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Boardroom Maneuverings May Dictate Next Moves at Two Luxury Hotel REITs

Investors Agitate as Sale Prices for Luxury Hotels Outpace Luxury Hotel REIT Stock Prices
June 19, 2013
As the hotel investment market has started heating up, so too has the jockeying for control of two luxury hotel REITs: Morgans Hotel Group Co. and Strategic Hotels & Resorts.

Morgans Hotel Group Co. had been preparing to explore a sale of the company should its board of director nominees get re-elected at last week’s annual meeting. However, this week the firm's senior management is re-evaluating options after stockholders voted out its entire slate of directors and voted in seven new board members.

And separately, a hedge fund operator has stirred up the potential sale of Strategic Hotels & Resorts.

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Out with the Old; In with the New

Morgans Hotel stockholders voted overwhelmingly last week to replace the established board with an entirely new slate of nominees put forward by OTK Associates LLC, the largest shareholder of Morgans Hotel with 13.9% of the outstanding common stock of the company.

"The outcome of this vote sends a clear and irrefutable message from Morgans stockholders that meaningful change was needed at the company," said Michael Olshan, a founding member of OTK. "The new board is eager to begin working constructively to address the company’s balance sheet and expense structure, and to run the company in a manner that is in the best interest of all stockholders.

"We think Morgans’ best days are ahead and look forward to working together to return the company to its rightful place as the leading international boutique hotel platform," Olshan added.

The election results do not necessarily mean a sale of the international hotel operator is off the table, nor does it mean that a sale will be pursued.

Leading up to the annual meeting, Olshan said the seven nominees who were subsequently voted in would be prepared to evaluate "any and all strategic alternatives in an unbiased, disinterested fashion.”

Sensing the end was coming, the previous board adopted a resolution just prior to the annual meeting approving the nomination of OTK’s nominees for election. That move ensured that the election of OTK’s nominees at the 2013 Annual Meeting would not constitute a “Change of Control” of the company, which would have triggered repayment of some outstanding bonds.

New York-based Morgans Hotel Group is widely credited as the creator of the "boutique" hotel and operates Delano in South Beach, Mondrian in three markets - Los Angeles, South Beach and New York -- Hudson in New York, Morgans and Royalton in New York, Shore Club in South Beach, Clift in San Francisco, Ames in Boston and Sanderson and St Martins Lane in London. The firm has ownership interests or owns several of these hotels.

The hotel owner and operator also has other properties in various stages of completion, including Delano properties in Las Vegas; Cesme, Turkey and Moscow, Russia; Mondrian properties in London, England; Istanbul, Turkey; Doha, Qatar and Baha Mar in Nassau, The Bahamas; and a Hudson in London.

The firm also owns a 90% controlling interest in a food and beverage company called the Light Group.

Hedging Their Options

Meanwhile, a large independent shareholder of Strategic Hotels & Resorts hired some big guns to act as financial advisor to its investment in the REIT.

New York hedge fund operator Orange Capital LLC retained Houlihan Lokey to coordinate buyer interest in Strategic Hotels & Resorts. Houlihan Lokey also represented Orange Capital in advocating for the formation of an independent committee at Charter Hall Office REIT that led to the auction of its $1.7 billion U.S. office portfolio.

The sale of Strategic would be an outcome Lewis has pushing since gaining control of more than 3% of the REIT’s shares earlier this year. Lewis started a very public battle to get Chicago-based Strategic Hotels & Resorts to sell its 18 luxury hotels with 8,271 rooms and return the money to shareholders.

However, the REIT has long resisted such a move and has not publicly budged from its position that it was not for sale, nor has it publicly confirmed news reports that it has hired a financial advisor, identified as Eastdil Secured.

"We noted with great interest a story by Reuters and The Wall Street Journal that Strategic Hotels may have hired a financial advisor to sell the company,” Daniel Lewis, managing partner of Orange Capital said. "We urge Strategic Hotels to publicly confirm the recent press reports so that interested buyers understand the objective and scope of any sale process."

Lewis is also pushing for the REIT to form an independent committee to pursue a sale, including hiring financial and legal advisors.

"We reiterate our position that absent a sale, management lacks a credible long-term plan for creating shareholder value," Lewis said. "A sale of the company would likely result in proceeds of up to $14 per share, or approximately 82% above the company’s closing price on June 12."

Lewis argues that private market values for luxury hotel properties have far exceeded public market valuations, and further believes there is a large pool of well-capitalized buyers for luxury hotels.

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