Sunstone Seeks Surface Opportunities

Sunstone Hotel Investors Inc. has raised some speculation as to the future of its Renaissance Orlando Resort at SeaWorld after buying the land underneath the 778-room hotel earlier this month. The San Clemente, CA-based REIT paid $30.4 million for 32.6 acres that it has occupied for years under a third-party ground lease.

“This acquisition advances our strategy of creating stockholder value by redeploying capital into our existing portfolio,” Robert A. Alter, chairman and CEO of Sunstone, stated in a press release announcing the acquisition Sept. 5. He added that the transaction was “a unique opportunity to consolidate the fee interest in a core hotel.”

Bryan Giglia, Sunstone’s VP of corporate finance, tells GlobeSt.com that the all-cash buyout of the ground lease was done to take advantage of falling prices for commercial land in Florida. The owner recently completed $27 million worth of renovations to the Renaissance Orlando Resort, near SeaWorld and in proximity to other local theme parks.

However, local observers wondering whether Sunstone is positioning the asset for possible sale. The transaction closed three months after Sunstone sold the 726-room Hyatt Regency Century Plaza hotel for $366.5 million, after it had been renovated, rebranded and repositioned.

While the Los Angeles hotel was considered a “previously underperforming hotel,” Sunstone executives say the one in Orlando continues to perform well after renovations, which included guest room upgrades, a redesigned 10-story atrium and 185,000 sf of refurbished meeting space. Giglia will not comment on whether the hotel is being positioned for sale.

Sunstone estimates saving approximately $2.8 million in ground rent this year alone after acquiring the dirt underneath the Renaissance Orlando Resort. Analysts tracking the New York Stock Exchange-listed REIT (ticker symbol SHO) estimate that the deal should bring about annualized cost savings of one to five cents per share, both in overall portfolio value and funds from operations.

“Overall, we view this as a sensible use of capital,” Joshua Attie of Citi Investment Research stated in a note to investors. He gives Sunstone a “buy” rating, saying the company’s liquidity is a plus given the hotel industry’s current credit woes.

Other analysts aren’t so sure: Argus issued a report on Sunstone in August, downgrading shares from “hold” to “sell,” based on the fact that it can no longer buy hotel portfolios at a discount as it had in the past. On the other hand, the report pointed out that the credit crunch will limit construction of new hotels that would compete against Sunstone’s assets, which encompass more than 15,000 rooms in 45 upscale properties.