SAN CLEMENTE, CA-Sunstone Hotel Investors is considering acquisitions and is executing a financial strategy designed to improve its liquidity and reduce its debt, the REIT’s executives reported in the company’s earnings conference call last week. Sunstone, which raised $158.6 million in a common stock offering after the third quarter ended, may yet lose some of its hotels to mortgage defaults but sees the prospect of acquiring other properties at favorable prices. The REIT believes that the hotel industry is “moving into a phase of the cycle where well-capitalized proactive public companies may have opportunities to create significant value through acquisitions,” president and CEO Art Buser commented in the company’s conference call.
“I’m spending about a third of my time now on acquisitions,” Buser said. The Sunstone chief said that the company has “delivered four expressions of interest for hotel acquisitions” in recent weeks, and Sunstone said in its formal statement accompanying its earnings report that it “believes that the recent declines in demand for lodging and continuing capital constraints may lead to opportunities to acquire hotels at discount valuations.” According to its statement, the REIT is analyzing prospective acquisitions on the basis of price, value-add potential, synergies from economies of scale and other efficiencies, locations that are in high-performing markets and “relationships with current owners of hotel real estate, who may look to divest of such real estate in the future.”
The raising of the $158.6 million increased Sunstone’s cash position to approximately $409.9 million, according to CFO Kenneth Cruse, who described the stock offering as “an important milestone for the company, marking a shift in our business strategy from defense to cautious offense.” Cruse said that Sunstone now has “the offensive capacity to take advantage of market opportunities to selectively acquire hotels properties at discount valuations.”
Among the steps that Sunstone is taking to manage its finances is a loan restructuring program. Cruse outlined five loans in the restructuring program, including mortgages on the Marriott in Ontario, CA, which the REIT expects to go into receivership in the fourth quarter, and the W Hotel in San Diego. Earlier this year, Sunstone chose not to make the June 1 payment on the $65 million mortgage on its W Hotel in San Diego, deciding instead on what it termed an “elective default” on the mortgage when it could not work out new terms with the lender’s representative on the property. The situation at the Ontario Marriott is similar, he said.
The other three loans that Cruse described included a $105 million mortgage on its Baltimore Renaissance that is being converted to an interest only loan for a period of up to 30 months; a renegotiation that is under way on the $29 million loan secured by its Westchester Renaissance; and a $246 million mortgage loan with Mass Mutual that is secured by 11 hotels.
Mass Mutual is analyzing the 11 hotels and is expected to come back to Sunstone with a response to its proposals in the coming weeks. Meanwhile, “Since Mass Mutual not responded to our proposals in advance of our Nov. 1 debt service payment date, we elected not to subsidize this payment, which we expect will result in a default under the loan while negotiations are pending,” Cruse said. If Sunstone is unsuccessful in negotiating acceptable restructuring terms for the $246 million Mass Mutual loan, “We may elect to deed back the 11 hotels securing this loan in satisfaction of the debt,” Cruse said.
Sunstone reported a loss of $23.1 million for the quarter compared with earnings of $4.4 million in last year’s third quarter, with both revenue ($176 million versus $220.1 million) and RevPAR ($101.78 million versus $127.49 million) down for the quarter on a year-over-year basis. It reported funds from operations if $10.3 million, compared with $36.5 million in the third quarter of last year.