In a letter sent to the Strategic Hotels & Resorts’ board of directors on Feb. 1, Orange Capital revealed, after intensive research into the strategic alternatives for the company’s unique portfolio of luxury hotel properties, that it believed the best alternative for the company to maximize shareholder value was with an immediate sale, with 100 percent of the net proceeds distributed to or otherwise being received by shareholders.
“Orange Capital has carefully studied Strategic’s ongoing operations, growth prospects, and capital structure,” the letter stated. “We analyzed a variety of strategic alternatives for the company’s unique portfolio of luxury hotel properties, taking into account the cyclical nature of the lodging industry, the scarcity value of the company’s portfolio, possible changes in interest rates, private versus public market valuations for luxury hotel properties and the M&A environment for luxury real estate.”
Strategic’s hotel portfolio currently is comprised of 18 high-profile properties, including the Four Seasons in Washington, D.C., Silicon Valley and Punta Mita; the Ritz Carlton Half Moon Bay and Laguna Nigel; the Intercontinental in Chicago and Miami; and the Marriott Essex House in New York.
“As we pointed out in the letter, there has never been more demand for luxury or trophy real estate assets including in a lodging space,” Daniel Lewis, Orange Capital’s managing partner, told Commercial Property Executive. “The company by virtue of its leverage, has a very high cost of capital relative to someone like Singapore or Qatar who can basically cash bid these things. When you carry that up with a management that doesn’t have a plan other than waiting for a cycle, it’s our position that a board of directors has to execute on a plan that is a best risk adjusted return for a shareholder.”
Analysis from Orange Capital showed the sale of Strategic’s unique and highly attractive properties would likely result in proceeds of $11-14 per share, a 40-79 percent premium over the most recent closing price. The valuation is based upon a property level analysis using capitalization rates, replacement cost and comparable M&A transactions. It also takes into consideration qualitative variables such as the scarcity value of luxury hotel assets and conditions in the capital markets.
In a company press release, Strategic Hotels & Resorts issued the following as a response to the letter: “While we are disappointed Orange Capital released its letter publicly to advance its short-term trading interest, we remain focused on maximizing the longer-term interests of our shareholders. We believe in open, transparent communications with our shareholders and regularly communicate our company’s strategy, investment merits, risks and opportunities. Strategic Hotels is acknowledged to have among the highest quality portfolios in the industry and remains focused on delivering on its well-articulated operating and balance sheet strategy. We remain open to strategic opportunities to enhance our already pristine portfolio and will always act to enhance long-term shareholder value.”
Orange Capital is the beneficial owner of 6.25 million shares of Strategic common stock. The analysis done by Orange Capital further shows that on a weighted average basis, the portfolio is worth $590,000 to $675,000 per key.