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Strategic Hotel Capital Inc. (NYSE: BEE)

Strategic Hotel Capital Inc. (BEE), a self-administered and self-managed real estate investment trust (REIT), engages in the ownership and asset management of upper upscale and luxury hotels in North America and Europe. It owns the fee interest in 11 hotels, comprising approximately 4,961 rooms, located in Arizona, California, Florida, Illinois and Louisiana, as well as in Mexico; owns leasehold interests in hotels in Illinois, France and Germany comprising an aggregate of approximately 859 rooms; owns a 35% interest in a hotel in Prague, Czech Republic comprising approximately 372 rooms; owns an 85% interest in each of the InterContinental Hotel in Miami and the InterContinental Hotel in Chicago; and a 31% interest in and acts as asset manager for a joint venture that is developing the Four Seasons Residence Club Punta Mita, a luxury vacation home product.

The Company also manages seven hotels. The Company operates hotels under the brands of Embassy Suites, Four Seasons, Hilton, Hyatt, InterContinental, Loews, Marriott and Ritz-Carlton. The Company qualifies as a REIT under the Internal Revenue Code. As a REIT, it would not be subject to the federal income tax if it distributes 100% of its annual taxable income to its shareholders.

Strategic Hotel was co-founded by Laurence Geller in 1997 and is headquartered in Chicago, Illinois.

Share Statistics Sep-28-09			2007	2008	%Chg	Q2 2008	Q2 2009	% Chg
Symbol	BEE	Revenue, $Mn	968	975	0.8%	270	193	-28.7%
Current price	$2.51	Gross marg.	37.8%	35.6%	-2.1%	39.3%	31.8%	-7.4%
52wk Range:	0.00 – 9.00	Oper. margin	11.8%	-27.0%	-38.8%	15.5%	-26.3%	-41.8%
Avg Vol (3m):	2,265,070	Net margin	7.2%	-32.1%	-39.3%	6.8%	-40.7%	-47.4%
Market Cap.	167.62M
Dil. Shares Outst.	75.17M	EPS, $	0.52	-4.58	n/m	0.14	-1.14	n/m

Source: Reuters.com, SEC Filings.

Financial Summary

For the second quarter ended June 30, 2009, the Company’s revenue declined 29% to $193 million mainly due to lower occupancy and average daily rates at the operated hotels. Substantially all of BEE revenue is derived from the operation of 19 hotels with a total of 8,358 rooms.

Net loss attributable to common shareholders was $86.0 million, or $1.14 per diluted share, compared with net income attributable to common shareholders of $10.6 million, or $0.14 per diluted share, for the second quarter of 2008. Second quarter 2009 results include impairment of goodwill and other charges totaling $49.8 million, including impairment of goodwill of $41.9 million and write-offs of $7.9 million related to the abandonment of certain capital projects.

As of the end of second quarter 2009, the Company had $398.4 million available on its $400.0 million bank credit facility against $261.3 million total outstanding, leaving $137.1 million of liquidity. Certain financial covenants limit availability on the facility, including cash flow generated by five borrowing base assets, calculated on a trailing 12 month basis.

Analyst Consensus

According to Reuters Estimates, analysts are expecting the Company to report revenue of $727 million and EPS of -$1.66 per share for the fiscal year 2010.

	# of Estimates	Mean	High	Low	1 Year Ago
SALES (in US$ millions)
Quarter Ending Sep-09	4	183.81	186.30	181.00	231.62
Quarter Ending Dec-09	4	200.20	213.70	188.75	258.38
Year Ending Dec-09	5	758.08	768.00	746.00	992.11
Year Ending Dec-10	5	727.41	756.10	706.00	1,020.18
Earnings (US$ per share)
Quarter Ending Sep-09	1	-0.37	-0.37	-0.37	–
Quarter Ending Dec-09	1	-0.41	-0.41	-0.41	–
Year Ending Dec-10	1	-1.66	-1.66	-1.66	0.01
LT Growth Rate (%)	3	6.67	10.00	5.00	5.00

Source: Reuters, SEC Filings.

Six analysts polled by Thomson Reuters rate the Company with “Hold.”

Analyst Detail	Buy	Outperform	Hold	Underperform	Sell	No Opinion
Latest	0	0	5	1	0	0
4 weeks ago	0	0	5	1	0	0
2 months ago	0	0	5	1	0	0
3 months ago	0	0	5	1	1	0
Last year	0	0	9	2	0	0

Source: http://markets.ft.com/tearsheets/analysis.asp?s=BEE%3ANYQ

Investment Highlights

The Company operates as a self-administered and self-managed REIT that holds real estate interests and, through payments of dividends to stockholders, is permitted to reduce or avoid federal income taxes at the corporate level. BEE employs internationally known hotel management companies to operate its hotels for under management contracts. The Company currently owns or has investments in 19 hotels with a total of 8,358 rooms.

