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Marley DelDuchetto/MEDILL

Strategic Hotels' current funds from operations is considerably higher than it was in the same quarter of 2010.

Strategic reports third-quarter loss after CEO departs

by Marley DelDuchetto
Nov 08, 2012

Strategic Hotels and Resorts Inc., damaged by one-time charges, reported a significant third-quarter net loss. But underlying profitability at the luxury hotel real company strengthened as it deleveraged and restructured its balance sheet.

The Chicago-based hospitality real estate investment trust lost $8.6 million, or 5 cents per share, in the latest quarter, due primarily to $3 million in transaction costs from its acquisition of Jumeirah Essex House in New York and a $2.7 million charge related to a tax assessment at Hotel Del Coronado in California. Strategic has appealed the assessment and the company’s Chief Financial Officer Diane Morefield said she “expects a reversal.” Strategic’s loss narrowed from last year’s deficit of $11.9 million, or 6 cents per share.

The bottom-line results of REITS are typically overlooked by investors in favor of a more commonly accepted measure of performance known as funds from operations, or FFO. FFO removes the skewing effect of depreciation.

Strategic’s FFO rose 51 percent to $17.0 million, or 8 cents per share, from $11.3 million, or 6 cents per share, in the same quarter last year. On that basis, Strategic’s earnings fell 1 cent short of the estimate of analysts surveyed by Bloomberg.

Like many players in the hospitality industry, Strategic fell victim to the recession and found itself highly leveraged as the economic downturn took hold. Its stock fell as low as 69 cents in 2009. Since then, the company has cut its debt in half and its stock has rebounded to more than $6 a share.

Strategic’s founder and CEO Laurence Geller unexpectedly resigned Nov. 2. The stock price soared, rising as much as 18 percent, after the announcement. Geller’s departure led many analysts to believe the company could be putting itself up for sale.

"It is less likely the company will exist without him, so there is the potential of a transaction where it is purchased by someone else or goes private," said analyst William Marks of JMP Securities.

In an exclusive interview with Medill Reports, Geller said, “The company will continue on its course as they were before.” Geller would not comment on whether or not he would make an offer for the company. In his exit agreement, Geller, who is 64, is prohibited from attempting to purchase any or all parts of Strategic for 18 months, according to documents filed with the Securities and Exchange Commission.

Strategic held a conference call Nov. 5 after the market closed to announce Geller’s resignation. On the call, many analysts questioned the timing and reasoning behind it. Ryan Meliker of MLV & Co. said it seemed “like a bizarre time to announce.” Bill Crow of Raymond James and several others tried to ask what led to the resignation but were all met with the same response: “We ended in a mutually agreed agreement.”

The company’s new CEO Raymond Gellein said, “The board and Laurence entered into the discussions on his contract and thought that this was a good time for him to go on to his next adventures, so the board and Laurence unanimously agreed on that.”

Strategic currently owns 18 properties in the U.S., Mexico and Europe with nearly 8,300 rooms. The REIT’s revenue per available room increased 4.4 percent for its urban hotels and 7.2 percent for its resorts in the third quarter. RevPAR is calculated by dividing the revenue for a hotel by the number of rooms. Jeff Donnelly, an analyst for Wells Fargo said, Strategic’s U.S. RevPAR is 5.8 percent than its competitors.’

“While Laurence has moved on, nothing else about our team, our strategy, our vision has changed,” Gellein said during a conference call with analysts Thursday morning. “We believe we have the right framework to continue moving forward with our strategy.”

The REIT’s strategy, known as “Strategic 2.0”, involves cutting management costs and expenses at individual properties, attracting high-profile restaurants and retailers for its properties, and offering more physical fitness opportunities and beauty treatments at its resorts. The company also is paying down debt.

Strategic owns hotels such as the Fairmont Chicago and the InterContinental Chicago. It expects RevPAR growth of 6 to 8 percent and FFO per share of 21 to 29 cents for the year. Donnelly noted that analysts’ “consensus is within this range.”

For the first nine months, Strategic lost $43.1 million, or 22 cents per share, compared with a loss of $7.8 million, or 4 cents per share, last year. Comparable FFO for the period, however, more than doubled to 21 cents per share from 9 cents per share in 2011.

“I am hugely optimistic about our potential,” Gellein said. “We have a unique portfolio and have worked really hard on our balance sheet. I think we’re in great shape and am very optimistic about the future.”

Strategic’s shares closed unchanged Thursday at $6.13.