Sunstone buys San Diego Hilton, sells Miami Beach hotel, reflags Times Square DoubleTree

ALISO VIEJO, CALIFORNIA Sunstone Hotel Investors Inc. has acquired the 1,190-key Hilton San Diego Bayfront and has sold the 409-key Royal Palm Miami Beach.

Sunstone also announces that it will rebrand its 460-key DoubleTree Guest Suites Times Square as Hilton Suites Times Square, following a renovation to be completed next year. At that time, the property’s management will be consolidated with the nearby Hilton Times Square under the oversight of Highgate Hotels.

The REIT is acquiring a 75% majority interest in Hilton San Diego Bayfront for US$475 million or approximately US$399,000 per key, representing a 13.8-times EBITDA multiple. Hilton Worldwide will continue to manage the hotel and will remain as the 25% minority equity partner. The acquisition is expected to close during the second quarter. 

Opened in December 2008, the 30-story San Diego hotel has 165,000 sq. ft. of meeting space and 4.3 acres of outdoor waterfront event space. It boasts the highest ratio of meeting space to hotel rooms in downtown San Diego and features the largest pillar-free ballroom in the city. In 2010, its second year of operation, the hotel generated RevPAR of US$139.51, EBITDA of US$34.3 million and net income of US$14.3 million. 

“This transaction is consistent with our strategy of acquiring high-quality, upper-upscale branded hotels at discount valuations,” says Sunstone President Ken Cruse. “This transaction, which is our third off-market acquisition of the year, marks a meaningful improvement in our portfolio quality, scale and growth potential.”

The REIT will also sell its Royal Palm to an undisclosed buyer for US$130 million, or about US$318,000 per key. Sunstone will receive US$40 million in cash and will provide a US$90 million loan to the buyer. Sunstone retains an “earn out” right that enables it to receive future payments of up to US$20 million if the hotel achieves certain return hurdles. 

The buyer is obligated to complete the planned renovation of the hotel, which is budgeted to cost approximately US$42.6 million and is expected to be completed in 2012. The disposition is expected to close during the second quarter.

“While we believe the Royal Palm project has strong future potential, monetizing this investment at a profit while retaining rights to participate in the project’s upside will enable us to redirect our focus on our core portfolio strategy of acquiring and asset-managing branded, institutional-quality upper upscale hotels,” Cruse says.

Sunstone’s comparable RevPAR is expected to increase 6.2% year over year for March and 5.4% for the first quarter. “We are pleased with the overall performance of our portfolio quarter-to-date,” says Chief Operating Officer Marc Hoffman. “Our gateway markets and recent acquisitions continue to outperform our expectations. Meanwhile, our design and construction team continues to deliver top-quality renovations on time, on budget and with minimal disruption to hotel operations.”

During the first quarter, Sunstone invested US$30 million into various renovations, including the completion of projects at Embassy Suites Chicago, Marriott Tysons Corner, Marriott Quincy and the Kahler Grand. Another major renovation, at Marriott Boston Long Wharf, is proceeding as planned.

Analyst David Loeb of Robert W. Baird & Co. maintains a neutral rating on the REIT. “We continue to remain on the sidelines as Sunstone’s acquisition strategy unfolds,” he says in an investor note.

With the latest transactions, Sunstone’s portfolio now stands at 33 properties with 13,457 guestrooms. Sunstone’s hotels are primarily in the upper-upscale segment and are generally operated under nationally recognized brands.

Hilton San Diego Bayfront
Hilton San Diego Bayfront