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It’s been a little over two years since Chicago-based Strategic Hotels & Resorts went public, and very little dust has been allowed to gather since then. President and CEO Laurence Geller and his team have launched an aggressive campaign of acquisitions and dispositions, both with a focus on retaining those assets–luxury only, thank you–that promise long-term enhancement potential. Included in the properties Strategic has added in the past year alone are the Westin St. Francis (for $440 million) in San Francisco; the Four Seasons Washington, DC (for nearly $170 million); and the Chicago Fairmont (for $154 million). Performance figures at the end of 2005 revealed total shareholder returns of 31% with RevPAR improvements of 12.5% and total RevPAR, a big mint on Strategic’s pillow, grew by 11.4%. In an exclusive interview, Geller explained his rather aggressive–and often contrarian–attack on the hotel investment market.

GlobeSt.com: So how are you doing compared to last year?

Geller: Spectacular. It’s hard to do year-on-year comps on us because after we went public, the company was split into two and we were left with properties that were not the magic properties for the long term. So we have sold and bought, and by the end of Q2 of next year the only original asset that will remain of the US portfolio is the Lowe’s Hotel in Santa Monica, CA. That’s a pretty telling transformational act. We’ve turned this company into the high-end lodging REIT, and every one of our assets has a defined and accretive three-to-four-year master plan.

GlobeSt.com: What does that mean?

Geller: It means that if they don’t meet the quality standards or they don’t have the growth opportunity, even though it’s like selling my children, I sell my children. So year-on-year comps are tough because some assets we had, some we didn’t have. But in general we’ve outperformed everyone in terms of RevPAR and total RevPAR.

GlobeSt.com: Total RevPAR?

Geller: Our goal is to have 50% of our revenue coming from non-rooms. My theory is that a hotel is a mixed-use development and the rooms are the anchor tenant. We’re just under that goal in this second full year, and next year I hope we can get to that, although–thank goodness–room rates are increasing high enough that it’s a challenge. No one seems to think about total RevPAR–selling antennas on the roof, retailing, garage parking. They take the dough but they don’t measure themselves against it. I care about yield per sf, not just yield per room.

The second philosophical problem I have with the way people look at our industry is when they discuss percentage margins. I don’t mind building three more restaurants as long as they’re profitable, even if they’re making only 25% on margin.

GlobeSt.com: In 2005 you did about $455 million in acquisitions. What does it look like for 2006?

Geller: I think it’s going to be probably about $2 billion this year.

GlobeSt.com: And dispositions?

Geller: We’ve been selling so much. We’ve probably sold $300 million or $400 million, and we’ll probably sell another $250 million in the next few months. So between the money we raised in sales and the money we’ve raised in equity offerings this year we’ve got an enormous amount of liquidity.GlobeSt.com: In last year’s annual report you outlined certain goals for 2006. Let’s see how you did in each.

Geller: So you can hang me by my own words?

GlobeSt.com: Exactly. The first is to exceed peer averages for growth and RevPAR.

Geller: We’ve done it. Essentially, we did it in two ways. First, we have quality products. Second, we’ve developed a room-rate pricing model. We look at what consumers are saying and we look at demand and we make sure we’re pricing or repricing appropriate to that research.

GlobeSt.com: Next on the list was expanding business-segment margins and profit by containing cost and improving productivity.

Geller: We pioneered an industrial-engineering system and refined it over the years. We break down every job into hours per job and then look at how many hours are really necessary. The jobs, of course, have to be done to a hotel’s quality standards.

GlobeSt.com: Next up was continuing to refine and implement internal investment strategies that return short-, medium- and long-term organic growth and cash flow.

Geller: That goes to our major point of difference from the competition. We have three major types of capital: financial, human and intellectual. Our job is to invest all of that capital into a project. For instance, we used to own Embassy Suites. After a year there was nothing more we could fiddle with, so they were just cash cows. That doesn’t help us. We want only those hotels where we have continual three-year plan in which to enhance and improve.

We own the Ritz Carlton Half Moon Bay in California. When we bought it we found the hotel was marketed at Baby Boomers, but the decision-makers for the meetings and the leisure business are for the most part Gen-Xers. Our consumer research showed that they found the hotel boring. We had 60 rooms with fireplaces and they get $50 more per night. So we took 50-odd rooms that open up to the grounds and built fireplaces into the patios. A sum total of $1,400 per room gets us $62 more per night. We changed the customer base, we rebuilt retailing, we put energy into the hotel and we made money doing it. That’s internal enhancement.

GlobeSt.com: Another goal for 2006 was to maintain a strong balance sheet that ensures access to capital, but you warned about remaining disciplined about re-entering the market for additional funding. Explain.

Geller: We made some bold decisions here. We looked at the cycle and our disposition program and determined to refinance to get cheaper, more flexible debt. We also said we would go into the equity market to raise money, de-lever our balance sheet and we will be positioned to take advantage of any opportunity by using our balance sheet. It’s controversial, but we were disciplined about it and our balance sheet is beautiful. We’ve transformed this company deliberately. We played the cycle properly, and although the cycle is strong, the velocity of rate increase will taper down. Having said that, as they taper down we’ll be bringing incremental earnings to the properties in vast amounts.

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