SILVER SPRING, MD— For a company that made its mark in the early ’90s by jumping in and acquiring numerous distressed properties, Sunburst Hospitality Corp. is finding the current lodging real estate landscape pretty arid. Still, it’s not like SHC hasn’t been active. Since 1998, Sunburst has divested 49 properties, restructuring in 2001 after shareholders approved a leveraged buyout that took the company private some 18 months ago. After divesting 11 properties in the last year, it now has 52 properties that it owns and operates in 24 states. “We bought 54 hotels back in the early ’90s when we saw some significant opportunities,” said Jim MacCutcheon, president/CEO. “We just haven’t seen them this go ’round. You don’t have the highly motivated sellers now as you did then.” MacCutcheon believes those owners who don’t have to sell aren’t selling. “When we were buying aggressively in the ’90s, you had 15% to 20% of all hotels in delinquency on their financing. This time it’s under 5%, probably more like 1% to 2%.” Plus, the break-even occupancy point has dropped “a whole lot lower than it was then,” along with decreasing interest rates and more labor efficient hotels than in the past, the CEO noted. “Even the lenders, when they’re getting in jams with people, they’re working it out with them versus forcing a sale of the asset,” added MacCutcheon. “We try to keep our ear to the ground, but we just haven’t seen [the opportunities].” This is particularly true for the markets Sunburst wants to be in, and the CEO stressed that the company has left markets where it didn’t want to own hotels long term. These include Phoenix and Charlotte, NC. “We probably sold eight hotels in those two cities,” he said. Good fits right now, said MacCutcheon, are mid-price, extended-stay hotels in “good” locations and limited-service hotels in high-barrier-to-entry markets. He noted the MainStay Suites extended-stay product now makes up 35% of the SHC portfolio, which is weighted with Choice Hotels International products. “We like it. The business model’s good and they’ve done very well relative to the rest of the industry during the last year.” MainStays also are “very simple” to manage, he said. Sunburst this year also has been busy paying down LBO debt. In fact, the most significant factor affecting SHC in the past 12 months is that its cash flow “has taken a big hit,” said MacCutcheon. “On a trailing 12-month basis, we’re 10% to 15% below where I would have said a year ago we’d be on cash flow.” A combination of factors— the economy, 9/11, drive-to versus fly-to properties— are all part of the mix-of-the-moment affecting the company, said MacCutcheon. “Our RevPAR in places like San Francisco, LAX, Anaheim and Miami was so high a year-and-a-half ago, that— having taken big hits there on RevPAR— that’s pulling down our total company-wide statistics.” There’s also impact from the downturn in inbound international travel. “The South Americans aren’t coming to South Florida, the Germans aren’t coming the way the used to; the Asians aren’t coming to the West Coast. We probably rely on the business traveler more than most limited-service operators. This is something we saw coming down in March of last year, and then in September we just got our clocked cleaned like everybody else,” said MacCutcheon. Sunburst had a bridge loan on the LBO tied to planned asset sales that it had 24 months to repay. That was paid down in only eight months, pulling the company out of the debt a year ago. “Ironically, we closed our last hotel sale in September ’01, so we were selling at a good time,” said MacCutcheon. “Since then we’ve been sort of hunkering down, trying to maximize our internal cash flow and continue to pay down debt using that cash flow and seeing what opportunities are around the corner.” While Sunburst is concentrating on internal economies rather than acquisitions, it still has its normal portfolio capital expenditures and in certain cases is
