Sunstone May Sell 10% Stake to Fund Acquisitions

Sunstone Hotel Investors Inc., owner of 57 Western U.S. hotels, is considering selling an equity stake of no more than 10% to raise cash to buy properties, Chairman Robert Alter said.

The San Clemente-based real estate investment trust has spoken with several institutional investors about such a stake, Alter said. The REIT would sell preferred stock convertible to common shares, raising about $50 million to $75 million, he said.

REITs including Sunstone and Starwood Hotels & Resorts bought hotels at a record pace last year and earlier this year. Now, they’re having trouble raising money to buy properties. Investors’ concerns that the slowing economy will hold back hotels’ profit growth are stopping hotel companies from issuing new stock or bonds to the public.

Sunstone shares hit a high of $17.38 this year. At Monday’s close of $9, they were down 48%. The company’s hotels operate under such brands as Marriott, Holiday Inn and Hilton.

Alter said Sunstone, if it had the financing, could buy properties cheaply from competitors that expanded too quickly.

“As a result of some companies getting in over their heads, we think there’s some opportunities,” he said.

One of those who grew too fast, said Alter, is Patriot American Hospitality Inc., the second-largest hotel REIT after Starwood.

Patriot American said two weeks ago that it will sell about 30% of its equity in convertible preferred shares to an investor group led by financiers Leon Black and Thomas Lee.

The $1-billion sale will give it cash to help repay about $1.7 billion in debt coming due. Some investors criticized the sale, however, because it could dilute the value of their shares.