|Shares Out. (in M):||6||P/E||0.0x||0.0x|
|Market Cap (in $M):||145||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||0||EBIT||0||0|
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Strategic Hotels & Resorts, Inc. (BEE) is a real estate investment trust (REIT) which high-end hotels and resorts in theUnited States,MexicoandEurope. The company currently has ownership interests in 17 properties with an aggregate of 7,762 rooms.
I am recommending the Strategic Hotels preferreds. I am recommending the Series C 8.25% preferreds (current price $25.18) as an illustrative example but in reality I like all three (Series A, B, and C). I believe the Strategic preferreds represent a ~12% total return opportunity within the next 3-6 months (possibly sooner) with the imminent reinstatement of the Company’s preferred dividend and payment of the accrued interest in arrears. On an annualized basis that represents a ~25-50% return. In the interim, I am effectively collecting a ~10.5% accreting current yield (not cash paying) while I wait. I believe this investment opportunity presents bond-like risk with equity like upside and is very compelling.
Strategic recently held an investor day where they intimated that both events (reinstatement of the dividend and payment of the accrued dividends in arrears) were likely to happen in the near term and simultaneously. Strategic is set to announce 3Q earnings the first week in November and I believe they could choose to announce action on the preferred dividend at that time. If not, I believe action on that topic is likely to happen sooner rather than later.
I believe this investment opportunity exists because of the illiquidity of the preferred market in general and the fact that it is relatively inefficient because the preferred market is dominated by retail rather than institutional investors.
On the Series C 8.25% preferred as an example there are 11 dividends of .516 cents in arrears or approximately $5.67. The Company has not paid the dividend since the last quarter of 2008. The Company has chosen not to pay the preferred since that time to preserve liquidity through the downturn and because of an overleveraged balance sheet. That said, the balance sheet is currently in much better shape and the reinstatement of the preferred and payment of the accrued dividends is imminent in my opinion.
Post repayment of the accrued dividends I believe Strategic should trade at a 9.15% current yield or better which translates to a price of $22.56 on the Series C stock -- 8.25%/($22.56/$25.00) = 9.15% current yield. I am using another leveraged hotel preferred Ashford Hospitality (AHT) as my comp to determine where Strategic should trade post payment of the accrued dividends. In fact, Strategic is less leveraged and has better quality assets so I think this is a conservative assumption. So if I am right and one were to buy the Series A preferred today at $25.18 and collect $5.67 in back dividends and the preferred were to trade at $22.56 after the payment of the back dividends I am collecting $28.23 in aggregate.
Strategic’s business is well documented on their website and by the sell side so I will quickly provide a basic overview of the business, the balance sheet, and the Company’s commentary on the preferred. For more details see the Company’s recent investor presentation and transcript that they presented at their investor day presentation onOctober 4, 2011.
The link is here: http://ir.strategichotels.com/phoenix.zhtml?c=176522&p=irol-irhome
Strategic owns world class luxury hotels. Properties include the Fairmont Chicago, Four Seasons Punta Mita,Marriott Grosvenor Square, Four Seasons Jackson Hole, Ritz Carlton Laguna Niguel,RitzCarltonHalfMoonBay, Four Seasons Washington D.C., Four Seasons Silicon Valley, Intercontinental Chicago, and Hotel del Coronado.
Average ADR is $220 per night and average RevPAR is $150 per night which positions the Company as the highest end publicly traded lodging name. EBITDA margins are ~20%.
In January 2011, Strategic embarked on a comprehensive refinancing of its balance sheet. Because almost all of Strategic’s debt was non-recourse to the Company (property level debt) they were able to aggressively negotiate with CMBS or insurance company debt holders to refinance their debt on highly favorable terms. In other words, by threatening to hand keys back to lenders (lenders that had no interest in owning the properties) Strategic was able to achieve very good outcomes. The net result is the recapitalized balance sheet has lowered leverage from 14.3x at01/01/10to 7.2x.
Importantly, and something that many do not focus on, is that most of the Company’s debt remains non-recourse to the Company. Specifically, as of 06/30/11the Company had only $127 mm of credit facility debt vs. $865 mm of mortgage debt and $77 mm of cash. In short, while leverage is still high the fact that most of the Company’s debt is non-recourse substantially de-risks the balance sheet.
What has Strategic said about the status and plans for the preferred? They have been very explicit about their desire and intent to deal with the preferred in the near term. Paying the dividends in arrears and going current on the preferred would also allow them to pay a common dividend to shareholders. In the Company’s own words on p. 50 of their recent investor day presentation:
Key excerpts from the transcript of the Company’s investor day on October 4 echoed the comments from the prepared slides. See below:
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