In a turbulent financial market, players such as Blackstone are worth tracking because they usually have more wherewithal to invest in hotels than others do.
The investment was notable less for its size than what it indicated about market trends. Blackstone bought about 8.65 million shares in the small, publicly traded Aliso Viejo, California-based hotel real-estate investment trust.
Blackstone’s move gave it control of about 4 percent of shares outstanding and made the firm one of the five largest shareholders as of June 30. Sunstone’s largest investors, such as BlackRock, Vanguard, and StateStreet, have invested passively, holding the stock in their mutual funds and other offerings.
Blackstone and Sunstone didn’t respond to requests for comment.
While small, Sunstone owns full-service hotels under the Marriott, Hilton, and Hyatt brands in popular locations, such as the Montage Healdsburg resort in California wine country. It has carried out nearly $700 million in transactions this year, including its purchases of the Hilton San Diego Bayfront and the Confidante Miami Beach, managed by Hyatt. In comparison, $5.3 billion worth of hotels were sold in the second quarter across the U.S, said LW Hospitality Advisors.
“Sunstone’s balance sheet is healthy,” said a J.P. Morgan research report issued before the Blackstone move. Joseph Greff and other analysts forecast that the company will end the year with its debt only about three times its adjusted earnings.
But Sunstone may only have the capital firepower to make one or two more hotel acquisitions in the next year. The company generated $37.7 million in net income on $251.2 million in revenue in the second quarter.
“It’s better positioned than others to be a likely net buyer over the near term,” wrote analysts at Jefferies in a report titled “Locked, Loaded, and Looking for Targets.” But the Jefferies analysts, writing before the Blackstone investment, were cautious about the company’s “ability to deploy increased liquidity through the next economic cycle.”
Blackstone’s Puzzling Intentions
The world’s largest private equity firm may see hotels as a category that will be more resilient during economic cycles than other real-estate assets. Hoteliers can adjust rates nightly to adapt to inflation or demand shifts, unlike the managers of commercial real estate with long-term tenants.
So Blackstone may be an early leading contender to buy Sunstone and take it private. The firm’s support could grow to enable Sunstone to speed up acquiring hotels while streamlining operations and applying best practices from its other hotel portfolio companies.
Blackstone, a veteran real-estate investor, has notched many wins with its hotel investments and may be looking for more. An 11-year investment in Hilton led to a tripling of its returns in 2018. Its sale of The Cosmopolitan in Las Vegas was its most profitable investment ever, netting the company about $4.1 billion in profit. Earlier this year, Blackstone joined Starwood Capital in buying 111 WoodSpring Suites properties from Brookfield Asset Management for $1.5 billion. Last year, Blackstone and Starwood Capital bought Extended Stay America chain and its approximately 650 hotels for $6 billion.
Veteran private equity firms such as Blackstone may often have the edge over other hotel investors over the next year because their scale and diversified portfolios may help them complete more hotel company acquisitions despite rising interest rates driving up the price of debt.
On a side note, a modest benefit for Blackstone of its ownership stake in Sunstone is that the firm might be better able to cross-sell the software service of Groups360, a platform that helps match meeting planners with venues — that Blackstone Innovations Investments owns a minority stake in. Group travel accounted for 44 percent of Sunstone’s business in the second quarter.
“Group room nights for the third and fourth quarter 2022 are pacing at approximately 82 percent of pre-pandemic levels at an average rate that is 5 percent higher than 2019,” said CEO Bryan Giglia on an earnings call this month. “This would imply that our overall group revenue pace for this time period is down only 15 percent from the same time in 2019.”
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Photo credit: A guest room at the Montage Healdsburg, a resort in California wine country owned by Sunstone Hotels. Source: Montage.