Sunstone Hotel Investors Inc., which owns 59 hotels, mostly in the Western U.S., said Tuesday that it accepted a sweetened buyout offer of nearly $453 million by an investor group that includes top Sunstone management.
SHP Acquisition LLP, which plans to take the San Clemente company private, will pay $10.35 per share in cash, a 37% increase over its previous offer in April. In addition, SHP will absorb Sunstone's debt of about $440 million.
Sunstone would become the second major real estate investment trust in Orange County to be taken private this year, an indication of how REITs have fallen out of favor with Wall Street. In June, Orange County's largest landlord, Irvine Apartment Communities, was acquired by Chairman Donald Bren and became a subsidiary of the Irvine Co.
But some analysts voiced concern that Sunstone is being sold for less than its worth. Most real estate investment trusts' stock prices have slumped this year, providing a convenient excuse for companies to go private, perhaps to investors' disadvantage, analysts said.
"The price being paid for these assets is below the net asset value," said Brian Rogers, an analyst at Putnam, Lovell, de Guardiola and Thornton. He estimated the company's value at $12 per share. "It feels to me like an opportunistic purchase," he added.
Sunstone said its second-quarter profit will be less than expected. The real estate investment company said it expects to report funds from operations of 32 to 33 cents a share for the three months, lower than the 35 cents estimated by analysts polled by First Call Corp.
Real estate investment trusts commonly use funds from operations, or net income plus depreciation and before extraordinary items, to measure earnings. That's because the measure is used to calculate dividends.
Sunstone, which went public in 1995, acquires hotels and rebrands the properties under major franchise names, such as Hilton, Marriott and Holiday Inn. It owns hotels with a total of 10,500 rooms.
The company's debt has piled up as it was forced to spend heavily to renovate some of the older hotel properties.
The stock slumped as the company encountered competition from new hotels and found it more difficult to get access to capital. The shares have lost about 20% of their value over the last year.
On Tuesday, the stock closed at $9.44 a share, up 50 cents, on the New York Stock Exchange. A total of 873,000 shares changed hands, more than five times higher than the average daily volume over the last three months.
In becoming a privately held firm, Sunstone should have an easier time raising money for acquisitions, executives said.
As a REIT, the company has been able to shelter income from taxes so long as it pays out most of its profits as dividends. It's also barred from operating its own hotels.
SHP Acquisition is a partnership between Sunstone Chairman Robert Alter, other Sunstone management and Westbrook Partners, a real estate investment firm that already owns a 9.6% stake in the company.
Westbrook would become the majority shareholder, said Alter, who would remain chairman and chief executive.
"Having an investment partner like Westbrook with its large funds and its access to capital will allow Sunstone to continue its strategy," he said.
All of Sunstone's hotels are leased by a closely held company controlled by Alter. His group's ties to the company raised concerns that other buyers, who might have paid more, weren't given a fair opportunity to bid.
A special committee of Sunstone directors solicited other offers, said director Laurence Geller, the committee's chairman. It contacted 40 other prospective buyers, he said, and sent packets of information to 20.
"We kept the playing field level," said Geller, who added that Alter's offer was the highest he received.
The deal, which requires shareholder approval, is expected to be completed by the fourth quarter. Shareholders would have the option of receiving $10.35 per unit in cash, or changing e their units into equity in SHP.
SHP has received a firm commitment from a unit of PaineWebber Inc., for debt financing to pay for the purchase, Geller said.
If Sunstone receives a higher bid and accepts it, the company would owe SHP $25 million for a breakup fee and expenses.
Sunstone also has the right, if it receives a higher purchase offer, to buy Alter's Sunstone Hotel Properties Inc., which leases Sunstone's hotels, and Sunstone Hotel Management Inc., which operates them, for $30 million in cash.
Bloomberg News contributed to this report.
Sunstone Going Private
Sunstone Hotel Investors Inc. has accepted a buyout bid from investors, including top management, who plan to take the company private. Sunstone at a glance:
Headquarters: San Clemente
Chairman and CEO: Robert Alter
Employees: 5,000 (75 in San Clemente headquarters)
Business: Owns 59 hotels in Western U.S. under such brands as Marriott, Hilton, Holiday Inn
Tuesday stock close: $9.44, up 50 cents
Net income Revenue (millions) (millions) 1997 4th qtr. $2.6 $17.3 1998 1st qtr. $6.6 $23.7 2nd qtr. $6.3 $24.9 3rd qtr. $4.6 $29.0 4th qtr. -$0.5 $21.5 1999 1st qtr. $4.3 $24.9
Sources: Sunstone Hotel Investors Inc., Bloomberg News