Art Buser likely didn’t make many friends among hotel lenders in 2009. Shareholders are another matter.
The chief executive of San Clemente-based Sunstone Hotel Investors Inc., which owns all or part of 40 hotels, made waves by giving back some properties to lenders after going underwater on their mortgages.
The moves came amid the worst industry downturn since after the terrorist attacks of 2001. But they weren’t acts of desperation.
Buser used the hotel givebacks as part of a larger strategy of bolstering Sunstone’s portfolio by shedding underperforming hotels and then going on the hunt for acquisitions.
Wall Street has approved.
Sunstone’s shares are up about 50% for 2009 with a market value of $850 million. After initially slumping on word of Sun-stone’s first default in June, the company’s shares nearly doubled from July to late December.
In 2008, Buser joined as Sunstone’s president and became chief executive in early 2009, replacing founder and formative former chief Bob Alter.
Buser led the company’s shed-and-buy strategy after earlier moves paved the way for the effort.
In June, he sent shockwaves through the industry with Sunstone’s plan to turn over the W Hotel in San Diego. Sunstone became the first publicly traded hotel owner in the downturn to hand back keys to a lender. The giveback wrapped up in September.
“Once they defaulted on the W, the world figured out that they were serious,” said David Loeb, an analyst at Milwaukee-based Robert W. Baird & Co. “It was a game changer for Sunstone in their negotiations with lenders.”
Sunstone bought the 258-room W for $96 million in 2006 from a group led by developer Gatehouse Capital Corp. It owed $65 million on the hotel. The value of the W, like others, had dramatically fallen. One analyst estimated the hotel was worth 70% less than when Sunstone bought it.
The W hadn’t generated enough in revenue to cover operating costs and debt since 2007. 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.
“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,” Chief Fi-nancial Officer Ken Cruse said at the time.
In July, Sunstone stopped making payments on a mortgage for the Renaissance West-chester Hotel in White Plains, N.Y., and entered talks with lenders about reworking
the loan.
In September, Sunstone said it planned to forfeit its Marriott Ontario Airport, a 299-room hotel across the street from LA/Ontario International Air-port. The hotel went to a receiver in the fourth quarter.
In November, Sunstone skipped a payment on a $246 million mortgage on 11 hotels with Springfield, Mass.-based Massachusetts Mutual Life Insurance Co.
Company watchers expect a handover or debt reworking soon for the hotels.
“Art comes and realizes he has assets that appear to be worth less than their debt,” analyst Loeb said. “He’s been determined to figure out the right way to deal with that, which in some cases is returning the assets to lenders.”
Buser also sold off a handful of hotels in 2009. Most of the hotels Sunstone shed through sales or forfeitures were older or in weak or saturated markets.
Amid Sunstone’s defaults, Buser in October oversaw the sale of $170 million worth of stock, which generated $159 million for the company after expenses. He plans to use the proceeds for acquisitions, meaning Sunstone won’t have to rely on lenders for deals.
“I’m spending about a third of my time now on acquisitions,” Buser said on an early November conference call with analysts.
Buser has a long history in hotels, particularly when it comes to deals.
Before Sunstone, Buser worked in various roles at Chicago’s Jones Lang LaSalle Inc.’s hotel unit. During the peak of hotel deals, Buser oversaw $4.5 billion worth at Jones Lang LaSalle.
“There is no one in the public market world who has better contacts to be able to find acquisitions than Art Buser,” analyst Loeb said. “He’s in the best position to unearth any deals out there.”
Buser’s challenge could be in closing deals in the next few quarters as sellers are likely to drag their feet in the hopes of a recovery and higher valuations later in 2010, according to analysts.
