Art Buser came to Aliso Viejo-based Sunstone Hotel Investors Inc. with a five-year plan to shed the company’s weaker hotels and replace them with upscale acquisitions.
He’s ahead of schedule, thanks to the hotel industry’s downturn.
“Nothing has happened as originally planned,” said Buser, Sunstone’s chief executive. “My five-year business plan when I took this job still is in a box because the economic environment that I was hoping for didn’t occur.”
In 2009, Buser sent shock waves through the industry by turning over the W Hotel in San Diego to its lender.
Sunstone, which owns all or part of 30 hotels, became the first publicly traded owner in the downturn to hand back a hotel that no longer was worth what was owed on it.
“We essentially became the siren song,” Buser said. “There were follow-up articles saying the W San Diego was the most important loan default of 2009.”
Sunstone followed the W giveback by handing over eight more hotels to lender Massachusetts Mutual Life Insurance Co. The hotels, which the company refers to as the “Mass Mutual eight,” are in the process of being transferred.
“Everything that has happened was far less of a plan and was more dealing with the current environment as it came at us,” Buser said. “We went at it early. Now we’re focused on growth and doing the right thing for the company.”
Sunstone has turned the givebacks into part of a larger strategy of bolstering the company’s portfolio by shedding underperforming hotels and buying better ones.
The plan dates back to Buser’s predecessor, company founder and longtime chief Bob Alter, who’s now executive chairman. Buser joined Sunstone as president in 2008 and took over as chief executive from Alter in early 2009.
With defaults largely behind Sunstone, Buser now is out shopping. Last month, the company paid $126 million at a foreclosure auction for the Royal Palm Hotel in Miami Beach.
More deals are said to be in the works.
“In the second quarter, we wrote over $2 billion in (letters of intent) and are continuing to bid on deals,” Buser said.
Last fall, Sunstone did a stock sale that raised $159 million for acquisitions.
“The ironic thing was we raised money in October with the promise of placing it smartly, but it took us all the way to August to get one deal done,” Buser said.
Deals have been slow to come by because of a valuation gap between buyers such as Sunstone looking to acquire at a discount and owners who are holding out for higher prices as a hotel recovery gets under way.
“Deals in this environment have taken on lives of their own,” Buser said.
In many cases, Sunstone’s been looking at acquiring hotel debt or groups of hotels where lenders might be pushing for a sale.
“All of our deals have been lender sales,” Buser said. “We haven’t bought a deal from the open market.”
Sunstone was reported to have made a bid on Southern California’s largest hotel, the 1,625-room Manchester Grand Hyatt in downtown San Diego.
The company was looking to buy the hotel from developer Doug Manchester, who in turn would have gotten a stake in Sunstone, according to reports.
Talks over the $580 million deal are said to have broken down last month.
Buser declined to comment on the Manchester Grand.
“Typically in the past we haven’t talked about deals much until they are non-refundable,” Buser said. “It is accurate to say we are not in negotiations or in pursuit of that asset at this time.”
History of Deals
Buser has a long history in hotels, particularly when it comes to deals.
Before Sunstone, he worked in various roles in the hotel unit of Chicago’s Jones Lang LaSalle Inc. During the peak of hotel deals earlier this dec- ade, Buser oversaw $4.5 billion worth of transactions at Jones Lang La-Salle.
The move to default on the W San Diego and the other hotels was one of the hardest decisions for Sunstone, according to Buser.
“I grew up in a small town in Wisconsin,” he said. “As my 91-year-old mother reminded me, ‘Bad people don’t pay their debts. Good people keep their promises.’ That small town upbringing is still very much who I am and resonates in my head.”
Sunstone bought the 258-room W for $96 million in 2006 from a group led by developer Gatehouse Capital Corp. The company owed $65 million on the hotel when it opted to stop paying on its debt. One analyst estimated the W was worth 70% less than when Sunstone bought it.
Sunstone decided to walk away after failing to rework terms of a loan with New York-based Centerline Capital Group, part of New York’s Centerline Holding Co.
“We had extended negotiations and it wasn’t like we showed up one day with the proverbial keys,” Buser said.
Buser said his biggest regret about the defaults was letting “people believe we were tough guys,” willing to walk away in a game of chicken with lenders.
“It was an emotionally charged series of events, and we weren’t sticking it to anyone,” Buser said. “We worked very closely with our lenders to make the process as easy as possible.”
Reacquired Hotel
In one case, Sunstone came full circle.
In June, the company reacquired the Renaissance Westchester Hotel, a 347-room hotel in White Plains, N.Y. that it had stopped making payments on in 2009.
It paid $24.8 million for the Renaissance Westchester in a deal that did away with the hotel’s prior $29.2 million mortgage.
Sunstone and others are more optimistic about the recovering hotel industry, which in 2008 and 2009 saw its worst downturn since right after the 2001 terrorist attacks.
“We are seeing it, but recovery takes place at different rates in different markets,” Buser said.
In July, the company moved its headquarters from its longtime base in San Clemente to Aliso Viejo.
Buser called it “the start of a new beginning for the company.”
