Sunstone Hotel Investors, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter report. Sunstone is a lodging REIT that owns and asset-manages primarily upper-upscale U.S. hotels, operated by third parties. At year-end, it had interests in 27 hotels, including two classified as held for sale; its 25 hotels held for investment comprised 12,450 rooms. The two hotels were sold in January 2018 for a combined gross price of $139.0 million.
Financial and operating performance
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $1,193.6 million | $1,189.3 million | +0.4% |
| Operating income | $141.0 million | $170.4 million | -17.3% |
| Net income | $153.0 million | $140.7 million | +8.8% |
| Income attributable to common stockholders | $132.5 million | $118.2 million | +12.1% |
| Basic and diluted EPS attributable to common stockholders | $0.59 | $0.55 | Up $0.04 |
| Adjusted EBITDA (non-GAAP) | $338.6 million | $330.0 million | +2.6% |
| Adjusted FFO attributable to common stockholders (non-GAAP) | $271.0 million | $260.8 million | +3.9% |
Comparable Portfolio RevPAR rose 3.6%, to $175.17, as ADR increased 3.4% and occupancy improved 20 basis points to 82.9%. Reported operating income included a $40.1 million impairment charge on the two Houston hotels. Net income also benefited from $45.5 million in gains on 2017 asset sales, a $7.0 million gain related to the 2013 Rochester Portfolio sale, and a $7.8 million income-tax benefit. Operating income was approximately 11.8% of revenue, down from 14.3% in 2016.
Cash provided by operating activities was $310.8 million, versus $305.4 million in 2016. Hotel renovations and additions used $115.1 million, down from $182.2 million. Operating cash flow less these expenditures was approximately $195.7 million before acquisitions, financing and distributions; this is not a company-reported free-cash-flow measure. Investing activities used $146.1 million and financing activities used $46.2 million.
Balance sheet and liquidity
- Cash and cash equivalents were $488.0 million; restricted cash was $71.3 million, for total cash including restricted cash of $559.3 million.
- Consolidated debt was $990.4 million, compared with $935.9 million at year-end 2016. Debt net of deferred financing fees was $982.8 million. Total assets were $3.86 billion and total equity was $2.58 billion.
- Debt had an approximately five-year weighted-average term. 77.8% was fixed-rate or swapped to fixed, at a weighted-average rate of 4.5%; the weighted-average rate across debt was 4.1%. The $220 million Hilton San Diego Bayfront mortgage was variable-rate, with an interest-rate cap at 6.0% through December 2020.
- Scheduled principal maturities and amortization were $7.4 million in 2018, $8.0 million in 2019, $304.1 million in 2020 and $111.2 million in 2021. The company reported no outstanding borrowings under its $400 million credit facility at year-end.
- After the January 2018 hotel sales and payment of approximately $133.9 million in common and preferred dividends, management estimated pro forma cash, including restricted cash, of approximately $564.4 million.
Material changes and notable items
- Sunstone acquired the newly developed 175-room Oceans Edge Hotel & Marina in Key West for approximately $173.9 million. It sold the Fairmont Newport Beach and Marriott Park City for net proceeds of $122.8 million and $27.0 million, respectively.
- The two Houston hotels were affected by Hurricane Harvey and a weak local market. Sunstone recorded $40.1 million of impairment charges. Hurricanes Harvey and Irma also affected three other hotels; recorded 2017 restoration expenses were approximately $1.7 million in total. The company filed a business-interruption claim for Oceans Edge, with any recovery dependent on settlement.
- Sunstone issued $240 million of senior notes at fixed rates of 4.69% and 4.79%, maturing in 2026 and 2028, and used part of the proceeds to repay the $176 million Marriott Boston Long Wharf mortgage. It refinanced the Hilton San Diego Bayfront loan with a $220 million interest-only mortgage at one-month LIBOR plus 105 basis points, initially maturing in December 2020 with three one-year extension options.
- The company issued 4.88 million common shares through its at-the-market program for $79.4 million gross proceeds. A board-authorized $300 million share repurchase program had no purchases through year-end.
- Management released a $13.6 million deferred-tax valuation allowance, partly offset by the effect of the Tax Cuts and Jobs Act’s lower corporate tax rate. The reported 2017 tax benefit and net income therefore include significant tax-related effects.
Outlook, risks and contingencies
Sunstone expects regular common dividends of $0.05 per share per quarter during 2018 and anticipates capital expenditures similar to 2017’s $115.1 million. If regular dividends do not meet the REIT distribution requirement, management expects a possible “catch-up” dividend in January 2019. The filing provides no specific 2018 earnings or RevPAR guidance.
Management emphasizes disciplined acquisitions and dispositions, active hotel asset management, low leverage and liquidity flexibility. Key risks include lodging sensitivity to economic and travel demand, competition and new supply, concentrated exposure to California and other regional markets, natural disasters and insurance limitations, labor and operating-cost inflation, reliance on third-party managers and brands, and refinancing and interest-rate exposure. Franchise standards and renovation commitments may require significant capital; outstanding construction commitments were $60.9 million. Certain ground, building and air leases, environmental indemnities, REIT qualification requirements and debt covenants also create potential constraints or liabilities. The company stated that ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- How the Houston hotels perform after the impairment, and whether further impairment or recovery is warranted.
- The final amount and timing of any insurance proceeds for hurricane-related business interruption or damage.
- The basis for 2017 reported earnings, including asset-sale gains, the Rochester-related gain, impairment and the deferred-tax valuation-allowance release; compare GAAP results with non-GAAP Adjusted EBITDA and FFO.
- Hotel-level trends behind the 3.6% comparable RevPAR increase, including market supply, group demand and the post-renovation performance of Boston Park Plaza and Wailea Beach Resort.
- Debt maturities, the floating-rate exposure and extension conditions on the Hilton San Diego Bayfront loan, as well as the availability and use of liquidity after dividends and hotel sales.
- 2018 renovation spending, the $60.9 million construction commitment, and whether common dividends remain supported by operating cash generation and REIT distribution needs.