Sunstone Hotel Investors, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Sunstone is a REIT that owned 15 hotels at quarter-end, operated by third-party managers. Financial figures below are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $243.4 | $172.3 |
| Operating expenses | $218.7 | $179.1 |
| Net income | $21.1 | $15.1 |
| Income attributable to common stockholders | $17.3; $0.08 per diluted share | $10.2; $0.05 per diluted share |
| Net cash provided by operating activities | $47.2 | $13.1 |
| Adjusted EBITDAre, excluding noncontrolling interest | $60.0 | $27.2 |
| Adjusted FFO attributable to common stockholders | $43.8 | $16.4 |
Revenue less operating expenses was $24.8 million, or approximately 10.2% of revenue, versus an operating loss of $6.8 million, or approximately 3.9% of revenue, in Q1 2022. These simple calculations are not company-defined measures. Interest expense was $13.8 million, up from $5.1 million.
- Hotel metrics: For the 14 hotels owned in both periods, occupancy rose 16.0 percentage points to 69.0%, ADR increased 3.2% to $311.05, and RevPAR rose 34.3% to $214.62.
- Cash and debt: At March 31, cash and cash equivalents were $96.4 million, restricted cash was $49.1 million, and total debt principal was $815.6 million. The company had $500 million of unused revolving-credit capacity, subject to covenants. Total liabilities were $1.00 billion.
- Cash use and commitments: Investing activities used $22.5 million, including $22.5 million for renovations and additions. Financing activities used $36.5 million, including $18.6 million for common-stock repurchases and $14.0 million for dividends and distributions. Remaining renovation and construction commitments were $51.0 million.
Material changes versus the prior comparable period
- Revenue increased 41.3%; room revenue rose 40.1% and food-and-beverage revenue rose 78.9%. The company attributed improvement mainly to stronger travel demand and higher occupancy, alongside the 2022 acquisition of The Confidante Miami Beach.
- Results are not directly comparable: Q1 2022 hotel operations were affected by COVID-19’s Omicron variant; Sunstone acquired The Confidante in June 2022 and sold three Chicago hotels in early 2022.
- Operating expenses increased 22.1%, reflecting higher activity and occupancy, property taxes, insurance, utilities, payroll and management fees. Corporate overhead declined 21.0%.
- Interest expense increased $8.7 million, driven by additional term-loan borrowings, higher rates on variable debt and unfavorable noncash derivative changes. The reported weighted-average interest rate was approximately 5.55%, versus 3.6% a year earlier.
- Q1 2022 included $22.9 million of hotel-sale gains and $4.4 million of Hurricane Ida insurance proceeds in interest and other income. Q1 2023 instead included a $9.9 million gain from release of escrowed funds and resolution of potential obligations tied to the former Hilton Times Square.
- Operating cash flow improved to $47.2 million from $13.1 million. Investing cash flow shifted from $164.4 million provided in Q1 2022, largely from hotel-sale proceeds, to $22.5 million used in Q1 2023.
Outlook, risks and unusual items
- The filing provides no specific company earnings or operating guidance. Management says inflation and higher interest rates have raised labor, food, renovation, tax, insurance, utility and borrowing costs; rate increases by hotel operators have partly mitigated expense pressure.
- Management expects liquidity from working capital, its revolver and potential asset sales or capital-market transactions, while cautioning that financing may be less available or more costly and future asset sales are not assured.
- A $220 million mortgage on the Hilton San Diego Bayfront was scheduled to mature in December 2023. Subsequent to quarter-end, on May 1, Sunstone entered a $225 million SOFR-based term loan, with an initial two-year term and a 12-month extension option, expecting to use substantially all proceeds to repay that mortgage.
- Management reported 51.6% of debt fixed or swapped to fixed rates; its market-risk discussion states 78.5% of debt obligations were fixed or subject to cap or swap protection. A 50-basis-point change in variable rates was estimated to affect future earnings and cash flows by approximately $2.5 million.
- Key risks include economic slowdown or recession, inflation, interest-rate and refinancing exposure, hotel competition and alternative lodging, reliance on travel demand and third-party managers, renovation impacts and costs, severe weather and climate events, cyber risks, and geographic concentration. Eleven hotels were concentrated in California, Florida, Hawaii and Massachusetts.
- After quarter-end, the company repurchased another 301,461 shares for $2.9 million. It had $492.4 million remaining under its repurchase program at March 31 and a $300 million at-the-market equity offering program with no shares issued under it in Q1.
- The filing reports no legal proceedings, no new risk factors in this quarter, no defaults on senior securities, and effective disclosure controls. Management reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Progress and final terms of the May 2023 term loan and repayment of the Hilton San Diego Bayfront mortgage, including the resulting interest cost and maturity profile.
- Whether stronger hotel demand and RevPAR persist, and how operating-cost inflation affects hotel-level margins and cash generation.
- Revolver covenant headroom, availability of financing, and the effect of variable rates; note the filing’s differing descriptions of fixed-rate debt versus debt with rate protection.
- Timing and funding of the $51.0 million renovation commitments and other capital needs, alongside repurchases and dividends.
- Resolution of the remaining Hilton Times Square employee-related obligation and any material legal, environmental, weather or insurance developments.