At Cove Street we are constantly weighing three key variables: business, value, and people. In the case of Belmond Ltd., we are confident in the company’s value and the underlying hotel business. However—and it’s a big however—there is a problem in the form of a disadvantaged corporate governance structure with B shares voted by a Trust that effectively controls the company. We hate this, as do many others, as evidenced by what we estimate is at least a 50% discount to intrinsic value.

But, hope can spring eternal. In September of 2015, Belmond replaced their CEO—who we liked—with Roeland Vos, a gentleman with a successful track record as President of Europe, Africa, and the Middle East at Starwood. Roland has done nothing wrong to date and his initial plan was conceptually solid: improve operations, enhance existing properties through intelligent capex, and build a base of management contracts in an effort to boost the company’s profitability and growth rate. What’s not to like? But as a colleague once noted, strategy is for amateurs and execution for adults.

So on to the Analyst day in June. Let’s just say the announced plan was so “aspirational” and, in our view, so poorly timed that…well, it just did not go well.
Here is the first question from the room:

We’ve kind of heard this before in a variety of different ways over the years. I feel like it’s déjà vu all over again. The plan you put forth is not a whole lot different from what we heard a few years ago, albeit with a potentially highly risky acquisition strategy in an attempt to double your number of properties and in a market right now where values outside of your hotels are fairly premium priced. And with Chinese bidders bidding the values up, it’s hard for us to really sit here and imagine that you’re going to create a lot of value in acquisition strategy…I think everybody is owed a little more than just here’s a plan and oh, by the way, we’re going to spend a fortune on buying hotels. I really fail — I fail to see like what value add that you guys bring relative to any other more diversified premier luxury brand that’s better known than Belmond. Those list of hotels that you mentioned, One & Only, et cetera, they’re much better owned. They’re real global brands that people identify with. You have phenomenal properties, but there’s not really much of our brand beyond the brand equity of each of the hotel properties themselves. So I just—I’m trying to wonder how we’re going to really generate value here and really how you expect to compete with other buyers when properties are available for sale that were going to really add much value.

And to save time and space, the next 4 questions were exactly the same.

In fairness to the new CEO, he has not done anything dumb yet, and if Barry Sternlicht, his boss at Starwood had listened to us, he wouldn’t be in the process of selling for a $14 billion enterprise value. (And he just bought 4.9% of Belmond.) But every bone in our body in this interest rate and economic environment says you should be a seller of real estate, not a buyer. And all the alleged great minds in real estate— Sternlicht, Zell, Roth et al.—seem to be of the same mind.

In a world of low interest rates, weakening emerging market currencies, and Chinese investment constraints, hotels have recently become one of the assets of choice for “noneconomic” buyers (also known as dumb money). Anbang Insurance Group recently paid $1.95B for the Waldorf Astoria or $1.3mm for each room. China’s Sunshine Insurance group payed more than $2mm per room for the Baccarat Hotel & Residences. These valuations may make more sense for Chinese buyers who face a likely erosion in the value of the Yuan that will offset part of the absurdly high prices they are paying. However it is not just international buyers, but also U.S. firms that are paying ever higher valuations for trophy hotel assets. A Chicago-based real estate investment trust recently purchased the Montage hotel in Laguna for a similar price of $1.3mm per room or $360mm total.

Belmond owns one of the most unique portfolios of high end luxury hotels in the world. In many cases their locations are literally not replicable. Their RevPAR is 50% higher than the Four Seasons. It screams uneconomic trophy purchase for an oil Sultan or Russian oligarch.

But we have a problem. The company bets that the present value of a “2020” plan (about the 50th one we have seen out of corporate America this year) will greatly exceed the present value of selling the company now. There is not a zero probability he is right and we are wrong, but the bird in the hand is very, very, very much less of a guess than a bird in the 2020 bush.

We have material upside here with a downside that is highly likely to be boredom given the issues noted above. In a market where a lot of things are elevated, we can do worse.