It was only a matter of time. Commercial property developers and owners are no different from houseowners. When it makes sense financially to walk away from a loan, be assured they will be gone. And yesterday we had more proof that size and reputation are no obstacles when choosing to send the keys back to the mortgage holders.
Sunstone Hotel Investors, Inc., a publicly traded REIT and owners of the chic San Diego W Hotel, announced yesterday they plan to forfeit the 258-room luxury property back to the lien holders in lieu of making any further payments. The property was purchased in 2006 for $96 million and has a current loan balance of $65 million. The owners say it is worth substantially less than $65 million, and after failing to reach a deal with creditors, they have chosen to give up the property.
Full story from the WSJ:
Sunstone Hotel Investors Inc. intends to forfeit the 258-room W San Diego to its lenders after its efforts to reach a compromise on the luxury hotel's $65 million securitized mortgage failed.
Sunstone, a real-estate investment trust that owns 43 hotels, bought the W for $96 million in 2006 from a group led by developer Gatehouse Capital Corp. Since then, the slumping performance of the W San Diego and the broader hotel market has made supporting that mortgage a challenge for Sunstone.
Foreclosures and forfeitures of hotels are becoming commonplace in this recession, though a public REIT turning over a high-profile, luxury property still is rare. Default rates on securitized mortgages backed by hotels have risen sharply as travelers have cut back, occupancies and revenues have tanked and, subsequently, hotel owners have run into difficulty making their debt payments. To wit, 3.16% of securitized mortgages backed by hotels now are delinquent on payments as compared to just 0.44% at this time last year, according to Trepp LLC.
A recent report by the special servicer of the W's mortgage, Centerline Serving Inc., noted that the W San Diego since 2007 has failed to generate enough monthly income to cover both its operating costs and its interest payments.
The special servicer "declined our proposed modifications (to the loan), and we didn't make the June 1 payment and we don't intend to," Sunstone President and Chief Executive Officer Arthur Buser said in an interview Sunday. "We're prepared to convey the property to the lender in lieu of repayment."
A special servicer is a lenders' representative that, among other duties, negotiates modifications of securitized mortgages with borrowers.
Mr. Buser declined to say what compromises Sunstone proposed. "We offered several different things, and they came back with 'no,'" Mr. Buser said. "Our basic choices are to keep on paying or not pay. Based on those alternatives, it's an easy choice."
A Centerline representative didn't return messages seeking comment. However, the special servicer recently hired law firm Perkins Coie LLP and industry consultant Prism Hotels & Resorts, which has managed foreclosed hotels and overseen others as a court-appointed receiver, to assist it in regard to the W San Diego.
Sunstone, based in San Clemente, Calif., estimates the W San Diego is worth much less than the $65 million balance on its mortgage. At the end of last year, the hotel posted an occupancy of 69% and generated revenue per available room of nearly $153.
Sunstone made a change recently to its unsecured debts that will make it easier for the REIT to forfeit mortgaged properties if it needs to do so. Last month, Sunstone included in a consent-solicitation offer to its bondholders a provision dictating that any default on a separate Sunstone loan of up to $300 million wouldn't in turn trigger a cross default of those bonds. Previously, the cross-default threshold was $25 million or more. Thus, Sunstone now can default on mortgages of up to $300 million and not worry about its bondholders declaring a cross default and demanding immediate payment.
The W San Diego is managed by Starwood Hotels & Resorts Worldwide Inc., which owns the W brand. Management contracts typically survive foreclosure.