Sunstone Hotel Investors, Inc. — Q3 2022 Form 10-Q
Business and period. The filing covers the quarter and nine months ended September 30, 2022. Sunstone is a hotel-owning REIT; it owned 15 hotels at quarter-end. Results reflect a recovering lodging market, portfolio changes, and the continuing effects of COVID-19.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $244.3 million | $167.4 million | $667.9 million | $335.3 million |
| Net income (loss) | $20.5 million | $(22.1) million | $73.3 million | $(105.3) million |
| Income (loss) attributable to common stockholders | $17.1 million; $0.08/share | $(29.3) million; $(0.13)/share | $58.9 million; $0.27/share | $(121.0) million; $(0.56)/share |
| Net cash from operating activities | Not separately provided for the quarter | $149.7 million | $8.4 million |
- Q3 operating expenses were $214.3 million, up 18.0%; revenue grew faster, increasing 45.9%. Q3 operating income before interest and other items was approximately $30.0 million, versus an operating loss of approximately $14.2 million a year earlier.
- Q3 Adjusted EBITDAre, excluding noncontrolling interest, was $63.8 million versus $35.4 million; Adjusted FFO attributable to common stockholders was $51.3 million versus $23.4 million. These are non-GAAP measures and may not be comparable across issuers.
- For the nine months, investing cash outflow was $134.4 million and financing cash outflow was $10.2 million. Capital expenditures and hotel additions were significant uses of cash.
- At September 30, cash and cash equivalents were $117.6 million, restricted cash was $50.3 million, and debt principal was $816.6 million, compared with $611.4 million at December 31, 2021. The company had no revolver borrowings and $500 million of available capacity, subject to covenants.
- 42.4% of debt was fixed-rate or swapped to fixed rates; separately, management’s market-risk disclosure says 69.4% was fixed or subject to an interest-rate cap. These measures describe different protection, so verify their definitions. A 50-basis-point rate movement was estimated to change annual earnings and cash flows by about $2.4 million.
Material changes versus the prior comparable period
- For the existing portfolio, Q3 occupancy rose 19.3 percentage points to 72.5%, ADR increased 11.0% to $290.42, and RevPAR rose 51.2% to $210.55. For the first nine months, existing-portfolio occupancy increased 25.6 points to 66.8%, ADR rose 20.7% to $289.10, and RevPAR rose 95.7% to $193.12.
- Revenue recovery drove higher hotel operating costs. Management also cited higher insurance, property taxes, utilities, payroll and management fees. Corporate overhead fell, partly reflecting prior-year CEO transition costs.
- Sunstone acquired The Confidante Miami Beach for $232.0 million and bought the remaining 25% interest in Hilton San Diego Bayfront for a preliminary $101.3 million, bringing its ownership to 100%. It sold three Chicago-area hotels and recorded $22.9 million in total gains.
- It repurchased 7.996 million common shares for $86.6 million during the first nine months, at an average $10.82 per share. At quarter-end, $413.5 million remained under the repurchase authorization.
Outlook, risks and unusual items
- Management reported stronger corporate transient and group demand alongside robust leisure demand, and expected business travel and group room nights to increase during the remainder of 2022. It provided no quantified financial guidance and emphasized limited visibility.
- The July credit agreement increased each of two term loans to $175 million and extended their maturities to 2027 and 2028. The $220 million Hilton San Diego Bayfront mortgage was due in December 2022; Sunstone had notified lenders that it intended to exercise a one-year extension. The related interest-rate cap also expires in December 2022, and a new cap is required for the extension.
- The filing identifies inflation, labor and other operating-cost increases, recession and travel-demand risk, COVID-19, hotel competition, renovation needs, climate and severe-weather events, and floating-rate debt as material risks. Restricted cash and reserve requirements also limit some cash availability.
- Hurricane Ida-related insurance proceeds included $4.4 million for property damage and $1.0 million for business interruption; claims were not final. Hurricane Ian caused immaterial damage, with about $0.6 million of restoration expense expected in Q4 2022 and no expected recovery above insurance deductibles.
- Renovation contracts represented $66.7 million of commitments at quarter-end. Sunstone reported routine legal claims and said it did not expect identified uninsured liabilities to materially harm results, while noting litigation outcomes remain uncertain.
- After quarter-end through issuance, Sunstone repurchased another 1.171 million shares for $11.3 million. Its Q3 $0.05-per-share common dividend was paid in October.
Important facts for investors to verify
- Whether the Hilton San Diego Bayfront mortgage extension and replacement interest-rate cap were completed on acceptable terms.
- How much of reported earnings and cash generation reflects ongoing hotel operations versus hotel-sale gains and hurricane insurance proceeds.
- Whether occupancy, ADR and RevPAR recovery continues as group and corporate travel return, and whether revenue gains can outpace labor, insurance, utility and other cost inflation.
- Available liquidity after restricted cash, renovation commitments, debt service, dividends and continued share repurchases; confirm compliance with financing covenants.
- The final working-capital and cash adjustment for the Hilton San Diego Bayfront interest acquisition, and the final settlement of outstanding hurricane insurance claims.