Casinos & Hotels

How to Value Strategic Hotels in a Buyout

Strategic Hotels & Resorts, Inc. (NYSE: 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.

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:

  • 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:

  • 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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