Sunstone Hotel Investors
Inc. is forfeiting a group of 11 U.S. hotels to Massachusetts Mutual
Life Insurance Co. after stopping payments on a $246 million mortgage,
the latest example of a commercial-real-estate owner giving up a
money-losing asset to a lender.

Sunstone said it is turning over the hotels to MassMutual after the
two couldn't reach a deal to workout the loan by reducing payments,
among other things. Sunstone had skipped its November payment on the
mortgage in a bid to compel the insurer to work out a deal.

The hotels, ranging from the Kahler Inn & Suites in Rochester,
Minn., to the Holiday Inn Downtown in San Diego, cumulatively generated
$20 million in annual cash flow. But their combined operating and
interest expenses left Sunstone with a $19.1 million annual loss.
Sunstone now estimates the value of the 11 hotels at $173 million, well
below their mortgage amount.

In deeding back the properties, Sunstone "is in a much better place,
more delevered, better credit statistics and much stronger," Sunstone
CEO Art Buser said in an interview.

A MassMutual spokesman declined to comment. Sunstone said in its
third-quarter conference call in November that it had stopped making
payments on the MassMutual mortgage.

Many commercial mortgages are nonrecourse, meaning the borrower can
walk away from the loan without penalty by forfeiting the property
pledged as collateral. By doing so, the borrower frees itself of the
debt and, often, a cash drain caused by the property's operating costs.
Thus, handing back the keys has become an attractive option as many
office buildings, hotels and shopping malls no longer generate enough
cash to make their mortgage payments. And in many cases, the properties
no longer are worth the amounts borrowed against them.

Sunstone, a real-estate investment trust based in San Clemente,
Calif., turned over three other hotels—the W San Diego, the Marriott
Ontario Airport hotel in Ontario, Calif., and the Renaissance
Westchester in White Plains, N.Y.—to separate lenders in the past year.
Another hotel REIT, Ashford Hospitality Trust, disclosed last month it is turning over the Hyatt Regency Dearborn in Detroit to a lender. Morgans Hotel Group Inc. is doing the same with the Mondrian Scottsdale in Arizona.

While the recession hit all property types, hotels were among the
hardest hit because, unlike offices and malls with long-term leases,
hotels can empty out overnight. That fact now is reflected in
distressed-debt statistics. The 60-day past-due delinquency rate on
securitized mortgages tied to hotels now is nearly 8.1%, up from 0.5% a
year ago, according to debt-rating company Fitch Inc. Real Capital
Analytics now counts $1.4 billion in U.S. hotel loans either in
foreclosure or on banks' books because of defaults.

Sunstone's Mr. Buser said the forfeiture to MassMutual is the last
one Sunstone intends to make in this cycle. The REIT now owns 26 hotels
and has roughly $400 million in cash and equivalents amassed in two
equity sales last year and asset sales in 2008 and 2009.

"Now the resources of the firm, both the people and the money, can
be switched to offense," Mr. Buser said. "We're seeing an increasing
number of acquisition opportunities."

Sunstone prepared for its forfeitures last year by reaching
agreement with holders of its $65 million in bonds that no cross
default of the bonds would be declared as a result of it defaulting on
up to $300 million of mortgages.

By KRIS HUDSON