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How to Value Strategic Hotels in a Buyout
Strategic Hotels & Resorts, Inc. (BEE) has been thrown around as a would-be takeover target before, and Credit Suisse decided to take a look back at its value prospects after a recent Bloomberg report that the company is seeking a buyer.
With an Outperform rating at Credit Suisse, the firm has an official price target of $15.00 versus a recent closing price of $13.50. While that implies upside of just over 10%, Credit Suisse's Ian Weissman said that an in-depth asset value analysis implies that a strategic buyer from private equity or sovereign wealth would likely pay at least $16.50 per share to acquire Strategic Hotels & Resorts.
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Credit Suisse's asset by asset valuation model for its luxury hotels was said to be a much better company now versus 3 years ago when it first
considered a sale. Strategic Hotels & Resorts operates hotels and resorts under the following brands: Fairmont, Four Seasons, Loews, InterContinental, KSL Resorts, Marriott, Montage Hotels & Resorts, Ritz-Carlton, and Westin.
The firm sees several reasons as to why this portfolio could trade over the next 6 months, listed as follows:
Its much improved ultra-luxury portfolio would garner material interest from sovereign wealth and generational wealth investors.
Its balance sheet is in good shape at 4.5x leverage.
The company has simplified its story by consolidating joint ventures.
Consolidation comes at the end of a recovery.
The CEO contract expires at the end of 2015, and he is already in his late-60s.
Credit Suisse sees Strategic Hotels & Resorts, Inc. worth $16.50 or more in the hands of sovereign wealth. The firm believes the company would do a deal with a private equity or sovereign wealth so-called trophy buyer that would be seeking an irreplaceable portfolio rather than just an IRR-driven REIT buyer. These were the comments under that scenario and with an assumed 5.8% cap rate used by the land and building management industry:
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7.8% unlevered IRR (vs. the 8.5%-9.0% we use for BEE's lodging peers, and ~6%, for high quality malls, office and apartments);
5% annualized SSNOI growth through 2019 (vs. '14 growth of 15%).
Here is a list of the company's resort properties:
Fairmont Scottsdale in Scottsdale, AZ
Four Seasons Resort in Jackson Hole, WY
Four Seasons Resort in Scottsdale, AZ
Four Seasons Resort
Hotel Del Coronado in San Diego, CA
Loews Santa Monica Beach in Santa Monica, CA
Marriott Lincolnshire in Lincolnshire, IL
Montage Laguna Beach in Laguna Beach, CA
Ritz-Carlton Half Moon Bay in Half Moon Bay, CA
Ritz-Carlton, Laguna Niguel in Dana Point, CA
Its list of 'urban properties' or hotels is as follows:
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Fairmont Chicago in Chicago, IL
Four Seasons Hotel in Austin, TX
Four Seasons Hotel in Silicon Valley, CA
Four Seasons Hotel in Washington, DC
Intercontinental Chicago in Chicago, IL
Intercontinental Miami in Miami, FL
JW Marriott Essex House in New York, New York
Marriott Hamburg in Hamburg, Germany
The Westin St. Francis in San Francisco, CA
At $13.59, Strategic Hotels & Resorts has a 52-week range of $11.01 to $14.26 and a consensus analyst price target of $14.56. Its current market cap is $3.75 billion.
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