Strategic Hotels to sell Paris property
(Crain's) — Strategic Hotels & Resorts Inc. is selling a hotel in Paris for $51.5 million, another step in the company's efforts to reduce its debt burden amid a severe industry downturn.
Illustrating just how much hotel values have fallen, the sale price for the 116-room Renaissance Paris Le Parc Trocadero is nearly 45% less than the $93.6 million that Strategic paid for it a little more than two years ago.
The Chicago-based real estate investment trust, which invested another $10 million in the property, took a charge in the third quarter to write down the hotel's value by $30.8 million.
But the sale will help the company shore up its highly leveraged balance sheet, increasing the odds that Strategic will survive the recession.
"We view the sale as a solid positive for (Strategic's) liquidity, providing the company with necessary breathing room as it enters another challenging year," Keefe Bruyette & Woods Inc. analysts Smedes Rose and Daniel Cooney write in a report.
Strategic will receive all the proceeds from the sale because the hotel has no debt. The company says it has agreed to sell the property to an investment group affiliated with Houston-based Westmont Hospitality Group. The transaction is expected to close within 45 days.
The sale "reduces corporate overhead related to our European operations, and is in line with the company's disciplined, strategic disposition strategy," Strategic CEO Laurence Geller says in a news release.
In October, the REIT sold the 240-room Four Seasons Mexico City for $54 million. After the Le Parc sale, the company will own 17 hotels, including two in downtown Chicago, the Fairmont Chicago and InterContinental Chicago.
The price of the Paris hotel represents a 4.8% yield, or capitalization rate, based on the property's current net operating income. The proceeds will likely go towards paying down Strategic's $313.5-million line of credit, which had a balance of $210 million in early November, according to the KBW report.
The company now must decide what to do with a 372-room InterContinental hotel it owns in Prague in the Czech Republic. Given problems with the hotel's $152.2-million loan, some analysts expect Strategic to hand the property back to its lender, Wiesbaden, Germany-based Aareal Bank.
In August, Aareal demanded that Strategic pay e29.5 million, or about $42.9 million, to bring the loan back into balance, according to the company's third-quarter report. Strategic had to make the payment by Dec. 5 to prevent the loan from going into default. The InterContinental has also violated a loan covenant requiring a 1.4 ratio of income to interest payments.
"Management has assessed that, in the worst case, a failure to maintain financial covenants in the Prague loan and foreclosure by the lender would not have a material impact to the Company's liquidity," the third-quarter report said.
That's why Strategic may simply walk away from the hotel.
"We believe (Strategic) will choose to convey this property to the lender rather than invest additional funds; given that the loan is non-recourse, the impact to the company would be minimal," write the KBW analysts in a November report.
Mr. Geller declines to discuss the loan but says "we are working very collaboratively with the lender." An Aareal Bank spokesman wasn't immediately available Wednesday afternoon.
Strategic shares rose 16 cents, or 9%, Wednesday to close at $1.92. The shares have risen 14% this year, vs. a 53% gain for the Bloomberg REIT Hotels Index.
