Sunstone Hotel Investors Inc., owner of the W San Diego, announced on Sunday that it is handing the property over to lenders, after it failed to negotiate for lower interest rates, and said that it won’t be making it’s June mortgage payment.
Sunstone is a lodging Real Estate Investment Trust (REIT) based in San Clemente, CA, which purchased the hotel in 2006 for $96 million from developers, $65 million of which came from a fixed 6.14% rate commerical mortgage backed securities loan.
Scheduled 2009 debt service on the mortgage is approximately $4.0 million. The principal amount of the mortgage equates to more than $250,000 in debt per room.
Sunstone now feels that the W San Diego is now so devalued that they’d rather wash their hands of the whole mess, rather than trying to meet the payments.
Ken Cruse, Sunstone Chief Financial Officer, stated in a business update to investors that, “As a result of negative supply and demand fundamentals in the San Diego market, we believe the intrinsic value of the W San Diego is now meaningfully below the principal amount of its debt. While the Company maintains more than adequate liquidity to support or repay this mortgage, we believe a conveyance of this hotel in settlement of the debt would be in the best interest of our stockholders…”
And the worrying thing is that Sunstone has interests in 43 hotels comprised of 14,755 rooms primarily in the upper-upscale segment, operated by big brand name operators including Marriott, Hilton, Fairmont and Starwood (W is a Starwood Brand). And they’re willing to wash their hands off more hotels in the same ‘devalued’ state, if necessary.
Even more worrying for the hotel industry is that it’s not just investors like Sunstone who’re walking off the table. Wall Street has apparently decided that the hotel industry won’t be returning back to profitability any time soon, so many big banks are calling in the chips, in a bid to take control of whatever’s left of the assets.
Wells Fargo recently sent in a notice of default to the investors of Extended Stay America, which operates 680 hotels in the U.S. and Canada. That’s an $8 billion mess involving Bank of America, Wells Fargo, and Bear Stearns (stake now controlled by the Federal Reserve) which nobody can afford to walk away from. And so they’re haggling over it now in a New York court.
Lenders - with Wells Fargo as their trustee – are taking control of the Loews Lake Las Vegas after the owners (Loews is also a minority investor in the property, in addition to being the manager) refused to continue funding the operations, and said they’d be willing to hand over the property to lenders. That’s a $117 million loan.
Anekona W, the company that owns The Lotus at Diamond Head hotel which was formerly the W Honolulu, filed for Chapter 11 bankruptcy and the property is scheduled to be sold at a public auction on June 12. Kabuto Arizona Properties LLC, which owns the Wigwam Golf Resort & Spa in Phoenix, also filed for Chapter 11 bankruptcy protection couple of weeks back to stop Citigroup Inc. from taking control.
(Update – June 10, 2009 – The $3.1 billion Fontainebleau Las Vegas project has filed for Chapter 11 bankruptcy. Also the St. Regis Resort Monarch Beach in Dana Point, CA, which has been scheduled for a foreclosure auction. Ironically, this St. Regis is where the whole thing with AIG and corporate spending began.)
There’s many, many more cases like these all over the map. And these are not all isolated incidents. It’s a case of everyone on Wall Street having come to a joint conclusion that they cannot afford to wait on these loans any longer.
Of course, these are all the same Banks – Wells fargo, BofA, Citgroup, Merrill Lynch, Wachovia, Bear Stearns, etc. – which were on the verge of going bust until they were bailed out with hundreds of billions in tax-payer funds.
So here’s the question – Where’s the hotel industry’s bailout?