PIA property: Is The Roosevelt Hotel worth over $1 billion?

It stands on the corner of 45th Street and Madison Avenue, in the heart of Midtown Manhattan, bearing a quintessentially American name. Yet The Roosevelt Hotel is the property of Pakistan International Airlines (PIA). As the conversation about the national carrier’s ailing finances continue to unfold, one of the questions that will invariably be asked is: how much is The Roosevelt Hotel worth, and would selling it help PIA? But a little knowledge of history is needed first.

The Roosevelt Hotel was completed in 1924 and is named in honour of former US President Theodore Roosevelt, who had previously been the governor of New York State. It has 1,015 rooms, including 52 suites. Some of the suites are among the most luxurious available in Manhattan. The hotel has a remarkably good location, adjacent to Grand Central Terminal, one of the two major railway stations in New York, and right in the middle of the largest business district in the US.

In 1979, PIA, through its subsidiary PIA Investments Limited, leased the hotel on a 20-year lease with the option to buy the hotel at a specified price at the end of the lease period. One of the investors in the deal was Prince Faisal bin Khalid bin Abdulaziz Al Saud of Saudi Arabia. The hotel is operated through a management contract by Interstate Hotels and Resorts – a subsidiary of Brookfield Asset Management, a Canadian investment firm.

In 1999, during the second administration of Prime Minister Nawaz Sharif, the government chose to exercise its option of purchase and bought the hotel, along with Prince Faisal, for $36.5 million. The previous owners engaged in a year-long battle in court, arguing that since the hotel was worth at least $250 million at the time, they should not be obliged to sell at the previously arranged price. New York courts ruled in favour of the Government of Pakistan in June 2000, though PIA was forced to pay off the $23 million mortgage on the hotel.

And so, in the early years of the Musharraf administration, the government came to own a prime piece of New York real estate and bought it at a steal of a price. Yet in reality, this was merely the recovery of what had until then been a losing deal for PIA. The Roosevelt Hotel had lost money for PIA for nearly every year between 1979 and 1999. The government bought out the Saudi prince’s share in 2005 for $40 million.

The government put up the hotel for sale in 2007 for $1 billion but was never able to close the deal, largely due to the near-simultaneous change in government in Islamabad and collapse in US real estate prices. In 2011, the government formally took the hotel off the market.

Now, with the government trying to restructure PIA, the hotel may once again be put up for sale. So how much is the hotel worth now?

According to many real estate experts, this is one of the best times to be selling a hotel in New York City. Several large, iconic hotels have recently been sold, creating a high benchmark for asking prices. The Waldorf-Astoria, one of the most famous hotels in the world, was recently sold by Hilton Hotels to Anbang Insurance Group – a Chinese insurance company – for $1.95 billion, which translates to $1.4 million per room. Two other hotels in Midtown Manhattan – the Park Lane Hotel and the Langham Place Fifth Avenue – recently sold for over $1 million per room. However, the average price of a hotel sold in Manhattan was $627,000 per room in 2014, according to a report by Bloomberg.

So what would that translate to for The Roosevelt Hotel? At the average price, the Roosevelt, with its 1,015 rooms, would sell for $636 million. If it sells for the prices of hotels sold in Midtown Manhattan, which are its true comparable, it would sell for between $1 billion and $1.4 billion in enterprise value.

In short, it is an extremely valuable asset that would fetch some much needed cash for the government. So should it be sold? Well, the consolidated financial statements of PIA showed that the hotel contributes a negligible amount in terms of annual cash flow to the airline, and offers no real direct strategic benefits. When an asset has a high market price, low cash flows and no real strategic value, it is usually a good time to sell.

Published in The Express Tribune, January 7^th, 2015.