Sunstone Buying Stake in 17 Hotels to Double Its Size

Sunstone Hotel Investors Inc. said Tuesday that it planned to acquire a stake in 17 hotels, a deal valued at $322 million, which would more than double the size of the real estate investment trust.

“We think this deal will separate us from the smaller guys,” said Joe Biehl, chief financial officer. It’s the company’s largest acquisition yet, and company officials say it will provide them with additional avenues to expand.

San Clemente-based Sunshine plans to acquire Rochester, Minn.-based Kahler Realty Corp. from its parent, New York investment firm Westbrook Partners.

“Through Westbrook’s contacts, we have the opportunity to acquire other properties,” said Robert Alter, Sunstone chairman and chief executive.

As part of the deal, Westbrook will gain a 13% stake in the company--making it the largest single shareholder--and it will gain a seat on the fledgling REIT’s board.

The transaction is expected to close in October subject to regulatory approvals, company officials said.

Sunstone, which owns mid-priced hotels like Holiday Inns and Hampton Inns, has been nicknamed the “hotel doctor” by industry analysts for its niche of buying up less attractive or poorly managed properties and renovating and rebranding them to turn a bigger profit.

Alter said Sunstone plans to spend the next 18 to 21 months renovating and rebranding many of the Kahler hotels.

“We want to get in strong franchise brands,” he said. “We expect to upgrade our customer base and rate.”

Kahler owns five hotels in the Salt Lake City area, including the 351-room Salt Lake City Hilton and four hotels with 1,329 rooms surrounding the renowned Mayo Clinic in Rochester, Minn.

Occupancy at the 17 Kahler properties in Arizona, Idaho, Montana, Texas and West Virginia averaged 69.1% in 1996, and Kahler earnings reached $28.1 million last year on revenue of $124.7 million.

Sunstone’s funds from operations grew 195% this quarter from the same period last year to $6.2 million.

Alter said he plans to retain many of Kahler’s 3,100 employees.

When the acquisition is complete, the company will have a market capitalization of more than $700 million, more than 10 times the size of its public offering in August 1995. Since then, the company has been growing rapidly, adding 21 hotels to the 10 it already owned.

To acquire Kahler, Sunstone will pay Westbrook $95 million in cash, issue $57 million in new stock and assume or retire about $170 million in debt, company officials said.

It also has agreed to pay Westbrook a $16.5-million bonus, if Kahler’s assets exceed certain performance goals, the company said. Alter said he expects the deal to break even and begin making a profit early next year.

Sunstone is one of 14 hotel REITs around the country, which sells shares in the properties it owns. Analysts say these REITs can be more aggressive than corporations in making acquisitions and renovations, because they do not have to pay income tax and do not have to repay traditional bank financing.

These REITs have been prospering in the last couple of years as occupancy and room rates have increased nationwide, after a long recession.

“Things have been shooting right back up. The number of rooms is still lower than demand,” said Burl East, an analyst with Chicago-based Everen Securities.

Alter said Sunstone has negotiated several other Southern California hotel purchases.

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Sunstone Hotel Investors

Headquarters: San Clemente

* Business: Hotel real estate investment trust

* Chairman/CEO/president: Robert A. Alter

* Hotels owned: 30 upscale and mid-priced hotels in Western U.S.

* Latest purchase: 17 additional hotels for $322 million

* Formed: 1995

* 1996 revenue: $15.1 million

* 1996 net income: $5.6 million

* Status: Public

* Exchange: New York Stock Exchange

Source: Sunstone Hotel Investors; Researched by JANICE L. JONES / Los Angeles Times

What is a Real Estate Investment Trust (REIT)?

Pronounced: “Reet”

Definition: Combines capital of many investors to acquire or provide financing for real estate; similar to a mutual fund in that investors obtain benefit of diversified real estate investment portfolio under professional management; most are publicly traded on major stock exchanges.

Investors: Individuals, pension funds, endowments, insurance firms, trusts and mutual funds

Types of REITs

Some invest in a variety of properties while others specialize, for example, in hotels, shopping centers, apartments or health care facilities. REITs can be also grouped by investment strategy:

* Equity: Owns real estate; revenue comes principally from rent

* Mortgage: Loans money to real estate owners; revenue comes from interest earned on mortgage loans; some invest in residuals of mortgage-based securities

* Hybrid: Combined strategies of both equity and mortgage REITs

Who Determines a REIT’s Investments?

Board of directors or trustees; directors elected by, and responsible to, shareholders; directors appoint management personnel

How Are REITs Managed?

Professional management is hired and periodically reviewed by the REIT’s board of directors. REIT managers are selected based upon their real estate background and expertise.

How Do I Invest in a REIT?

Shares may be purchased through stock brokers or, in some cases, from individual REITs. Contact the National Assn. of Real Estate Investment Trusts for a free listing of all publicly traded REITs, with exchange symbols, and a list of available education publications, as well as a list of mutual funds that primarily invest in REITs. NAREIT: (800) 3NAREIT

Source: National Assn. of Real Estate Investment Trusts (NAREIT); Researched by JANICE L. JONES / Los Angeles Times