Check Your Cash Into Strategic Hotels

 | Mar 13, 2013 | 4:00 PM EDT  | Comments
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One of the fundamental selling points of equity ownership is that it allows any individual the opportunity to own a piece of a business. I realize that many people don't truly view owning 100 shares of a company as being a part owner of a business: if you own 100 shares of Apple (AAPL), you can't just walk into CEO Tim Cook's office and start making decisions or call Apple suppliers and negotiate terms. But the reality is that equity represents ownership and minority ownership is still ownership. So when you invest, you are exchanging your money for a proportionate ownership interest in the company's assets, liabilities and cash flows.

Warren Buffett likes to quip that investors should stick to companies that can be run by a fool because one day it might be. Buffett's observation was meant to instruct investors to focus on the business and its attributes as, in the end, the quality of the company will carry the day.

Today, owning shares in Strategic Hotels & Resorts (BEE) is a way to put money in quality, one-of-a-kind assets that should reward investors over the long run. (Honestly, I have not looked at Strategic Hotels deeply enough to assess the quality of management, so in no way am I questioning the company's executives; on the contrary, the company's major shareholders seem satisfied with the current state of affairs.)

An investment in Strategic Hotels provides a chance to put money into a one-of-a-kind luxury hotel. At the right price, many would seriously consider taking excess cash earning 0% and put into a five-star hotel that not only would deliver a return on investment but also protect your dollars against inflation as the real estate appreciates over time. Luxury brands, as history has shown, tend to withstand economic shocks much better than non-luxury brands do.

So what is Strategic Hotels? It's a real estate investment trust that owns 18 luxury hotels, including Embassy Suites, Four Seasons, Hilton, Hyatt, InterContinental, Loews, Marriott and Ritz-Carlton brands. Most of Strategic's properties were bought in the last decade, and a few in the late 1990s. The company also owns several attractive parcels, including a 21-acre ocean front lot in Mexico adjacent to the company's Four Seasons Residence Club Punta Mita. 

All these properties currently command an enterprise value of less than $4 billion. One of Strategic's shareholders, a hedge fund, has written the company a letter saying that if the hotels were sold off, Strategic shares could be worth $14. Shares today trade for less than $8. Many analysts agree that the properties could easily fetch more than $14 a share. To be sure, BEE has no plans to sell but instead plans to operate the properties, betting that the next couple of years will prove fruitful for the luxury hotel market. Indeed, other large shareholders believe that asset sales would be even stronger a couple of years from now once the Company has improved operations. Shareholders find themselves in good company: Cascade Investment, the investment arm of Bill Gates, owns nearly 7%; Canada's Woodbridge owns nearly 13%.

Luxury hotels, like those owned by Strategic, have proven to be good stores of value over time. In 2011, the Ritz-Carlton Moscow was sold for $600 million, or $1.8 million per room, by Verny Capital. Last year, a majority interest in New York's Plaza Hotel was sold at a total valuation of $575 million for 230 rooms plus retail space. That's $2.3 million per room, which should be discounted considering the retail space. Strategic's portfolio consists of 8,271 rooms, although Strategic doesn't own 100% of these rooms. I don't have the precise number, but I do believe actual ownership is in excess of 6,000 rooms (I know Strategic owns the vast majority of its properties). At $1 million per room, the total value is $6 billion; at $1.5 million per room, the value is $9 billion. Strategic currently has an enterprise value of under $4 billion -- not a bad place to park your dollars for the next few years.

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