Sunstone Hotel Investors Chairman and interim CEO Douglas Pasquale said his company's decision to move on from previous CEO John Arabia was driven by the need to find someone with a deeper background in real estate transactions and "different leadership attributes" to help expedite the real estate investment trust's evolution as a company.
Speaking during the company's third quarter earnings call, Pasquale described Arabia as a long-time friend who did a great deal to reduce the company's debt levels and improve corporate governance, but it was time for a change.
"With the passage of time, as the company grew and evolved, it was the board's determination that — notwithstanding the fact that over certain periods of time the company performed well on a relative basis — there was significant more opportunity to create value," he said. "In order to best accomplish that, it was the board's view that new attribute traits were important, including someone who had more of a real estate background and transaction background."
Sunstone officials announced Arabia was leaving the company in early September in tandem with the announcement that Pasquale would take over the chief executive role on an interim basis as they conducted a search for a permanent replacement. Arabia initially joined the company in 2011 as CFO and executive vice president of corporate strategy before being promoted to president in 2013 and eventually taking over the chief executive role in 2015.
Pasquale said during the call he accepted the position on the condition he would hold it for less than a year, and a filing with the Securities and Exchange Commission indicates he will receive a $825,000 base salary with a $2.25 million one-time restricted stock award with the potential to earn between $750,000 and $3 million in performance bonuses.
In an unusual move for a hotel earnings call, Jeffrey Pierce, managing partner for activist investor group Snow Park Capital Partners, asked Pasquale to provide a deeper explanation for the separation during the question-and-answer portion of the call. Pierce said the cost of Pasquale's salary combined with severance for Arabia is "just a dead weight" for the REIT.
"The explanation that was given on a disorderly transition I think is just unsatisfactory," he said. "Saying it's the right time to move on and creating a disorderly transition that costs shareholders $20 million, I think, is very disrespectful for shareholders."
He went on to describe Arabia as "arguably the most well-liked CEO in the space."
In response, Pasquale reiterated his claim that the company has evolved to the point that it needs a different type of leader.
"So I don't disagree that John was very well-liked," he said. "I am among his biggest fans, OK? So let's start with that. Now I'm going to set it aside. I wish John nothing but the best. I hope at some point in time we're able to rekindle our friendship. He's very intelligent, and he's a good man. We made the decision that his skill set did not match what the needs of that company are. That costs money. That's how business works. That's how it was set up. You're going to be able to tell if we made a good decision or not based on what we do from here."
Pasquale went on to applaud a wave of transactions the company has completed in the lead-up to the conference call, which includes:
- A deal to purchase the 85-room Four Seasons Resort Napa Valley for $177.5 million, which marks one of the most expensive hotel deals on record on a per-room basis.
- The October sale of the 348-room Renaissance Westchester for $18.8 million.
- An agreement to sell the 340-room Embassy Suites La Jolla for $226.7 million.
While many of these deals started under Arabia's tenure, Pasquale said they required complicated work done under the existing leadership team. He said those deals are "an indicator of good things to come down the road."
Sunstone currently has 17 hotels in its portfolio.
Asked by analysts whether the leadership change could be a catalyst to sell the company, Pasquale said the company has a path to growth on its own.
"The board is completely focused on maximizing shareholder value and believes that the company has a clear path to achieve its goals," he said. "As I mentioned, we're actively conducting a search process now to find a new CEO to continue executing on our capital recycling and growth plans. And as you can see, from yesterday's announced transactions, we're executing on that strategy. I believe we're off to a great start. And as I've said, a couple times already, we expect to continue to build on this momentum. So, you know, we know our commitment to maximize shareholder value, and but that's what we're doing, and we believe we have a very good strategic plan. We have a great balance sheet. We have a great management team. And we have a very good portfolio that we have every intent on on building and improving upon."
In Sunstone's third quarter earnings release, the company reported a net loss of $22.1 million, an improvement from a loss of $91.1 million in the same quarter the previous year, with companywide adjusted earnings before interest, taxes, depreciation and amortization for real estate of $35.4 million, a 197.7% increase.
As of press time, the company's stock was trading at $13.10 a share, up 15.6% year to date. The NYSE Composite was up 18.6% for the same period.