Sunstone to Acquire Hyatt Regency in San Francisco for $262MM

Ensamble Real Estate Investments, Emeryville, Hyatt Place Emeryville, San Francisco, Bay Area, Esat Bay


By Jon Peterson

Aliso Viejo-based Sunstone Hotel Investors is in the process of buying the 802-rooom Hyatt Regency San Francisco hotel located at Five Embarcadero Center in San Francisco for $262.5 million or $327,000 per room.

“This is our first entry into the San Francisco high barrier to entry market in downtown San Francisco. This deal should close sometime in early December,” says Ken Cruse, chief executive officer for Sunstone in its third quarter 2013 results conference call.

The buyer thinks that the property has been a strong performer. “The Hyatt in San Francisco has a RevPar of $208 for this year. This represents an increase of 11 percent for RevPar in 2012,” said Cruse.

This gross purchase price represents a 14.2x equity multiple on 2014 forecast EBITDA of $18.5 million. The cap rate on this transaction is 6 percent. This return is based on forecasted net operating income for the 2014 year.

Sunstone acquired the property in an all-cash deal. The publicly traded REIT plans to fund the acquisition of the hotel using proceeds from its issuance of common stock on November 1st.

Hyatt will continue to operate the hotel under an operating lease with economics that follow a typical management fee structure. Sunstone is planning a room renovation on the property to be started in early 2014.

Sunstone sees that the Hyatt Regency is located in the Embarcadero District in downtown San Francisco. The REIT thinks that the property will benefit from San Francisco’s favorable supply and demand dynamic as well as the over three million square feet of additional office space under construction within a five block radius of the hotel.

Sunstone sees that there will be very little new hotel construction happening in San Francisco. The company expects the San Francisco market to face less than one percent growth in new hotel supply over the next four years as hotel development in the city generally remains unattractive due to high development costs.

The property’s 444 square foot average guestroom and 67,000 square feet of meeting and banquet space position the hotel to capitalize on the expansion of the Embarcadero District as the premiere branded hotel in the Embarcadero.

Sunstone is a REIT that only invests in hotels. Through November 11th, it has interests in 28 hotels comprised of 12,942 rooms. Most of its assets are upper upscale properties and are operated under national brands like Marriott, Hilton, Hyatt, Fairmont and Sheraton.

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