The Company’s Average daily rates declined from $292 in second quarter 2008 to $233 in second quarter 2009, while occupancy rates declined from 76.6% to 67.7% for the same period. As a result, the revenue per available room declined by 29.6% for second quarter 2009 compared to second quarter 2008. The Company expects revenue per available room and occupancy declines to continue through 2009.

The lodging industry is faced with a weakening operating environment hampered by lagging consumer confidence and restrained corporate spending leading to softness in both transient and group demand. It is unlikely that the industry will recover, until current economic trends reverse and liquidity returns to the credit markets. In addition, the outbreak of the H1N1 virus (swine flu) is expected to have an adverse effect on lodging industry operating results worldwide.

The Company is in advanced stages of implementation of hotel specific contingency plans designed to reduce costs and maximize efficiency at each hotel. This includes adjusting variable labor, eliminating fixed labor, reducing the hours of room service operations and other food and beverage outlets, and reducing the implementation of certain brand standards. The Company believes these efforts could improve profitability margins and attenuate the losses generated by hotel demand deterioration.

BEE entered into a joint-venture agreement on its existing 60-acre ocean front land parcel near the Four Seasons Punta Mita Resort in Nayarit, Mexico with Cantiles de Mita, S.A. de C.V., a wholly owned subsidiary of DINE, the master developer of Punta Mita and original seller of the land parcel. In exchange for a 50% interest in the land, the Company is released from its final installment payment of $17.5 million due in August 2009 and receives a preferred position which entitles BEE to receive the first $12.0 million of distributions generated from the project with any excess distributions split equally among the partners.

BEE has named Raymond L. “Rip” Gellein Jr. and Eugene F. Reilly as independent members of its board. Gellein was president of the global development group for Starwood Hotels and Resorts Worldwide Inc. before he resigned in March last year. Reilly is president of the Americas division for industrial real estate investment trust AMB Property Corp. The two appointments bring Strategic Hotels’ board to nine members.

Technical Analysis

Source: http://stockcharts.com/h-sc/ui

BEE is trading above its 13-day moving average. This is considered to be the sign of a bullish trend. There is added weight to this indication because the moving average is rising and suggests that there has been buying interest in this stock.

BEE’s recent volatility has been greater than normal. This is evidenced by the increased distance between the upper and lower Bollinger Bands. These bands measure volatility using standard deviation and a large width is due to high volatility. Additionally, BEE is trading within its Bollinger Bands. This is a normal condition and suggests that the stock is neither overbought nor oversold relative to the recent price action.

The MACD for BEE currently indicates a strong bullish signal for two reasons. First, the MACD is above the signal line, a 9-day moving average. Second, the MACD is above 0, which implies that the underlying moving averages are trending higher.

Comparative Analysis

The luxury lodging industry is still affected by the bad economic environment; however the sector is likely to follow the economy, which is poised to reverse. The recovery is expected to make people start spending more money on luxury vacations and as a result the operations and profitability at BEE could turn to normality.

Company Name	Ticker	Price per	Mrkt. Cap.	P/E		P/S
Sep-28-2009	symbol	Share, $	$ Mn	2009	2010	2009	2010
Diamondrock Hospitality Co.	DRH	7.77	788	9.53	11.98	1.35	1.38
Ashford Hospitality Trust Inc.	AHT	3.57	240	3.25	4.43	0.25	0.26
Host Hotels & Resorts Inc.	HST	11.03	6,680	22.57	19.40	1.60	1.66
LaSalle Hotel Properties	LHO	17.67	1,100	11.00	14.85	1.83	1.92
FelCor Lodging Trust Inc.	FCH	4.56	298	6.05	10.70	0.32	0.32
Hospitality Properties Trust	HPT	19.90	2,260	5.79	6.41	2.15	2.11
Median				7.79	11.34	1.48	1.52
Strategic Hotels & Resorts Inc.	BEE	2.51	168	n/m	n/m	0.22	0.23

Source: Thomson Financial, Yahoo! Finance, Analyst estimates.

Insider Trading Activity

Net Share Purchase Activity

Insider Purchases – Last 6 Months
	Shares	Trans
Purchases	N/A	0
Sales	227,650	2
Net Shares Purchased (Sold)	(227,650)	2
Total Insider Shares Held	6.22M	N/A
% Net Shares Purchased (Sold)	(3.5%)	N/A

Data provided by Thomson Financial

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