- Strategic owns luxury hotels including Manhattan's Essex House
- Transaction is valued at about $6 billion including debt
Blackstone Group LP agreed to buy Strategic Hotels & Resorts Inc. for about $3.93 billion, expanding its lodging holdings to include luxury properties such as Manhattan’s Essex House and the Ritz-Carlton in Half Moon Bay, California.
Blackstone offered $14.25 a share in cash for Strategic, about 13 percent more than the unaffected intraday trading price on July 23, when Bloomberg reported on a potential transaction for the Chicago-based real estate investment trust. The firm also will buy the outstanding units of a subsidiary, Strategic Hotels Funding LLC, not held by the company, according to a statement Tuesday.
Blackstone, the world’s largest private-equity firm, is wagering on increasing demand for luxury hotels. In May, Blackstone bought three high-end resorts -- the JW Marriott and the Ritz-Carlton in Orlando, Florida, and the JW Marriott Phoenix Desert Ridge in Arizona -- for about $1.25 billion from a group led by Paulson & Co. The New York-based firm is also the biggest shareholder in hotel companies Hilton Worldwide Holdings Inc. and LaQuinta Holdings Inc.
The Strategic deal “reinforces the fact that Blackstone has a lot of capital to put to work,” Michael Kim, an analyst who covers the firm at Sandler O’Neill & Partners LP in New York, said in a telephone interview. “They’re certainly still finding opportunities to deploy that capital.”
Blackstone shares climbed 5.2 percent to close at $35.41. Strategic rose 3.5 percent to $14.07.
Strategic owns 18 high-end properties in urban centers and resort areas, including the Four Seasons in Jackson Hole, Wyoming, and the Fairmont in Scottsdale, Arizona. The REIT had hired bankers to explore a sale and attracted suitors including Bill Gates’s Cascade Investment, which increased its stake last month to 9.8 percent.
Upon acquiring Strategic, Blackstone may end up selling the assets individually to investors seeking trophy properties, much the way it’s been doing with buildings acquired in its 2007 takeover of Equity Office Properties Trust, said Ian Weissman, head of real estate research at Credit Suisse Group AG in New York.
“What Blackstone is very good at is being this wholesale-to-retail buyer,”
Weissman said in a telephone interview. “They buy portfolios of assets and then sell them to interested parties. Wealthy individuals don’t want to own a portfolio of assets, they want to own a single trophy asset.”
Weissman has an outperform rating on Strategic and last month set a share-price target of $17.
Peter Rose, a Blackstone spokesman, declined to comment on the transaction.
Strategic had a previous business relationship with Blackstone, jointly owning the luxury Hotel del Coronado in San Diego. Strategic took full control of that property last year after buying Blackstone’s stake.
“The board thoroughly considered various alternatives over the course of the past few years, and this all-cash offer from Blackstone creates significant stockholder value with a high degree of execution certainty,” Strategic Chairman and Chief Executive Officer Raymond L. “Rip” Gellein said in Tuesday’s statement.
Blackstone’s purchase is expected to be completed in the first quarter of 2016 and isn’t subject to a financing contingency, the companies said. Including debt, the transaction is valued at about $6 billion.
The occupancy rate at luxury properties reached 70.9 percent this year through June, up from 69.2 percent a year earlier, according to Hendersonville, Tennessee-based research firm STR Inc.
Blackstone’s bid for Strategic suggests that hotel values still have room to climb, said Lukas Hartwich, a lodging analyst at Green Street Advisors LLC.
“It’s a good vote of confidence that we’ve at least got a couple more years to go,” he said in an interview. “I don’t think Blackstone would be buying this portfolio if they thought we were about to head off a cliff.”