Sunstone Hotel Investors, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The company is a hotel-owning REIT; it held interests in 25 hotels, including one classified as held for sale, and had 24 hotels held for investment. Financial amounts below are in U.S. dollars; millions are rounded.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $317.4 million | $318.8 million | $588.9 million | $599.5 million |
| Operating income | $61.9 million | $62.7 million | $88.3 million | $93.0 million |
| Operating margin | 19.5% | 19.7% | 15.0% | 15.5% |
| Net income | $51.3 million | $51.4 million | $89.7 million | $115.2 million |
| Income attributable to common stockholders | $45.7 million | $46.0 million | $78.5 million | $104.7 million |
| Diluted earnings per common share | $0.20 | $0.21 | $0.35 | $0.47 |
| Adjusted EBITDAre, excluding noncontrolling interest | $101.2 million | $102.3 million | $163.6 million | $171.8 million |
| Adjusted FFO attributable to common stockholders | $83.7 million | $84.9 million | $129.6 million | $138.0 million |
Q2 revenue declined 0.4%; six-month revenue declined 1.8%. Q2 net income was nearly unchanged, while six-month net income fell 22.1%, principally reflecting lower gains on hotel sales. Six-month common income decreased 25.0%. Comparable-portfolio RevPAR increased 2.0% in Q2 and 0.7% year to date; occupancy fell 150 and 80 basis points, respectively, while ADR rose 3.8% and 1.7%.
For the six months, operating cash flow was $143.3 million, versus $150.3 million in 2017. Investing activities provided $32.0 million, including $137.0 million of asset-sale proceeds, offset partly by $87.1 million of renovations and additions and $18.5 million of intangible-asset purchases. Financing activities used $114.7 million, including $148.4 million of dividends and distributions. Cash, cash equivalents and restricted cash totaled $619.9 million at June 30; unrestricted cash was $544.9 million.
Notes payable were $986.6 million, before deferred financing fees; capital lease obligations were an additional $26.9 million. About 77.7% of debt was fixed-rate, including swaps. The weighted-average debt rate was 4.2%, and the weighted-average maturity was approximately five years. A 100-basis-point change in variable rates would affect future earnings and cash flows by approximately $2.2 million before the noncontrolling-interest adjustment. Total assets were $3.85 billion and total liabilities were $1.16 billion.
Material changes and notable transactions
- Q2 comparable RevPAR improved, but portfolio room revenue and overall revenue were affected by hotel dispositions and renovation-related disruption. Four hotels undergoing renovations lost approximately $7.3 million of potential room revenue in the first half, according to management estimates.
- The company sold the Marriott Philadelphia and Marriott Quincy in January for $137.0 million net proceeds and recorded a $15.7 million gain. The Hyatt Regency Newport Beach was sold in July for $95.0 million gross proceeds.
- The company acquired perpetual rights to portions of the Renaissance Washington DC building for $18.4 million, eliminating about $1.3 million of annual rent. It bought the land under the JW Marriott New Orleans in July for $15.0 million, excluding closing costs.
- The company recorded a $1.4 million impairment on its two Houston hotels amid market weakness. It also received $1.1 million of hurricane-related insurance proceeds during the first half.
- Q2 common stock issuance under the ATM program was 2.6 million shares. Net proceeds from common stock offerings were $44.3 million in the first half. No shares were repurchased under the authorized $300 million repurchase plan.
Outlook, risks and contingencies
The filing provides no quantitative earnings or operating guidance. Management expects cash needs for operations, hotel investment, debt service, distributions and potential acquisitions; anticipated funding sources include operating cash flow, cash on hand, asset dispositions, debt and equity offerings, and the credit facility. It emphasizes maintaining low leverage, liquidity and balance-sheet flexibility, while noting capital markets may not be available on favorable terms or at all.
Key operating risks cited include hotel demand and economic conditions, new supply and alternative lodging, wage and other cost inflation, competition, renovations and related disruption, hotel-manager and brand relationships, REIT compliance, interest rates, natural disasters, cyber risks and concentrated regional exposure. The company had $70.9 million of renovation and construction commitments and reported $1.63 billion of contractual obligations, including debt, interest and lease obligations. It disclosed customary environmental indemnities and $0.5 million of letters of credit; no draws had occurred. Management said pending claims and litigation were not expected to have a material adverse effect, though outcomes remain uncertain. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether renovation completions and post-renovation trading restore occupancy, RevPAR and earnings, particularly at the four disrupted hotels.
- Performance and valuation of the Houston hotels after the impairment, and the assumptions underlying property fair values.
- Final net proceeds and recognized gain from the July Newport Beach sale, and the costs and benefits of the New Orleans land purchase.
- Cash availability after restricted reserves, committed renovation spending, distributions and scheduled debt and lease payments.
- Interest-rate exposure, debt maturities, credit-facility capacity and the potential for further ATM share issuance and dilution.
- The sustainability of reported earnings and cash flow excluding asset-sale gains, insurance proceeds and other nonrecurring items; non-GAAP measures are company-defined and should be considered alongside GAAP results.