On Sunday, Sunstone REIT (SHO) provided a business update and discussed an "elective default" on their W San Diego property after failing to come to an agreement with their CMBS special servicer.  The company expects to "pursue similar options with certain of its other mortgaged hotels" where the mortgages exceed the value of the property.  We expect to see other REITs and private owners follow suit and hand back the keys on many properties over the next three years, mostly on mortgages underwritten at the peak of the market.


Back on May 20th, SHO amended its exchangeable notes indenture to increase the permissible basket of defaults on non-recourse indebtedness from $25MM to $300MM, before triggering an acceleration of payment.  This amendment was specifically aimed at increasing SHO's ability to exercise its option to walk away from "over-leveraged" assets.  We haven't seen this type of amendment pursued by other lodging companies yet, but expect that those that have limited baskets on non-recourse defaults to pursue similar strategies in the future.


This particular asset faced a more extreme situation than most hotels.  Deteriorating fundamentals in the San Diego upper upscale hotel market assets and increased supply created one of the worst hotel environments in the country.  Still, the W San Diego outcome provides another data point on the fallacy of using "NAV" to support valuations.  The confluence of the supply/demand issues led to the determination by SHO management that the asset was permanently impaired.  It no longer made sense to fund the negative cash flows of this asset ($4MM of interest expense vs 2009E EBITDA of $2MM).  Interestingly, the mortgage still had 8.5 years left before maturity and an attractive rate of 6.25%, so this was truly a proactive default.  


Sunstone acquired this asset in 2006 for $96MM or $372k per key and handed the keys to the lenders at $252k per key.  They concluded that the asset was worth "much less" than the $65MM mortgage on it.  Generating just $2MM in estimated EBITDA, the company made the accretive choice surrendering this asset at 32x EBITDA.  We're not sure how much less SHO thinks this asset is worth but we would guess somewhere in the $30MM range is more reasonable, a staggering 70% below where it was acquired just 3 years ago.

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more