IRVINE, Calif., April 28, 2021 — Sunstone Hotel Investors, Inc. (the “Company” or “Sunstone”) (NYSE: SHO), the owner of Long-Term Relevant Real Estate® in the hospitality sector, today announced the acquisition of the fee-simple interest in the 130-room Montage Healdsburg (the “Resort”). The newly constructed luxury Resort, which was completed in December 2020, was acquired for a gross purchase price of $265 million ($2,038,461 per room). The acquisition was funded from cash on hand and through the direct issuance of $66 million of perpetual preferred equity (the “Series G Preferred Equity”) to the seller, affiliates of Ohana Real Estate Investors (“Ohana” or the “Seller”). Upon stabilization, the Company expects the Resort to generate a 6.0% to 7.0% net operating income yield on total invested capital. The acquisition of the Resort further advances Sunstone’s strategy of owning a portfolio of Long-Term Relevant Real Estate®.
John Arabia, President and CEO, stated, “Montage Healdsburg is a spectacular resort, ideally located in one of the most sought-after and highest-rated leisure destinations in the U.S. The Resort, which took over 15 years to develop, is a perfect example of Long-Term Relevant Real Estate and its addition elevates the overall quality and growth prospects of our portfolio. Leveraging our industry relationships, we acquired the Resort on an off-market basis and at a discount to what it would cost to develop today. The acquisition is consistent with our stated tactics of acquiring LTRR in the early phases of a cyclical recovery and putting to work a portion of our excess liquidity, all while maintaining financial flexibility and access to capital to fund incremental external growth. Additionally, we are funding 25% of the transaction with attractively structured perpetual preferred equity that is being issued directly to the Seller that aligns our interests and gives us additional optionality.”
Tucked away among oak trees and sprawling vineyards in the hills of Sonoma County, Montage Healdsburg offers a secluded and serene retreat with convenient access to the world-renowned wineries and amenities of the country’s premier wine region. Built within the contours of the natural landscape, the transformative hideaway offers 130 bungalow-style rooms and suites, each with an outdoor fireplace and many with their own outdoor shower. The expansive 117-acre luxury Resort includes 16 acres of vineyards, an 11,500-square-foot spa, separate adult and family pools both of which overlook the vineyard, multiple signature dining experiences, over 12,000 square feet of purpose-built meeting space and various event lawns. The Resort will continue to be managed by Montage Hotels & Resorts.
Montage Healdsburg sits adjacent to the separately owned Montage Residences Healdsburg, which together with the Resort, comprise a 258-acre destination. Montage Residences Healdsburg will feature 40 to-be-built luxury homes that will be eligible to participate in the optional turn-key resort rental program. Ohana will continue to own and be responsible for the development and sales of Montage Residences Healdsburg.
For more information about the Resort, follow @montagehealdsburg or visit www.montagehotels.com/healdsburg.
Series G Preferred Equity
The acquisition is being partially funded through the issuance of $66.25 million of Series G Preferred Equity directly to the Seller of the Resort. The Series G Preferred Equity, which is callable at liquidation value by the Company at any time, will pay an initial dividend rate equal to the Resort’s annual net operating income yield on the Company’s investment in the Resort.
Transaction Rationale and Corporate Implications
The Company highlights the following rationale and corporate implications of the Montage Healdsburg transaction.
The Montage Healdsburg transaction:
- Is directly on strategy and increases the Company’s concentration of Long-Term Relevant Real Estate®.
- Is expected to generate a 6.0% to 7.0% net operating income yield upon stabilization.
- Increases the concentration of portfolio leisure demand by over 250 basis points to nearly 30% of pro forma rooms revenue.
- Is consistent with the Company’s stated tactic of being more acquisitive in the early years of a cyclical recovery following several years of well-timed, late-cycle divestitures of commodity hotels.
- Is in-line with the intention of increasing financial leverage through external growth in the early years of a cyclical recovery, while maintaining relative balance sheet strength.
- Deploys a portion of our outsized liquidity while maintaining access to capital to fund future investments.
- Is expected to provide additional earnings to help resume compliance with our unsecured debt covenants which will provide greater financial and capital allocation flexibility.
For additional information on the acquisition, please refer to the Montage Healdsburg Acquisition presentation located in the Investor Relations section of the Company’s website.
About Sunstone Hotel Investors, Inc.
Sunstone Hotel Investors, Inc. is a lodging real estate investment trust (“REIT”) that as of the date of this release has interests in 18 hotels comprised of 9,147 rooms, the majority of which are operated under nationally recognized brands. Sunstone’s business is to acquire, own, asset manage and renovate or reposition hotels considered to be Long-Term Relevant Real Estate®. For further information, please visit Sunstone’s website at www.sunstonehotels.com.