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Sunstone Seeks to Acquire $1 Billion in Hotels After Forfeitures

Sunstone Hotel Investors Inc., the real estate investment trust that’s forfeited 10 properties in the past two years, wants to buy $1 billion of assets in 2011 to expand its portfolio of upscale business hotels.

The company is looking to buy high-end hotels of 400 rooms or larger in major cities on the U.S. East and West coasts, said Kenneth Cruse, Sunstone’s president and chief financial officer. Among the purchases is the 62 percent of Doubletree Guest Suites Times Square it doesn’t already own for about $37.5 million. Sunstone plans to complete the New York acquisition this month.

“Many deals last year, we spent months and months and months on to analyze the transaction until it essentially moved away from us,” Cruse said in an interview yesterday at the hotelier’s Aliso Viejo, California, headquarters. “We think going forward we are able to close many deals within two to three weeks.”

Sunstone, the owner of 32 hotels including the Hilton Times Square, last month said Art Buser resigned as president and chief executive officer after the REIT failed to complete acquisitions. It’s seeking to take advantage of declines in property values after a 2009 industry slump that was the biggest since the Great Depression.

“As general hotel financing improved over the past three months and will going forward, there is going to be more competition for big deals,” said Ben Thypin, an analyst at Real Capital Analytics Inc. in New York. “You want to be buying now, not in two years, when you should probably be selling. But with Sunstone there’s even more pressure because they are public and have a responsibility to shareholders to act.”

Travel Rebound

A rebound in U.S. business and leisure travel is buoying the lodging industry. Revenue per available room, or revpar, in the top 25 U.S. markets rose to $76.61 in January through November of 2010 from $71.55 a year earlier, according to Smith Travel Research Inc. of Hendersonville, Tennessee.

“It looks as if by 2014 we’ll be back where we were in 2000 and 2007,” Robert Alter, Sunstone’s founder and executive chairman, said during the interview. “It’s clear that a lack of supply and improving fundamentals in the economy ought to make the next few years very successful and give us a nice run.”

Sunstone said yesterday that it expects to report a 5.7 percent increase in fourth-quarter revpar. The company on Nov. 4 forecast revpar would climb 5 percent to 7 percent in the three months ended Dec. 31, compared with a 3.3 percent gain in the previous quarter.

Hotel Sales

In 2010, a total of 666 hotels sold for a combined $11.6 billion, according to preliminary figures by Real Capital. That’s an increase of more than fourfold from 157 hotels that sold for $2.5 billion in 2009. Lodging transactions in the Americas is likely to jump as much as 25 percent this year, buoyed by REITs seeking to deploy cash, Jones Lang LaSalle Hotels said on Jan. 4.

“REITs will continue to be big players in hotel investments because they have such low-cost capital,” Thypin said. “But in 2011 there’ll be a lot more investors out there and a lot more lenders willing to lend. That will lead to a higher transaction volume and higher pricing.”

During the past two years, Sunstone forfeited eight hotels whose values had dropped below their mortgages to Massachusetts Mutual Life Insurance Co. Two additional properties, including the W San Diego, also were handed over to lenders.

Sunstone acquired Miami Beach’s Royal Palm hotel in an August foreclosure auction for about $117 million, the REIT’s only major purchase under Buser. LaSalle Hotel Properties, a Bethesda, Maryland-based competitor focused on upscale lodging, said in September that it bought a hotel in San Francisco as well as two in Philadelphia for a total of $292.5 million.

‘Letting Go’

Even as it makes acquisitions, Sunstone wants to sell several hotels that don’t fit its core strategy, Alter said.

“There are still a few assets we are considering letting go of,” he said.

Alter -- who once before left retirement to become chief executive officer, after Steven R. Goldman departed to join Hilton Worldwide Inc. in 2008 -- and fellow director Lewis Wolff will take active roles in guiding Sunstone’s strategy and acquisitions, the company said last month.

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