. We can't discuss it and tell the whole agreement publically available.

Bill Crow - Raymond James & Associates

Are there any other employees that are departing at this time?

Diane Morefield

No.

Bill Crow - Raymond James & Associates

Okay.

Diane Morefield

And, it's important to note that Laurence remains a significant shareholder in Strategic Hotels even beyond his employment here. I think as all of you know, his VCP payment, half of it he took in stock and deferred the stock, he also has significant RSUs and other shares, so Laurence continues to be vested in the company and wants the company obviously to succeed and will remain a significant shareholder.

Bill Crow - Raymond James & Associates

Yes, but knowing Laurence, I think, he probably believes that he is the best person to have done that, so that's why we are all trying to figure out where the disagreement came. I appreciate it. Thank you.

Bill Crow - Raymond James & Associates

You bet.

Diane Morefield

Welcome.

Operator

Our next question comes from Michael Bilerman, Citi.

Michael Bilerman - Citi

Hi. Good afternoon. I guess, the trouble everyone is having is that both of you were part of other public companies before and you've been in Strategic for a number of years that if you were going to make an announcement, you knew details and questions would be asked about why and all the questions have come out in terms of non-compete in terms of severance and all these things.

If you knew the agreement wasn't going to be filed for four days, and it was a mutually agreed upon decision, what triggered then the disclosure versus just waiting until you can produce some into the street with all the information, because you are going to have questions for another four days.

Rip Gellein

We felt that once the agreement was signed then it would be our duty to announce it, and so we felt that we needed to devote it promptly.

Michael Bilerman - Citi

But if the information can be disclosed to the street and no else obviously would find out about it, because it is confidential between the board and Laurence, why today versus not when the agreement could be made public.

Rip Gellein

Because he signed the agreement, so we needed to do that and then we are required to file it as an 8-K in four days and so we are going to do that. To the best of my knowledge, we are following the rules.

Diane Morefield

We also felt that it was important inform our employee base today. And, once our employees knew there was a risk of leak, so we wanted to public let everyone know that Laurence has stepped down. And, again, the separation agreement has to be filed within four days.

Michael Bilerman - Citi

Actually filed within four days, can't you just file it now? I mean, what's holding you guys back from just putting it out there?

Diane Morefield

We may file it sooner. The SEC rules are four days. We just are making sure everything is in order before we file it with the SEC.

Michael Bilerman - Citi

And, I just want to make sure there's one clarification, so there's a lot of CEOs that are employment contracts and there's a lot of CEOs that are in their 60s, a lot of CEOs have founded companies. Those agreements usually get extended, so I think where everyone is trying to is there has to have been some piece of it even if it was mutually agreed upon Laurence's passion for the company is evident in everything that he does, his passion for everything is actually evident in everything he does. That ultimately not getting to an agreement, there has to be have something there. Chairman of the board, you clearly have a role in deciding one way or the other.

Rip Gellein

The board as we have said over and over was, there was unanimous agreement of the board and Laurence, and that's what created the deal. So, there was no one person on the board. Obviously, Laurence, but board and Laurence came to a mutual agreement and that's what the appropriate thing is for us to tell you.

Michael Bilerman - Citi

Is there any other shoes to fall out of this. I mean, is there going to be potential other things that may come out at a later date or it's literally as you said?

Rip Gellein

No, and one of other things we would emphasize, which I think I talked about in my comments was that the balance sheet is strong, our hotels are terrific. It's a unique collection of assets run by very able brand and we've got a great team. So, the strategy is the same, there's not another shoe to drop, the management team is in place and I as the new CEO feel really good about all those points.

Michael Bilerman - Citi

If I remember correctly, you used to be a CEO of Vacation Ownership company, you also like sold that company, correct?

Rip Gellein

Yes. We sold it to Starwood in 1999, and then I stayed at Starwood through 2008 and the last role that I had at Starwood is what was called President of the Global Development Group, so I had the Starwood's owned hotel portfolio, the asset manager, the growth engine of the franchise and management contract group on a global basis in the time-share business which at time was maybe a $1 billion in revenue reported to me as well.

Michael Bilerman - Citi

I guess you come from a background of when you said you are working for you as in the shareholders in your opening comments that you are someone that is open to strategic alternatives and putting companies up for sale when the time is right.

Rip Gellein

As the CEO, the CEO has to look at all strategic alternatives.

Michael Bilerman - Citi

Okay. Thank you.

Rip Gellein

You bet.

Operator

Our next question comes from the line Jonathan Mohraz, J.P. Morgan.

Jonathan Mohraz - J.P. Morgan

Good evening. Diane, are there any legal costs associated with Laurence's stepping down?

Diane Morefield

There's nothing material.

Jonathan Mohraz - J.P. Morgan

Okay. Thank you very much.

Operator

Our next question comes from Smedes Rose, KBW.

Smedes Rose - KBW

Hi. It's Smedes. Could you just reiterate then going forward for you, what you feel is, you said the strategy is the same, but it seems like the strategy has largely been completed as you pointed out the balance sheet is good shape, the properties are on a healthy footing it seems. So, what do you see strategy for the next two years?

