“The Key Is to Outperform Your Competitors.”

By spending big even as it borrowed heavily, Strategic Hotels & Resorts appears to have survived the "AIG effect." An interview with Diane Morefield, CFO, Strategic Hotels & Resorts.

Over the past two years, Diane Morefield has proven that she has the “REIT” stuff. As CFO of Strategic Hotels & Resorts, she navigates the complex financial waters of a publicly traded real estate investment trust focused on the high end of the hospitality market. It is a segment that thrives in good times but is inevitably among the first to feel the pain whenever things turn sour. Therefore, the past two years have been particularly excruciating — or should have been. In fact, while the company’s stock price did plunge by 80%, it has rebounded strongly, and Morefield believes the best is yet to come. The 51-year-old CFO, a real estate veteran with an MBA from the University of Chicago, says that the company’s model, in which roughly three dozen employees set and manage the strategy for a $733 million hotel empire, has been tested and proven by the recession. She explains why.

The recession certainly hasn’t been easy for the hotel business. What proved to be your biggest challenge?

During the height of the crisis, we were very concerned about liquidity and, quite frankly, survival. One thing we did that proved critical was to become the first hospitality REIT to renegotiate our line of credit. We put in place a $400 million line in early 2009, secured by four of our hotels, and that gave us the liquidity we needed. Right now we have only about $40 million outstanding.

Did the stimulus spending benefit you in any way?

No, quite the opposite. I think some of the statements that the government made during the recession hurt hotels significantly, because they basically came out and said companies shouldn’t hold group meetings or even stay at hotels or resorts. It was literally referred to as the “AIG effect.” It hurt the entire industry and, ultimately, the average hotel worker, because if you’re selling fewer rooms you’re going to have to cut costs and that is going to hit housekeepers and busboys and bell captains.

The drop in business had quite an impact on your stock price, which has been notably volatile.

Financial-services firms are usually number one or two among our clientele, and that subset of our customer base dried up. Because we’re in the high-end, luxury part of the market, we’re probably going to be more volatile. When there is a downturn we tend to get hit harder, but we think our earnings are going to come back much faster and in more of a V shape because that’s always been the trend during recoveries. That is why you saw our stock price go up several hundred percent. [Editor's note: the stock rebounded from a March 2009 low of 61 cents a share to a May 2010 high of $6.64, and was trading at $4.26 at press time.]

Strategic Hotels is structured as a REIT. What does that mean in terms of what entity actually owns the hotels?

We, and therefore our investors, own the hotels, and we hire [property] managers such as the Four Seasons, Ritz-Carlton, and other well-known brands to manage them. The only real advantage of being a REIT is that you don’t pay corporate-level taxes, [but] on the other hand you are required to pay out virtually all of your earnings as dividends to your investors. [Also, a REIT] does offer an average individual investor the chance to own commercial real estate in an efficient investment vehicle. Another unique aspect is that many of the big hotel [brands] own some hotels and manage others, so they’re kind of a hybrid. That means that we both partner with and compete against Hyatt, Marriott, and the others I mentioned, depending on the market. Fortunately, we have very strong relationships with them.


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