Sunstone Hotels to Bank: Take this W and Shove it

Today's WSJ is reporting that Sunstone will simply turn over the W San Diego to the hotel's mortgage holder rather than continue paying the mortgage.

Sunstone, a REIT, owes $65M on the W which it purchased in 2007 for $96M. That translates to over $250,000 in debt per key for the 258 room hotel. Not surprisingly, Sunstone says the hotel is now worth less than the $65M mortgage so, like so many residential mortgage holders, they are simply walking away from the hotel and giving it back to the bank.

The WSJ reported that the hotel ran a 69% occupancy rate in 2008 and generated revenue per availiable room of ~$153 - not enough to cover the debt service.

The hotel has always been location challenged in that it is not within walking distance of the historic Gas Lamp Quarter where most of the restaurants and night life are in downtown San Diego. The opening of the 1190- room Hilton San Diego Bayfront has also not helped the W nor the overall San Diego market from a rate/occ perspective. In addition, Starwood added two hotels to its San Diego roster - The U.S. Grant Hotel (a Luxury Collection Hotel which has been recently renovated) and the Westin Gas Lamp Quater - a 450 room hotel. By adding additional assets that compete for the same pool of Starwood Preferred Guest members as well as groups and meetings, Starwood may have further compounded the W's troubles.

Of note, the management of the hotel as a W will probably not change anytime soon - management contracts usually live beyond ownership.