Rip Gellein

Well, we got the strategy included in several things. One, we've got these amazing assets and they have embedded growth within those assets, so we've got several plans that relate to our existing portfolio.

Within the last 60 days, we just added an iconic hotel in New York to our portfolio. We've announced that we will be selling one hotel to de-lever our balance sheet and as you know Laurence involved in various deals. We will be active, but cautious. We will do the right deal, we'll do the smart deals. That's what our strategy has been over the last couple of years, so we'll build value.

Smedes Rose - KBW

So, how do you think your leadership, I guess, will be different from Laurence's? I mean, what will you be doing differently now going forward?

Rip Gellein

I'll let you guys judge the difference. My style is to enhance the teams that work for the organization to look for opportunity. I have been a deal guy for most of my life, so we'll look for good new future opportunities and we'll continue to build on the strong culture and team that we have, so I am really fortunate to step into a situation that is as healthy as it is and we'll continue with the strategy that I help put together with Laurence two years ago. I think, we'll continue to build on that.

Smedes Rose - KBW

Okay. Thank you.

Rip Gellein

You bet.

Operator

Our next question comes from Andrew Didora, Bank of America.

Andrew Didora - Bank of America

Hi. Just one quick follow-up. Rip, can you have an employment contract already in place with Strategic, or is that going to be high end endowment feature?

Rip Gellein

I do not have a current employment contract with Strategic.

Andrew Didora - Bank of America

Any timetable in terms of when you think you will get that in place?

Rip Gellein

We think that it will be relatively soon, but we are working through it.

Andrew Didora - Bank of America

Okay. Thanks.

Operator

Our next question comes from the line of Jeff Donnelly, Wells Fargo.

Jeff Donnelly - Wells Fargo

Thanks. To follow-up as well as. Then maybe to build on that question, do you have a sense of how you are going to look to structure your employment agreement? I think, people are going to be interested to see how you are aligned with shareholder interest.

Rip Gellein

I can assure you that I will be aligned with the shareholder interest. It will be a market-based contract and I would want it to be state-of-the-art and completely in line with the shareholders' interest.

Jeff Donnelly - Wells Fargo

Do you have a sense at this point and just from a personal preference, if you'd wanted weighted more towards sort of stock performance rather than sort of call it regular income?

Rip Gellein

It will go to the board and the board will make those decisions in concert with me, so we haven't made our way through the details of it, but I can assure you that it will incent the proper behavior.

Jeff Donnelly - Wells Fargo

And just the last question, can you talk about how you and the rest of the board perceive the fair value of the portfolio? I think people are talking about. I mean, Laurence has always been very passionate about the ultimate value of the company and maybe where it trades relative to what he perceived its fair value to be. I guess, the question does the board have the same perspective the shareholders have and maybe what is that perspective?

Rip Gellein

Well, our perspective is that we have a very valuable portfolio, and I think Laurence shared that view and the board shares that view.

Jeff Donnelly - Wells Fargo

But is your sense that there is unusually wide discount in this portfolio versus your peers or do you think it's more in line, or? I don't think I want to comment on our peers at the moment. I'll just tell you that I think that our portfolio is unique. It's in amazing locations, irreplaceable assets and we are thrilled to have it and think it's valuable.

Jeff Donnelly - Wells Fargo

Okay.

Diane Morefield

And with no new supply coming on in any of our markets.

Rip Gellein

…virtually zero…

Diane Morefield

…and portfolio continue to appreciate value. There is certainly a dislocation in the market on all the hotel stock prices over the last few weeks, so it's safe to say we think as an industry we are all trading well below reasonable value.

Jeff Donnelly - Wells Fargo

Thanks, guys.

Rip Gellein

Thank you.

Operator

Our final question comes from the line of Enrique Torres, Green Street Advisors.

Enrique Torres - Green Street Advisors

Hi, Rip. Hi, Diane. Maybe to follow-up on the last question a little different way. From our perspective, we think the portfolio does traded up pretty substantial discount to NAV and replacement cost. What would you view as the levers to kind of unlock that track value for shareholders?

Rip Gellein

Well, number one execution, so we want to continue to execute best-in-class. Number two make sure that our balance sheet is the appropriate leverage and number three add unique properties when we can with really clever, if you will, well structured deals, and we've just executed on that and we are going to continue to keep doing.

Enrique Torres - Green Street Advisors

Okay. And can you share at all if there have been any expressions of interest from outside parties either to the company or to the board?

Rip Gellein

The successful public companies don't come in on rumors of those kind. So, we are not going to comment either.

Enrique Torres - Green Street Advisors

Okay. Fair enough. Thanks.

Diane Morefield

Thank you.

Operator

And that concludes the Q&A session. I would now like to turn the call back over to Mr. Rip Gellein.

Rip Gellein

I want to thank everybody for taking the time on the Friday afternoon at this hour to call in, and I look forward to meeting each of you, those of you I have not met in person and having these discussions about our company going forward, and I look forward to being the CEO and enjoying the growth of our enterprise, so thanks for dialing in.

Diane Morefield

Thank you.

Operator

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect.

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