Hotel Online  Special Report

Sunstone Hotel Investors, Which Owns 77 Hotels, 
Files Plans for $400 Million; IPO Will Pay Off
$80 million of its Debt with Part of Proceeds
By Sandi Cain,  October 21, 2004

San Clemente-based Sunstone Hotel Investors has filed plans to go public as a real estate investment trust in a deal that could raise more than $400 million.

The move isn’t unexpected for Sunstone. Last fall, Chief Executive Bob Alter told the Business Journal the company was looking at an offering in late-2004 or mid-2005.

Sunstone was a publicly traded REIT from 1995 to 1999, when it was taken private in a deal led by Alter and New York-based Westbrook Partners LLC.

According to Sunstone’s filing earlier this month with the Securities and Exchange Commission, the company plans to sell 21 million shares at $18 to $20, generating $380 million to $420 million.

Sunstone’s market value after the offering could be more than $700 million.

Alter: set to buy $3.7 million 
worth of shares in offering

Eight underwriters also have the option to buy up to 3.2 million extra shares. Citigroup Global Markets Inc. is the lead underwriter.

Sunstone, which owns 77 hotels in 23 states, didn’t specify a date for the offering in its filing. If the company goes public this year, it stands to be the biggest stock debut for Orange County in 2004.

Earlier this month, San Clemente-based medical device maker IntraLase Corp. raised $86 million in an initial public offering, the most so far this year.

Sunstone had 2003 revenue of $461 million, which was up about 75% from a year earlier thanks to hotel buys. The company posted a net loss of $22 million, largely because of depreciation and interest expense on more than $715 million in debt as of June 30.

The company plans to pay off $80 million of its debt with part of the offering’s proceeds.

Sunstone’s earnings before interest, taxes, depreciation and amortization were $97 million last year, up 64% from a year earlier.

Alter and other Sunstone officials couldn’t to comment in the runup to the offering.

In early 2003, Alter told industry trade publication Hotel Business that Sunstone was likely to wait until REIT assets were more highly valued before going public again.

REITs typically own real estate and don’t pay taxes on profits given to shareholders as dividends. They’re required to give at least 90% of their net income to investors.

“The major reason for renewed enthusiasm for new offerings in lodging is a significant surge of capital into the REIT sector,” said Jay Leupp, managing director at RBC Capital Markets in San Francisco. “Couple that with a strong performance (of the lodging sector) and that has raised the valuations that investors are looking for.”

REITs have fared better than the overall market this year, outpacing the S&P 500, Dow Jones Industrial Average and Nasdaq as of August, according to data from the National Association of Real Estate Investment Trusts.

Earlier this month, Irvine-based subprime mortgage lender New Century Financial Corp. converted to a REIT, raising $783 million in a related secondary offering.

Sunstone’s move has as much to do with the rebounding hotel market.

According to Hendersonville, Tenn.-based Smith Travel Research, hotel profitability is expected to increase by 5.5% in 2005. At the same time, the number of hotel rooms is expected to grow by only 1.3%.

But some hotel owners have hit bumps on Wall Street this year.

Chicago-based Strategic Hotel Capital Inc. (owner of the Ritz-Carlton, Laguna Niguel) went public in July. Since then, Strategic’s shares are down about 10% from their debut.

Another hotel owner, Orlando-based CNL Hotels & Resorts Inc., pulled a pending offering in August due to “market conditions,” according to the company.

Industry sources said Wall Street advisers worried CNL had grown too fast and recommended pricing below what the company had expected.

“The answer to the (IPO) riddle is that if you have the size and girth, the public market consistently provides low-cost capital for ongoing growth,” said Don Wise, chief executive of Napa-based Wise Hotel Investments.

For RBC, the most attractive niches are midscale, upscale and extended stay hotels. They are most apt to benefit from an expected rebound in business travel, analyst Leupp said.

Sunstone has upgraded its portfolio since going private five years ago. Nearly two-thirds of its hotels are in the upscale business niche.

This year the company opened an 80-room Residence Inn near the Mayo Clinic in Rochester, N.Y. In June, it opened the 196-room J.W. Marriott Cherry Creek near the Denver Tech Center in suburban Denver.

Locally, Sunstone owns the Hyatt Newporter and the Hilton Del Mar.

“Sunstone Hotel Investors has clearly demonstrated that they understand their niche in the markets,” Wise said.

In Sunstone’s filing, the company said its “focus is to own upper upscale and upscale hotels in urban and suburban markets with major demand generators and significant barriers to entry.”


Sandi Cain is a freelance writer and contributor to the Orange County Business Journal and meetings industry publications. She specializes in hospitality, tourism and travel. Cain holds bachelor’s and master’s degrees in education from Kent State University in Ohio, where she majored in social studies. A former high school teacher, she has written for niche-market sports publications in the U.S., England and Australia and formerly worked in both the printing and high-tech industries. A Cleveland, Ohio native, Cain hasbeen a resident of Laguna Beach since the late ’70s. She enjoys travel, gardening, reading and spoiling her three cats.


Sandi Cain
Laguna Beach CA

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