Business Context and Reporting Period
Company: Sunstone Hotel Investors, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: November 1, 2010
Event: Entry into a Material Definitive Agreement (Credit Agreement).
Key Financial Metrics and Facility Details
This filing details the establishment of a new credit facility rather than reporting period-end financial results (e.g., revenue or net income). Key metrics regarding the facility include:
- Facility Size: Revolving credit facility up to $150 million, with a $50 million sub-facility for letters of credit.
- Expansion Option: Facility may be increased to $250 million subject to additional lender commitments.
- Current Utilization: No borrowings outstanding as of the filing date.
- Interest Rates:
- Eurodollar Rate Loans: LIBOR + 3.25% to 4.25%.
- Base Rate Loans: Base Rate + 2.25% to 3.25%.
- Default Penalty: Interest rate increases by 2.0% upon an Event of Default.
- Unused Fee: Annual fee of 0.40% to 0.75% on the unused portion.
- Term: Terminates November 1, 2013, with an option to extend for one additional year.
- Collateral: Secured by a first lien security interest in equity interests of subsidiaries owning Borrowing Base Properties.
Material Changes and Covenants
The primary material change is the execution of the Credit Agreement with Bank of America, N.A., as Administrative Agent. The agreement imposes the following financial covenants:
- Maximum Consolidated Net Debt to EBITDA: Ranges from 8.65:1.0 down to 6.50:1.0 over the life of the agreement.
- Minimum Consolidated Adjusted EBITDA to Fixed Charges: Ranges from 1.10:1.0 up to 1.50:1.0.
- Minimum Tangible Net Worth: $653,760,000 plus 80% of aggregate increases in Shareholders' Equity.
- Indebtedness Limits:
- Maximum recourse indebtedness: 10% of consolidated tangible asset value.
- Maximum secured indebtedness: 50% of consolidated tangible asset value.
Operational covenants limit the ability to incur liens, change the nature of the business, merge, sell assets, make distributions (unless required for REIT status), or make loans/investments.
Outlook, Risks, and Contingencies
Use of Proceeds: Funds may be used for general corporate purposes, capital expenditures, acquisition financing, and repayment of indebtedness.
Risks and Events of Default: The agreement includes standard events of default, including failure to pay principal or interest, breach of representations, failure to comply with covenants, defaults on other indebtedness, Change of Control, and failure to maintain REIT status.
Related Party Transactions: Certain lenders and the Administrative Agent have performed and may perform commercial banking, investment banking, and advisory services for the Company, for which they receive customary fees.
Investor Verification Checklist
- Verify the specific properties included in the "Borrowing Base" to understand the actual borrowing capacity versus the $150 million commitment.
- Confirm the Company's current Consolidated Leverage Ratio to determine the applicable interest rate margin and unused fee percentage.
- Review the full text of the Credit Agreement (Exhibit 10.1) for detailed definitions of EBITDA, Fixed Charges, and Tangible Net Worth.
- Monitor compliance with the minimum tangible net worth covenant of $653.76 million.
- Assess the impact of the 50% secured indebtedness limit on future acquisition financing capabilities.