Sunstone Hotel Investors addresses expected capital needs through 2014, skips hotel payment

By Jennifer Lanning Drey

Portland, Ore., June 8 - Sunstone Hotel Investors Inc. has fully addressed all of its expected capital needs through 2014 with a series of recent recapitalization transactions, Arthur Buser, chief executive officer of Sunstone, said during a company conference call held Monday.

Transactions included the year-to-date repurchase of 75% of the company's exchangeable notes and the issuance of $99.1 million of common equity. Total face value of unsecured senior notes due 2013 was reduced to $62.5 million from $250 million.

Sunstone also sold its Marriott Napa for gross proceeds of $36 million and reached an agreement to amend its exchangeable notes indenture and corporate credit facility. The amendments are expected to provide the company another $85 million of capacity under the credit facility and added flexibility in managing its secured debt.

In addition to addressing its capital needs, Buser said the company has shifted a considerable portion of its capital structure from debt to equity through the use of every dollar of equity raised to retire $1.43 of senior unsecured debt.

"We are executing on a well-conceived plan designed to further solidify Sunstone's position of strength, improve our liquidity and deliver solid risk-adjusted returns to our stockholders," Ken Cruse, chief financial officer of Sunstone, said during Monday's call.

Following the transactions, the company has $183.6 million of unrestricted cash.

Sunstone will look to reduce leverage going forward though management of its unsecured debt portfolio, Cruse said.

Skipped hotel payment

Sunstone also said Monday that the company has elected not to make the June 1 debt service payment on the mortgage of its W Hotel San Diego.

Under the amendments made to its exchangeable notes indenture, defaults by Sunstone's subsidiaries on non-recourse indebtedness of less than $300 million will not result in acceleration of the notes prior to maturity.

Cruse said the company attempted to work with W Hotel San Diego's commercial mortgage-backed securities special servicer to amend the terms of the mortgage to provide for a reduction in current interest payments but was unsuccessful.

The CFO said Sunstone does not lack the means to continue subsidizing the loan but believes it is in the best economic interest of its stockholders to stop covering the debt service.

Sunstone does not expect further negotiations with the special servicer, and the company is prepared to turn the hotel over to the lender in lieu of repayment.

During the call, Cruse noted that Sunstone does not intend to convey a significant number of hotels back to its lenders as a result of the new flexibility under the amendment and will only do so when properties meet a specific set of criteria.

Specifically, he said cash flows of a hotel must fall considerably short of its debt service, the intrinsic value of the hotel must be permanently at a level below the principal amount of the mortgage and the lender must be unwilling to amend the loan to provide for a deferral or other reduction in current debt service.

W Hotel San Diego met those criteria, he said.

Sunstone is a lodging real estate investment trust based in San Clemente, Calif.

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