Sunstone Hotel Investors To Acquire The 544-Room Wailea Beach Marriott Resort & Spa

ALISO VIEJO, Calif., June 19, 2014 /PRNewswire/ -- Sunstone Hotel Investors, Inc. (the "Company" or "Sunstone") (NYSE: SHO) today announced that the Company has entered into a definitive agreement to acquire the 544-room Wailea Beach Marriott Resort & Spa (the "Hotel"), located on 22 fee-simple acres in Maui, Hawaii, for a net purchase price of $325.7 million, or $598,600 per key.  The purchase price represents a 16.9x multiple on 2014 forecasted Hotel EBITDA of $19.3 million and a 5.2% capitalization rate on 2014 forecasted Hotel net operating income. The Company expects to fund the acquisition, in part, with $60 million of common stock issued directly to the seller - an affiliate of Blackstone Real Estate Partners IV (the "Seller") -  at a price of $14.87 per share.  The Company expects to fund the balance of the purchase price with proceeds from the issuance of common stock.   Additionally, the Company expects to receive operational support from Marriott International, the Hotel manager, during a planned renovation of the Hotel in 2015 and 2016.  A definition of Hotel EBITDA and a reconciliation to net operating income is set forth at the end of this release.

Ken Cruse, Chief Executive Officer, stated, "We are pleased to announce our planned acquisition of the 544-room Wailea Beach Marriott Resort & Spa, our first acquisition in the strong Hawaiian market.  This acquisition fits squarely within our strategy of increasing our portfolio quality and scale while improving our financial flexibility."

Mr. Cruse continued, "The Wailea Beach Marriott Resort & Spa is located on 22 acres of fee-simple, ocean-front land in the heart of Wailea, Maui's most desirable location.  Wailea is one of the most attractive and supply-constrained leisure and group destinations in the United States. While the Hotel currently produces superior RevPAR relative to our portfolio average, we believe the Hotel's market penetration, cash flows and long-term value will materially benefit from our asset management process and a carefully planned and executed repositioning program. Accordingly, we intend to optimize the Hotel's 22-acre footprint within this exceptional market by creating a more well-defined, cohesive destination resort experience.  This project is highly consistent with our skill set, as our team has deep experience in the development and oversight of comprehensive resort hotel repositioning programs. Lastly, Marriott has demonstrated their commitment to the long-term success of this Hotel by working with us to provide operational support during our planned renovation."  

Transaction Rationale

The Company expects this acquisition will be additive to its stockholders in the following ways:

• Value-Add Opportunity: Through selective, value-add capital investment focused primarily on the Hotel's public areas, dining experiences and leisure amenities and its strong relationship with Marriott, the Company intends to reposition the Hotel, which we believe will enable the Hotel to achieve significantly higher ADRs. Specifically, the Hotel's ADR is currently approximately $50 below the ADRs being achieved by its Kaanapali competitive set and roughly $200 below the ADRs being achieved by the upper-upscale Wailea resort hotels. The Company expects to invest approximately $65 million into the Hotel in 2015 and 2016, focused primarily on enhancing the Hotel's public space experience.
  
  
• Improves Sunstone's Portfolio Quality and Scale: The Hotel's RevPAR and EBITDA are very strong (the Hotel's projected 2014 RevPAR and Hotel EBITDA per key is approximately $210 and $35,500, respectively). Accordingly, the acquisition is expected to increase Sunstone's full-portfolio comparable RevPAR by 1.3% and its Hotel EBITDA per key by 1.9%.
  
  
• Improves Sunstone's Long-Term Growth Profile: The Maui lodging market is Hawaii's strongest lodging market – it consistently maintains the highest ADR of all the Hawaiian Islands, and historically has been one of the quickest markets to recover given its convenient and increasing airlift capacity. Following the recent economic downturn, the Maui lodging market has demonstrated robust health, with compounded average annual RevPAR growth of 7.1%. Year-to-date through April 2014, RevPAR growth across the Maui lodging market is accelerating, and is up 7.6% over the same period in 2013.
  
  
• Improves Sunstone's Financial Flexibility: As the acquisition will be funded entirely with cash and common stock issued to the Seller, no debt will be incurred pursuant to the acquisition. As a result, Sunstone expects the acquisition to improve its credit statistics. Upon closing the acquisition, Sunstone will own 14 unencumbered hotels valued at more than $1.5 billion.
  
  
• Off-Market Transaction: Consistent with Sunstone's recent transactions, the Wailea Beach Marriott Resort & Spa acquisition was directly sourced by Sunstone through a pre-existing relationship with the Seller.
  
  
• Geographic Profile: The Company's portfolio of institutional-quality, upper-upscale hotels will be further diversified in terms of asset size, geography and business mix. Specifically, the acquisition of the Hotel will increase Sunstone's West Coast regional EBITDA (as a percentage of full-portfolio comparable Hotel EBITDA) by more than 300 basis points to 39%.

Hotel Description

The fee-simple, 544-room Hotel is located on 22 waterfront acres on Wailea Beach, Maui's most popular leisure destination and is adjacent to the high-end Shops at Wailea.  At an average size of nearly 450 square feet, the Hotel provides some of the largest standard guestrooms on Maui. The Hotel offers 45,000 square feet of flexible meeting facilities featuring three ballrooms, 21 meeting rooms, and significant outdoor oceanfront space that may be entitled for future development.

