Sunstone Hotel Investors, Inc. — FY 2021 Form 10-K
Reporting period: Year ended December 31, 2021. Sunstone is a hotel-owning REIT focused on upper-upscale, luxury and resort properties. At year-end it had interests in 17 hotels, including one classified as held for sale; 16 hotels were held for investment. All hotels were open by year-end, though some operated at reduced capacity.
Financial results and liquidity
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Total revenue | $509.2 million | $267.9 million |
| Operating income (loss) | $(88.1) million | $(393.9) million |
| Net income (loss) | $33.0 million | $(410.5) million |
| Income (loss) attributable to common stockholders | $13.7 million; $0.06 per diluted share | $(417.5) million; $(1.93) per diluted share |
| Adjusted EBITDAre, excluding noncontrolling interest | $67.2 million | $(88.1) million |
| Adjusted FFO attributable to common stockholders | $8.4 million | $(156.6) million |
| Net cash from (used in) operating activities | $28.4 million | $(116.7) million |
| Consolidated debt at year-end | $611.4 million | $747.9 million |
- Revenue rose 90.0% year over year as hotels reopened and travel demand improved. For the comparable existing portfolio, 2021 occupancy was 44.3%, ADR was $234.03 and RevPAR was $103.68; RevPAR increased 125.4% from 2020. Results remained substantially below pre-pandemic levels: 2019 revenue was $1.12 billion.
- Despite the return to net income, the company reported an operating loss. Net income included $152.5 million of gains on hotel sales, principally the $148.8 million gain on Embassy Suites La Jolla.
- Operating cash flow improved by $145.1 million from 2020. Investing activities used $239.7 million, including $363.5 million for acquisitions and $63.7 million for renovations; financing activities used $42.1 million.
- Year-end cash and cash equivalents were $120.5 million, with an additional $42.2 million of restricted cash. The $500 million revolving credit facility was undrawn. Total assets were $3.04 billion.
- Debt carrying the effect of fixed-rate swaps was approximately 64% fixed; the weighted-average debt interest rate was 3.7%. The $220 million Hilton San Diego Bayfront mortgage was the exception to the company’s otherwise fixed or swapped-to-fixed debt. A 100-basis-point change in variable rates was estimated to change annual interest expense by approximately $2.2 million before the joint-venture partner’s share.
- Common dividends remained suspended; no common dividend was declared for 2021. Preferred dividends continued. Preferred stock dividends and redemption charges totaled $20.6 million.
Material changes and significant transactions
- Sunstone acquired Montage Healdsburg for $265.0 million and Four Seasons Resort Napa Valley for $177.5 million. It issued Series G preferred stock as partial consideration for Montage and used cash and temporary credit-facility borrowing to fund the Four Seasons purchase.
- It sold Renaissance Westchester and Embassy Suites La Jolla, generating net gains of $3.7 million and $148.8 million, respectively. The La Jolla mortgage was assigned to the buyer.
- Debt declined from 2020, including through repayments of term loans and the La Jolla loan transfer. Sunstone amended its unsecured debt agreements, extending financial-covenant relief through the third quarter of 2022, subject to conditions. The company intended to exercise an extension option on the $220 million San Diego mortgage to move its maturity to December 2023.
- Sunstone issued $215 million of Series H and I preferred stock and redeemed $190 million of Series E and F preferred stock. It also issued 2.9 million common shares through its at-the-market program for gross proceeds of $38.4 million.
- Corporate overhead increased 43.1%, including $11.1 million of CEO transition and COO retirement costs. The company recorded a $2.7 million impairment related to Hurricane Ida damage; 2020 impairment losses were $146.9 million, including write-downs of hotels later sold.
Outlook, risks and contingencies
- Management said leisure demand led the recovery in 2021, while business transient and group demand remained well below pre-pandemic levels. It cited future group bookings as encouraging and expected portfolio improvement in 2022 and 2023, but provided no numerical financial guidance and emphasized limited visibility.
- COVID-19 and its variants, particularly Omicron, labor shortages and inflation could continue to weigh on demand, costs, cash flow and liquidity. Management noted that hiring difficulties could persist in 2022.
- Unsecured debt covenant testing was scheduled to resume for the period ending September 30, 2022, subject to amendment conditions and a minimum fixed-charge-coverage requirement. Management believed it could meet the covenants, but warned that renewed disruption to hotel demand could cause a failure to comply.
- Subsequent to year-end, Sunstone sold Hyatt Centric Chicago Magnificent Mile for $67.5 million. It was also under contract to sell two hotels for a combined approximately $129 million, subject to customary closing conditions.
- Hurricane Ida caused damage at two New Orleans hotels. Sunstone was pursuing property-damage and business-interruption claims for Hilton New Orleans St. Charles; the filing does not report a final settlement. Additional repair costs may arise.
- Other material exposures include hotel renovation commitments of $71.7 million, concentration in selected geographic markets, potential weather and climate losses, labor and insurance costs, cash-trap provisions on certain mortgages, and the risk of refinancing upcoming debt maturities. The company reported no pending legal matter expected to have a material adverse effect, while noting ordinary-course litigation and contingencies.
Important facts for investors to verify
- Progress in business transient and group recovery, hotel occupancy and ADR, and whether 2022–2023 bookings convert to realized revenue.
- Compliance with amended debt covenants as testing resumes, the status and timing of the San Diego mortgage extension, and the substantial 2023 maturities.
- Actual unrestricted liquidity after capital spending, debt service and preferred dividends, including the availability of the revolving facility under covenant terms.
- Completion and net proceeds of the two proposed hotel sales, and the effect of dispositions on recurring operating results.
- Timing and conditions for any common-dividend reinstatement; management stated that no 2022 common dividend may be needed or paid.
- Insurance recoveries and remaining repair costs related to Hurricane Ida, as well as execution and funding of renovation commitments.