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SAN CLEMENTE, CA-Sunstone Hotel Investors plans to pay a special fourth-quarter dividend, thanks to a taxable capital gain on the $366.5-million sale of the Hyatt Regency Century Plaza in Century City, CA earlier this year. The hotel REIT plans to disclose the amount and further details of the dividend in December, note analysts at Milwaukee-based Robert W. Baird & Co., who describe the move as a “creative solution” for applying the tax gain that Sunstone will realize this year.

The report—by Baird analysts David Loeb, Andrew Wittmann and Eric Palm—points out that Sunstone’s balance sheet is in good shape, as the company has “no debt maturities until 2010, a low cost of debt and relatively solid coverage for its debt covenants.” The analysts note that Sunstone, which recently turned in a solid performance for the third quarter ended Sept. 30, plans to pay the special dividend with a mix of cash and stock.

Sunstone said in its recent third-quarter earnings statement that the REIT initially held the proceeds from the sale of the Century Plaza for a potential 1031 exchange, but it later withdrew the funds from its 1031 accommodator after deciding not to proceed with an exchange. Internal Revenue Service rules generally require a REIT to choose between either paying tax on capital gains or distributing the capital gains to its stockholders within 30 days of the end of the year.

Selling the Century Plaza is one of a number of steps that Sunstone has taken this year in the face of “the challenges our industry now faces,” chairman and CEO Robert A. Alter said in the company’s earnings statement. According to the Baird report, those challenges include “rapidly deteriorating industry fundamentals” in the lodging sector.

The Baird analysts note that Sunstone has emphasized an “intense focus on preserving liquidity” because of the economic downturn, a course that the analysts consider a prudent move in these uncertain times. The Baird report says that the hotel REIT also has positioned itself well by assembling a diversified portfolio with concentrations in strong markets. “Sunstone’s portfolio is one of the more diversified portfolios of its peer group in regard to geography, brand, and segment,” the report says.

Other steps that Sunstone has taken in light of changing market conditions include the recapitalizing its balance sheet with long-term fixed rate debt and completing a major portfolio renovation program. “We believe we have the assets, liquidity, balance sheet and team to weather the current environment,” Alter said in the earnings statement.

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