Analysts offer blueprint for Blackstone’s buy
Analysts offer blueprint for Blackstone’s buy
09 SEPTEMBER 2015 9:36 AM
It’s unclear how Blackstone plans to reap returns from its $6-billion buy of Strategic Hotels. Two analysts pointed to the investment firm’s 2007 acquisition and subsequent sell-off of an office REIT as one likely outcome. 
REPORT FROM THE U.S.–Though Blackstone Real Estate Partners’ plans for Strategic Hotels & Resorts are as of yet unclear, one of the private equity firm’s more recent portfolio transactions could provide a roadmap to generating returns for investors, according to analysts. 
The deal, announced Tuesday, would see affiliates of Blackstone buy Strategic for $14.25 a share, or a total of approximately $6 billion.
Though Blackstone has been busy in recent years acquiring hotel companies and taking them public, two analysts pointed to the company’s $39-billion buy of office giant Equity Office Properties Trust in 2007 as a more analogous blueprint. After that deal, Blackstone quickly flipped for a profit many of the buildings for $36 billion*, according to the Wall Street Journal.
There’s great demand for luxury hotel real estate, particularly from foreign investors, sovereign wealth funds and private equity, said David Loeb, senior research analyst for R.W. Baird. Blackstone could sell off Strategic’s 17 mostly high-end hotels one by one to take advantage. 
“(Individual) luxury hotels and portfolios of select service is where the money is,” he said.
Loeb, who does not cover Blackstone, said he wouldn’t be surprised if the firm went the same route as it did with Equity Office Properties. 
“They quickly got out of risk,” he said. “They were able to very quickly essentially have no capital at risk … It was all gravy for their investors.”
Ian Weissman, managing director of REIT research for Credit Suisse, who covers Strategic but not Blackstone, noted that Equity Office Properties deal in a separate interview. 
“(Blackstone) made a lot of money selling the assets individually,” he said, although he does notexpect any immediate trades as a result of Strategic’s acquisition. 
If Blackstone wanted to go the consolidation route, Weissman said the window of opportunity is open for another 12 months, depending on an individual’s view of the cycle. 
Peter Rose, senior managing director of public affairs for Blackstone, declined to comment because of the public nature of the transaction. A spokesperson for Strategic did not return a call seeking comment.
A long time coming
News of the planned acquisition broke the morning of 8 September after months of speculation about the future of Strategic
Strategic filed its 8-K form with the U.S. Securities and Exchange Commission the afternoon of 8 September.
Though rumors about the future of Strategic Hotels picked up in July and then again in August, they’ve existed for years. When Laurence Geller stepped down as president, CEO and a member of the company’s board of directors in 2012, there was uncertainty who would take over leadership, Weissman said. Strategic had a high-quality portfolio with a great deal of capital, he added. 
“Management has done a very, very good job the last few years positioning the portfolio,” Weissman said.
Loeb suspects the discussions were going on for months ahead of Strategic’s July and August statements regarding exploring alternative options. Then the news broke that Cascade Investments wanted to participate in the process, he said, probably because it suspected something would happen and it wanted a seat at the table.
The companies’ agreed-to upon price of $14.25 a share is rich, Weissman said, but analysts had estimated the sale could go even higher at $16 a share. The pool of buyers likely was thin, though, which explains the $14.25 price, he said. 
The market responded favorably to news of the deal. The Baird/STR Hotel Stock Index was up 2.6% in the day’s trading. The REIT sub-index closed up 2.6% as well.

Correction, 9 September 2015: An earlier version of the story stated that Blackstone Group sold buildings in the Equity Office Properties Trust portfolio for $36 million. 

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