Sunstone’s Chicago Hotel Purchase Part of Expansion Plan

Sunstone Hotel Investors Inc. (SHO) agreed to buy the Wyndham Chicago hotel from Blackstone Group LP (BX) for $88.4 million as part of a plan to expand in major U.S. cities including Boston, Washington and New York.

Sunstone will fund the purchase with $30 million of cash and $58.4 million of common shares, to be issued to New York- based Blackstone at the equivalent of $10.71 each, the Aliso Viejo, California-based real estate investment trust said in a statement yesterday. The 417-room hotel will be renamed the Hyatt Chicago Magnificent Mile.

Sunstone, which plans to team with Hyatt Hotels Corp. (H) on a $25 million renovation of the property, is looking to buy additional hotels in Chicago and other gateway cities, including Los Angeles, in off-market transactions, according to Chief Executive Officer Ken Cruse.

“We want to avoid competition from other public REITs,” he said in a telephone interview. “We’ve been able to privately negotiate deals at a much better price than generically marketed deals that tend to be hotly contested.”

Sunstone wants to add hotels in markets where it already has a presence to take advantage of operational synergies, Cruse said. The company already owns an Embassy Suites in Chicago. Sunstone also is betting on demand from high-end business travelers and smaller groups in cities such as Chicago, said John Arabia, the hotelier’s chief financial officer.

Revenue per available room, a measure of occupancies and rates, climbed 14 percent to $56.74 in the first quarter in Chicago, the fifth-biggest increase among the top 25 U.S. markets, according to Smith Travel Research Inc. of Hendersonville, Tennessee.

Adjacent to Hospitals

“The Chicago hotel market has seen supply growth over the last few years, which has been largely absorbed,” Arabia said. “One thing this location has is a significant presence of medical businesses and the expansion of several hospitals within a several-block radius.”

The hotel is adjacent to Northwestern Medical Hospital, the Feinberg School of Medicine and the 23-story Ann & Robert Lurie Children’s Memorial Hospital, scheduled to open in June. The purchase price works out to about $212,000 per room, Sunstone said. The company’s investment will be about $250,000 a room including renovation costs, it said.

Blackstone will own about 5 percent of Sunstone following the transaction, scheduled for completion by midyear.

To contact the reporters on this story: Nadja Brandt in Los Angeles at nbrandt@bloomberg.net; Hui-yong Yu in Seattle at hyu@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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