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Sunstone Hotel Investors Inc. Reports Operating Results (10-Q)

November 04, 2010 | About:

Sunstone Hotel Investors Inc. (NYSE:SHO) filed Quarterly Report for the period ended 2010-09-30.

Sunstone Hotel Investors Inc. has a market cap of $1.04 billion; its shares were traded at around $10.57 with a P/E ratio of 8.3 and P/S ratio of 1.4. SHO is in the portfolios of Ken Heebner of CAPITAL GROWTH MANAGEMENT LP, John Paulson of Paulson & Co., Bruce Kovner of Caxton Associates, Steven Cohen of SAC Capital Advisors, Jim Simons of Renaissance Technologies LLC.

Highlight of Business Operations:

We own primarily upper upscale hotels in the United States. As of September 30, 2010, we owned 31 hotels held for investment (the 31 hotels), and we owned eight additional hotels until they were deeded back to the lender on November 1, 2010 pursuant to our 2009 secured debt restructuring program. These eight hotels are included in operations held for non-sale disposition. The eight hotels secured the non-recourse mortgage with Massachusetts Mutual Life Insurance Company (the Mass Mutual eight), and include: Renaissance Atlanta Concourse; Hilton Huntington; Residence Inn by Marriott Manhattan Beach; Marriott Provo; Courtyard by Marriott San Diego (Old Town); Holiday Inn Downtown San Diego; Holiday Inn Express San Diego (Old Town); and Marriott Salt Lake City (University Park). Three additional hotels which previously secured the Mass Mutual loan (Courtyard by Marriott Los Angeles Airport, Kahler Inn & Suites Rochester and Marriott Rochester) were released in April 2010 following our payment of an $83.0 million release price. In addition, the Renaissance Westchester was included in our 2009 secured debt restructuring program and held in receivership until we reacquired the hotel for $26.0 million, including related costs, in June 2010. Operating results for the Renaissance Westchester for 2009, therefore, are included in discontinued operations as possession and control of the hotel was held by a court-appointed receiver; whereas operating results from the date we reacquired the hotel, June 14, 2010, forward are included in continuing operations. The Renaissance Westchester, along with the three hotels released from the Mass Mutual loan, are included in the 31 hotels. Of the 31 hotels, we classify 29 as upscale or upper upscale, one as luxury and one as mid-scale as defined by Smith Travel Research, Inc. In addition to our wholly owned hotels, we own a 38% equity interest in a joint venture that owns one hotel, and we own certain other non-hotel investments. The majority of our hotels are operated under nationally recognized brands such as Marriott, Fairmont, Hilton and Hyatt, which are among the most respected and widely recognized brands in the lodging industry. While we believe the largest and most stable segment of demand for hotel rooms is represented by travelers who prefer the consistent service and quality associated with nationally recognized brands, we also believe that in certain markets the strongest demand growth may come from travelers who prefer non-branded hotels that focus on highly customized service standards.

The weighted average term to maturity of our debt, excluding debt on the Mass Mutual eight hotels, is approximately 6.4 years, and 100% of our debt is fixed rate with an average interest rate of 5.6%. Of our total debt, approximately $179.6 million matures over the next four years ($81.0 million in 2010, none in 2011, $33.4 million in 2012 and $65.2 million in 2013, assuming we repay our remaining Senior Notes balance of $62.5 million at the first put date in 2013). The $179.6 million does not include scheduled amortization payments, which total $2.4 million for the remainder of 2010, $13.5 million in 2011, $15.6 million in 2012, and $16.6 million in 2013. In addition, in April 2010, we made a partial payment of $83.0 million on the Mass Mutual mortgage loan to secure the release of three of the 11 hotels securing the loan, and in June 2010, we reacquired the Renaissance Westchester for $26.0 million, including related costs. In connection with the repurchase of the Renaissance Westchester, the $29.2 million non-recourse mortgage secured by the hotel was cancelled. We recognized a gain of $6.7 million on the extinguishment of this debt, which is included in discontinued operations. In light of improving secured debt markets and our desire to maintain flexibility in our level of indebtedness, on November 1, 2010, we refinanced the $81.0 million mortgage due in December 2010, rather than use excess cash to repay the loan in full. The new $92.5 million non-recourse mortgage matures in 2020 and bears a fixed interest rate of 4.97%, with scheduled monthly principal and interest amounts based on a thirty-year amortization. The proceeds from the new mortgage were used in part to repay the maturing $81.0 million mortgage, which bore an interest rate of 5.915%. We retained the excess proceeds for general corporate purposes. The new mortgage contains customary events of default relating to payments and breaches of representations and warranties.

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