Commercial Real Estate Direct Staff Report

Sunstone Hotel Investors, which earlier said it would give up a San Diego hotel because of a decline in the property's cash flow, and more recently threatened to default on a loan backed by a Baltimore hotel, is having trouble keeping up with debt payments on three other loans.

Last month, the San Clemente, Calif., REIT told the servicer of a $25.6 million mortgage on the Ontario Airport Marriott, a 299-room hotel next to the Ontario Airport in California's Inland Empire, that the property was not generating enough cash flow to fully support its debt. It said it wouldn't be digging into its own pocket to keep the loan current. The loan was securitized through Bear Stearns Commercial Mortgage Securities Trust, 2005-PWR9.

The 366-room Embassy Suites Chicago, which serves as collateral for a $75 million loan securitized through Banc of America Commercial Mortgage Trust, 2006-2, is evidently not generating anywhere near the amount of cash flow needed to service its debt. The loan remains with the deal's master servicer, but Realpoint has tagged it as a "high risk" for default. However, it said the property is probably worth more than the loan's balance.

And Sunstone has requested that a $48 million mortgage, securitized through Wachovia Bank Commercial Mortgage Trust, 2006-C24, and backed by the 284-room Marriott Del Mar in San Diego, be modified because of a decline in cash flow.

Meanwhile, analysts at Robert W. Baird Co. pointed to a recently amended bond indenture that allows the company to default on up to $300 million of property debt before a default of the bond is triggered. They cited a recent Sunstone investor presentation that identified hotels with relatively heavy debt burdens. That is, properties with more than the corporate average of $143,000 of debt per room.

Among them are the W Hotel in San Diego, which the company has been trying to give back to its securitized lender, the Embassy Suites Chicago, the Embassy Suites La Jolla, which is also in San Diego, and the Renaissance Baltimore Harborplace, which backs $105.8 million of debt securitized through Banc of America Commercial Mortgage Inc., 2005-4. The REIT recently warned it might default on the loan.

Incidentally, the Ontario Airport Marriott is not on the list of the company's most heavily leveraged properties.

In the first quarter, the property generated only $342,843 of cash flow, which is less than the amount needed to service its debt, according to servicer data compiled by Realpoint. For all of last year, it generated $2.6 million of cash flow, 1.34 times its debt-service obligation.

In analysis, Realpoint estimated the property was probably worth only $17.7 million - just 70 percent of its debt balance. That means the CMBS deal will likely see a substantial loss from the loan.

The transaction that owns the Ontario hotel loan also owns a $136 million mortgage on the Towers at Wyncote, a 1,086-unit apartment property in suburban Philadelphia that isn't generating enough cash to service its debt. Realpoint estimates the Wyncote property will contribute a $54.7 million loss to the PWR9 transaction, which has a remaining balance of $2.06 billion.

In total, Realpoint expects the deal to suffer $67.3 million of losses, which would completely wipe out all classes rated less than BBB-, and substantially eat away at the BBB- class. As a result, Realpoint has placed its underperform outlook on the deal's junior AAA class because of the potential degradation of its 12.7 percent subordination level.

Meanwhile, the BACM 2006-2 deal that owns the Embassy Suites Chicago is projected by Realpoint to see $45.9 million of losses, which would wipe out the $2.64 billion deal's three most-junior classes, including its unrated class. Realpoint has downgraded two of the classes to D as a result and has placed its underperform outlook on classes B, which it rates AA-, and below.

The Wachovia 2006-C24 deal could see a total of $59.9 million of losses from loans in special servicing. But the $1.6 billion deal's most senior classes have benefited from the pay off, with a prepayment premium, of its largest loan.

Comments? E-mail Orest Mandzy or call him at (215) 504-2860, Ext. 211.