Hotel stocks closed mixed on Monday after Sunstone Hotel Investors Inc. said it will turn the keys to a W Hotel in San Diego over to its lenders, and analysts predicted that more hotels may follow.
On Sunday, a real estate investment trust, announced it will default on its June mortgage payment for the 258-room W Hotel in San Diego after failing to lower its interest payments.
In a note to investors, Stifel Nicolaus & Co. analyst Rod Petrik said other repossessions may be on tap. "We would not be surprised to see more companies throw back keys to lenders on other secured hotel loans," he wrote.
Petrik noted that most hotel loans underwritten from 2004 to 2007 are underwater because property values have dropped as much as 50 percent from their peak in 2007.
Sunstone purchased the W San Diego in June 2006 for $96 million, which Friedman Billings Ramsey analyst C. Patrick Scholes noted was close to the peak of the market. The hotel carries a $65 million, fixed-rate commercial mortgage-backed securities loan with a 6.14 percent interest rate, which comes due Jan. 1, 2018.
The San Diego W, along with the rest of the hotel industry, has been battered by a sharp decline in travel spending that began during the financial crisis last fall and accelerated early this year. High-end hotels like the W have suffered the greatest declines as consumers and businesses have either delayed vacations and meetings or traded down to less expensive properties.
Sunstone, which has interests in 43 mostly high-end hotels, said revenue per available room across its portfolio was down 24.4 percent in May. Revenue per available room, or revpar, is a key gauge of a hotelier's performance because it measures both occupancy and room rates.
In a statement, Chief Financial Officer Ken Cruse said Sunstone had more than enough liquidity to repay the mortgage, but believed turning it over was in the best interest of stockholders.
Last month, the company had laid the groundwork for such a move by amending the covenants on its exchangeable bonds to allow the company to default on up to $300 million in non-recourse debt without triggering the maturities of those notes.
In a conference call with investors after the market closed on Monday, Sunstone executives said they would consider turning over other hotels if they meet certain criteria, including that their "intrinsic value" is permanently below the amount of the mortgage.
"We would like to point out that it is not our intent to convey a significant number of our hotels back to the lenders as a result of this new flexibility," Cruse noted.
Sunstone also noted that a foreclosure on the San Diego hotel is not a done deal, but the company does not expect further negotiations.
Scholes agreed that the move was a positive for Sunstone's equity holders and said he also expects similar action from other hotel owners.
"We do not think this will be last of such high profile lender repossessions and see further pitfalls ahead for lodging owners who are exposed to the luxury/large-group segment of the industry," Scholes said.
Sunstone's shares dropped 18 cents, or 3 percent, to $5.80 on Monday. Shares of Starwood Hotels & Resorts Worldwide Inc., which manages the hotel as owner of the W brand, gained 48 cents to $25.62.
Elsewhere in the industry, shares of Marriott International Inc. gained 3 cents to $24.55. Wyndham Worldwide Corp.'s stock slipped 22 cents to $12.23.
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