Luxury Hotels Poised for a Comeback

Who knew Laurence Geller was a geek? The suave, British-born but all-American luxury hotel magnate has a soft spot for industrial engineering. Decades ago, Geller, who is now president and CEO of Strategic Hotels & Resorts, worked for an industrial engineering company that eventually developed a beneficial hotel practice. There he learned the importance of strict controls on labor in all business, especially hotels, and the effect those controls can have on both the bottom line and property values.

“Everything we did was based on principles of industrial engineering,” he says. “I had those ideas knocked into me: empirical analysis and a systematic approach. I’ve applied them through all the five decades I’ve been in the hotel business.”

The collapse of the economy particularly hurt luxury hotel firms like Strategic, which posted a $313 million loss in 2008. Geller marshaled his firm to adopt a series of tough operational and marketing steps to weather the storm.

In particular, Geller and his team of asset managers scrutinized existing labor practices — many of which were ingrained in the cultures of the brands that operate them — at all of the then 19 upper upscale and luxury hotels the real estate investment trust owned.

As a partial response to public market forces, Strategy began to prune its portfolio, selling a Four Seasons in Mexico City and a Renaissance in Paris, and backing out of a deal to buy hotel space under development next to its Fairmont Hotel in Chicago.

While not yet back on firm footing, Strategic has shown improvements in its financial performance and key lodging industry benchmarks. In the first quarter, the firm trimmed its net loss from $43 million in 2009 to $40.3 million this year.

Similarly, funds from operations, a key REIT metric, improved year over year from an $11.5 million loss in 2009 to a $5.4 million loss in the most recent quarter. He forecasts increases in revenue per available room (RevPAR) between 6% and 8% for the second quarter, driven by hikes in the average room rate.

In speaking with analysts last week, Geller stressed operating performance improvements the company tracked through the first quarter. While RevPAR fell 1.6% in January, it flattened in February and rose 3.6% in March. Compression nights, or the number of nights the company achieved above 90% occupancy, grew from 118 across the chain in the first quarter of 2009 to 239 this quarter.

As part of its quarterly earnings release, the firm announced it closed on a $317.8 million, non-recourse mortgage agreement with Metropolitan Life and secured by its Westin St. Francis in San Francisco and Chicago Fairmont properties. On Monday of this week, Strategic said it will issue a secondary stock offering and use the funds to buy back bonds that come due in 2012. In the offering, the firm will sell as many as 46 million shares of its stock.

Under the deal with Met Life, two mortgages for $346 million that were due to mature this year and next were replaced with a new loan at 6.09% interest that matures in 2017. As part of the agreement, Strategic paid $26 million on the combined principal of the loans.

How Strategic navigated its way through the recessionary minefield and what the future holds for the REIT were several of many subjects Geller discussed during a lengthy interview in his Chicago office last month.

Watkins: How does this downturn compare with others you’ve experienced?

Geller: I could always see the cyclical resonance between Europe and the U.S. because of the travel patterns, but I’ve never seen a global situation like this. The depth and the speed of it astonished me.

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