In 2014, for the 20th consecutive year, Maui was named "Best Island in the World" in the Conde Nast Traveler Reader's Poll, and is one of the most desirable and high barrier-to-entry leisure and group destinations in the world. Additionally, Wailea is Maui's most exclusive master-planned resort community, and is consistently one of the more popular luxury resort destinations in North America. Located in South Maui, the Hotel's location is proximate to many of the island's best beaches, high-end restaurants and shops, and championship golf.

The transaction is expected to close in the third quarter.  The acquisition of the Hotel is subject to the satisfactory completion of customary closing procedures. Accordingly there can be no assurance that the acquisition of the Hotel will close. The forecast amounts are based on the Company's assumptions of operating performance.  Sunstone cannot assure you that the forecasts will be achieved.

About Sunstone Hotel Investors, Inc.

Sunstone Hotel Investors, Inc. is a lodging real estate investment trust ("REIT") that, as of the completion of the acquisition will have interests in 30 hotels comprised of 14,304 rooms.  Sunstone's hotels are primarily in the upper upscale segment and are generally operated under nationally recognized brands, such as Marriott, Hilton, Fairmont, Hyatt and Sheraton. For further information, please visit Sunstone's website at www.sunstonehotels.com.

Sunstone's mission is to create meaningful value for our stockholders by becoming the premier hotel owner.  Our values include transparency, trust, ethical conduct, communication and discipline.  As demand for lodging generally fluctuates with the overall economy (we refer to these changes in demand as the lodging cycle), we seek to employ a balanced, cycle-appropriate corporate strategy that encompasses the following:

• Proactive portfolio management;
• Intensive asset management;
• Disciplined external growth; and
• Continued balance sheet strength.

This press release contains forward-looking statements within the meaning of federal securities laws and regulations. These forward-looking statements are identified by their use of terms and phrases such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "should," "will" and other similar terms and phrases, including references to assumptions and forecasts of future results. Forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from those anticipated at the time the forward-looking statements are made. These risks include, but are not limited to: volatility in the debt or equity markets affecting our ability to acquire or sell hotel assets; international, national and local economic and business conditions, including the likelihood of a U.S. recession; the ability to maintain sufficient liquidity and our access to capital markets; potential terrorist attacks, which would affect occupancy rates at our hotels and the demand for hotel products and services; operating risks associated with the hotel business; risks associated with the level of our indebtedness and our ability to meet covenants in our debt and equity agreements; relationships with property managers and franchisors; our ability to maintain our properties in a first-class manner, including meeting capital expenditure requirements; our ability to compete effectively in areas such as access, location, quality of accommodations and room rate structures; changes in travel patterns, taxes and government regulations, which influence or determine wages, prices, construction procedures and costs; our ability to identify, successfully compete for and complete acquisitions; the performance of hotels after they are acquired; necessary capital expenditures and our ability to fund them and complete them with minimum disruption; our ability to continue to satisfy complex rules in order for us to qualify as a REIT for federal income tax purposes; and other risks and uncertainties associated with our business described in the Company's filings with the Securities and Exchange Commission. Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that the expectations will be attained or that any deviation will not be material. All forward-looking information in this release is as of June 19, 2014, and the Company undertakes no obligation to update any forward-looking statement to conform the statement to actual results or changes in the Company's expectations.

This release should be read in conjunction with the consolidated financial statements and notes thereto included in our most recent reports on Form 10-K and Form 10-Q. Copies of these reports are available on our website at www.sunstonehotels.com and through the SEC's Electronic Data Gathering Analysis and Retrieval System ("EDGAR") at www.sec.gov.

Non-GAAP Financial Measures

We present the following non-GAAP financial measures that we believe are useful to investors as key measures of our operating performance: Earnings Before Interest Expense, Taxes, Depreciation and Amortization, or EBITDA; Funds From Operations, or FFO; and hotel EBITDA and hotel EBITDA margin. These measures should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP. EBITDA, FFO, hotel EBITDA and hotel EBITDA margin as calculated by us, may not be comparable to other companies that do not define such terms exactly as the Company. These non-GAAP measures are used in addition to and in conjunction with results presented in accordance with GAAP. They should not be considered as alternatives to operating profit, cash flow from operations, or any other operating performance measure prescribed by GAAP. These non-GAAP financial measures reflect additional ways of viewing our operations that we believe, when viewed with our GAAP results and the reconciliations to the corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business than could be obtained absent this disclosure. We strongly encourage investors to review our financial information in its entirety and not to rely on a single financial measure.

EBITDA is a commonly used measure of performance in many industries. We believe EBITDA is useful to investors in evaluating our operating performance because this measure helps investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization) from our operating results. We also believe the use of EBITDA facilitates comparisons between us and other lodging REITs, hotel owners who are not REITs and other capital-intensive companies. In addition, certain covenants included in our indebtedness use EBITDA as a measure of financial compliance. We also use EBITDA as a measure in determining the value of hotel acquisitions and dispositions.

We believe that the presentation of FFO provides useful information to investors regarding our operating performance because it is a measure of our operations without regard to specified non-cash items such as real estate depreciation and amortization, amortization of lease intangibles, any real estate impairment loss and any gain or loss on sale of real estate assets, all of which are based on historical cost accounting and may be of lesser significance in evaluating our current performance. We believe the use of FFO facilitates comparisons between us and other lodging REITs.

The following tables include both historical and pro forma forecasted information regarding the Wailea Beach Marriott Resort & Spa:

For Additional Information:

Evan Pohaski
Vice President – Corporate Finance
Sunstone Hotel Investors, Inc.
(949) 382-3082 

SOURCE Sunstone Hotel Investors, Inc.