Strategic Hotels Worth $16.50 If It Gets Acquired By A Private Equity

Shares of

spiked higher last week after media reports suggested the company has hired bankers to consider strategic alternatives, including a potential sale of itself. In a report published Monday, Credit Suisse analyst Ian Weissman analyzed the company under a takeout scenario and placed a $16.50 per share price tag on a potential sale. According to Weissman, Strategic Hotels is a "much better" company today than it was three years ago when it was first exploring a sale. The analyst expanded that the company's "much improved" ultra-luxury portfolio could receive "material interest" from sovereign wealth and generational wealth investors while its balance sheet is in "good shape" at a 4.5x level. Weissman also noted that the company "simplified its story" by consolidating JVs and the expiration of its CEO Rip Gellein's contract at the end of 2015 also adds to the story. The analyst further broke down his assumptions which derived a $16.50 per share buyout value: 1) 7.8 percent unlevered internal rate of return (IRR) versus the 8.5 to 9.0 percent used for the company's lodging peers, and approximately six percent for high quality malls, office and apartments. 2) A five percent annualized same-store net operating income (SSNOI) growth through 2019 (versus a 2014 growth of 15 percent). 3) An assumed 5.8 percent cap rate. Based on the three assumptions, Weissman arrives at a take-out value north of $16.50. Finally, the analyst stated that his $16.50 takeout price target is "purely for the sake of a potential takeout by a sovereign wealth or trophy buyer" as he is not making any changes to his Outperform rating, $15.50 net asset value estimate and $15 price target.