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Strategic Hotels: Our Portfolio Is Not for Sale

REIT Rebuffs Hedge Fund Calling for Liquidation of Hotel Portfolio
February 20, 2013
"Stay the course," Raymond L. “Rip” Gellein Jr., Chairman of the Board of Directors and Chief Executive Officer for Strategic Hotels & Resorts, is telling investors.
"Stay the course," Raymond L. “Rip” Gellein Jr., Chairman of the Board of Directors and Chief Executive Officer for Strategic Hotels & Resorts, is telling investors.
If New York hedge fund operator Orange Capital LLC has its way, Strategic Hotels & Resorts will sell its 18 luxury hotels with 8,271 rooms and return the money to shareholders, which includes Orange Capital as of a few weeks ago. However, the Chicago-based REIT has long resisted such a move and is not budging from its position after receiving a letter from the hedge fund this month requesting disposition of the hotels.

Saying the letter does not constitute an offer to acquire the REIT, Strategic Hotels issued this response to its shareholders.

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“The board of directors of Strategic Hotels & Resorts acknowledges receipt of a letter dated Feb. 1, 2013, from Orange Capital, a shareholder who only recently acquired shares in the company. The board carefully reviewed the letter in its entirety and strongly disagrees with certain assumptions and conclusions outlined in the communication. While we are disappointed Orange Capital released its letter publicly to advance its short-term trading interest, we remain focused on maximizing the longer-term interests of our shareholders.”

In a filing with the U.S. Securities & Exchange Commission regarding its stock holdings as of Dec. 31, 2012, Orange Capital did not list any shares of Strategic Hotels & Resorts. In a press release this week, the fund claims to own 6.25 million shares of Strategic common stock.

The REIT’s stock experienced unusually heavy trading volume on Jan. 23, 2013, and since that time its stock price has jumped from about $6.75/share to $7.75/share this week.

“Strategic Hotels is acknowledged to have among the highest quality portfolios in the industry and remains focused on delivering on its well-articulated operating and balance sheet strategy,” the REIT’s response continued. “We remain open to strategic opportunities to enhance our already pristine portfolio and will always act to enhance long-term shareholder value.”

Strategic Hotels & Resorts was asked about just such of disposition strategy at its first quarter earnings conference call this past month and pretty much gave the same response.

“I don’t think you are going to see a new strategy, because I think anybody that came in and looked at this portfolio of hotels, knows it is a unique portfolio,” Rip Gellein, Strategic Hotels’ chairman and CEO said at that call. “I don’t think you will see us be real aggressive or in some different way begin to lever the company up or chase deals at this point in time. I think being prudent and creative, both with our internal capital as well as finding new assets, is the prudent way to go. I like our strategy.”

In its letter to the REIT, Orange Capital said it believes “the sale of Strategic’s unique and highly attractive properties would likely result in proceeds of $11-$14 per share, a 40% to 79% premium over the most recent closing price. Orange’s valuation is based upon a property-level analysis using capitalization rates, replacement cost and comparable M&A transactions. It also takes into consideration qualitative variables such as the scarcity value of luxury hotel assets and conditions in the capital markets.”

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