The owners of downtown’s W San Diego are walking away from the 258-room luxury hotel after their tries to modify their $65 million mortgage failed, according to a company announcement yesterday. The real estate investment trust Sunstone Hotel Investors Inc. owns 43 hotels and paid $96 million for the W in 2006.

Here’s more from the Wall Street Journal:

Since then, the slumping performance of the W San Diego and the broader hotel market has made supporting that mortgage a challenge for Sunstone.

Foreclosures and forfeitures of hotels are becoming commonplace in this recession, though a public REIT turning over a high-profile, luxury property still is rare. Default rates on securitized mortgages backed by hotels have risen sharply as travelers have cut back, occupancies and revenues have tanked and, subsequently, hotel owners have run into difficulty making their debt payments. …

A recent report by the special servicer of the W’s mortgage, Centerline Serving Inc., noted that the W San Diego since 2007 has failed to generate enough monthly income to cover both its operating costs and its interest payments. Sunstone has been covering the shortfall since 2007 to keep the loan out of default, but it opted this month to stop doing so.

The special servicer “declined our proposed modifications (to the loan), and we didn’t make the June 1 payment and we don’t intend to,” Sunstone President and Chief Executive Officer Arthur Buser said in an interview Sunday. “We’re prepared to convey the property to the lender in lieu of repayment.”

The OC Register’s real estate blog includes a breakdown of some of the Orange County-based company’s cited reasons for bailing on the hotel:

  • Competition in San Diego is steep. New hotels include a number of luxury boutique hotels, two additional Starwood-branded hotels and a 1,190-room convention hotel.
  • Hotel has a $65 million, 6.14% mortgage due in 2018 — that means principal payments are 30 times the projected 2009 cash flow.
  • Company skipped a June 1 loan payment.

Here’s Ken Cruse, chief financial officer, from the company announcement, stating that the company is able to make the monthly payments, but just doesn’t think it’s the best business practice to do so anymore:

As a result of negative supply and demand fundamentals in the San Diego market, we believe the intrinsic value of the W San Diego is now meaningfully below the principal amount of its debt. While the Company maintains more than adequate liquidity to support or repay this mortgage, we believe a conveyance of this hotel in settlement of the debt would be in the best interest of our stockholders as it would deleverage the Company.

KELLY BENNETT

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