Sunstone Hotel Investors May Sell 10% in Stock

Sunstone Hotel Investors Inc., owner of 57 Western U.S. hotels, is considering selling an equity stake of up to 10% to raise cash to buy properties, Chairman Robert Alter said.

The San Clemente 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.

Late Monday, however, the company urged shareholders to reject an unsolicited bid from IG Holdings Inc. to acquire up to 2% of Sunstone’s stock for $7.50 a share. Sunstone said IG’s bid is 15% to 20% below the recent market value of Sunstone shares, which closed Monday at $9, down 13 cents.

Phoenix-based IG Holdings, a company of private investors, reportedly has made similar tender offers for shares in a number of public companies at prices far below their shares.

Sunstone shares have fallen 47.8% this year. The company and other REITs, such as 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 is stopping hotel companies from issuing new stock or bonds to the public.

The company’s hotels operate under brands such 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 that grew too fast, Alter said, 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 some $1.7 billion in debt coming due.

Some investors criticized the sale, however, because it could dilute the value of their shares.