Sunstone Hotel to Spread Wings - Analyst Blog

Sunstone Hotel Investors Inc. (SHO), a lodging real estate investment trust (REIT), recently announced its plans to acquire premium hotels across the U.S. worth approximately $1 billion to expand its portfolio and capitalize on improving market fundamentals.

The company wants to buy upscale hotels of 400 rooms or larger in 2011 in major cities on the East and West coasts of the U.S. The acquisition spree is part of the long-term strategy of the company to own assets in some of the premium markets of the country at discounted prices as property prices have nose-dived in the last couple of years.

As part of its expansion plans, Sunstone has acquired a 62% ownership interest in a joint venture that owns the 460-room Doubletree Guest Suites Times Square hotel in New York City. With the $37.5-million-deal, the company is the sole owner of the most sought-after property in the Manhattan submarket in the heart of Times Square. Each room of the hotel spans across 540 square feet of space, making it the largest standard guest room hotel in the region.

The property generated RevPAR (revenue per available room) of approximately $302.25 and adjusted EBITDA (earnings before interest, tax, depreciation and amortization) per key in excess of $42,000 in 2010. The hotel is presently encumbered by approximately $270.0 million of non-recourse senior mortgage and mezzanine debt scheduled to mature in January 2012. Sunstone expects to refinance this debt during 2011 or repay any refinancing shortfall with available cash. 

In addition to improving the size and quality of its portfolio through focused acquisitions of high-quality hotels, Sunstone plans to continue selling non-core properties that do not fit its long-term strategy. The company operates its hotels under nationally recognized brands such as Marriott, Hilton, Hyatt, Fairmont and Starwood. With the latest string of acquisitions, Sunstone aims to strengthen its position in the premium segment in the hotel industry and cash-in on the tremendous growth potential as predicted by industry experts and third-party research reports. 

Jones Lang LaSalle Incorporated (JLL), a leading full-service real estate firm that provides corporate, financial, and investment management services, recently revealed in its research report that hotel sales and acquisitions would increase to the tune of 25% in 2011 in the Americas with investors vying for premium assets. According to Real Capital, a leading market research and commercial real estate sales and trends analysis firm, about 666 hotels were sold in 2010 for $11.6 billion. Jones Lang further anticipated that transaction volume would total approximately $13.0 billion in 2011 and envisioned the U.S. hotel market as one of the most active in the world.

The report cites that a healthy rebound in U.S. business and leisure travel has attracted a wide array of investors in the hotel industry, including investors from the Middle East. According to Smith Travel Research Inc., an independent research company in the lodging industry, RevPAR in the top 25 U.S. markets rose to $76.61 during the first 11 months of 2010 from $71.55 in the year-ago period. Jones Lang expects REITs to be the dominant buyers in 2011, with private equity groups and institutional investors increasingly joining the party as leverage levels and terms pick up with improving market fundamentals.

We presently have a ‘Neutral' recommendation on Sunstone, which is a Zacks #3 Rank. That translates into a short-term ‘Hold' rating and indicates that the stock is expected to perform in line with the overall U.S. equity market for the next 1–3 months.

 
JONES LANG LASL (JLL): Free Stock Analysis Report
 
SUNSTONE HOTEL (SHO): Free Stock Analysis Report
 
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