Sunstone Hotel Investors, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Sunstone is a hotel-owning REIT; at quarter-end it held interests in 28 hotels. Financial amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $250.4 | $205.0 | $679.9 | $596.1 |
| Operating income | $34.4 | $16.2 | $74.6 | $50.0 |
| Operating margin | 13.7% | 7.9% | 11.0% | 8.4% |
| Continuing-operations income (loss) | $15.8 | $(3.0) | $16.3 | $(8.1) |
| Net income | $15.8 | $39.6 | $64.8 | $38.4 |
| Income available to common stockholders | $11.6 | $30.9 | $44.3 | $14.3 |
| Basic and diluted earnings per common share | $0.07 | $0.23 | $0.28 | $0.11 |
| Adjusted EBITDA | $69.8 | $60.1 | $178.5 | $174.3 |
| Adjusted FFO | $48.0 | $31.6 | $110.7 | $87.4 |
Q3 revenue increased 22.1%; nine-month revenue rose 14.1%. Comparable-portfolio RevPAR increased 6.4% in Q3 and 3.7% for the nine months (4.0% for the nine months after adjusting for Marriott’s calendar change). Q3 occupancy and ADR for the comparable portfolio increased 260 basis points and 3.2%, respectively.
Comparisons are affected by acquisitions, dispositions, renovations and Marriott’s switch to a calendar reporting year. Marriott-managed hotels contributed eight additional reporting days in Q3 2013 and 24 additional days in the first nine months versus the corresponding 2012 periods. Q3 2012 and nine-month 2012 net income also included substantial gains from hotel sales in discontinued operations; Q3 2012 discontinued-operations income was $42.6 million.
Cash flow, debt and liquidity
- Cash from operations was $124.9 for the first nine months, versus $128.7 in 2012. Investing used $77.6, including $91.7 of renovations and additions; financing used $104.3.
- Cash and cash equivalents were $100.2 at September 30, down from $157.2 at year-end 2012; restricted cash was $84.1. Management reported $184.4 in cash including restricted cash.
- Debt totaled $1.410 billion, compared with $1.363 billion at year-end 2012. About 70.8% was fixed-rate; weighted-average debt cost was 4.9%, fixed-rate debt averaged 5.4%, and weighted-average maturity was approximately four years. A 100-basis-point move in variable rates was estimated to change annual cash flows by about $4.4.
- Management stated it expected available cash, operating cash flow, capital-market access and unencumbered properties to cover operating and other business needs for at least 12 months. This is subject to market access and other risks.
- Hotel renovation and construction commitments totaled $36.9; operating lease obligations were $559.4. The company invested $91.7 in its portfolio during the nine months.
Material changes and unusual items
- Acquired the 250-room Hilton New Orleans St. Charles for $59.1 and the 1,053-room Boston Park Plaza for $248.0. The latter acquisition included assumption of a $119.2 non-recourse mortgage at 4.4%, maturing in February 2018.
- Sold the Rochester hotel portfolio and commercial laundry facility for net proceeds of $195.6, recognizing a $51.6 gain. The company retained an 11% preferred-equity investment of $25.0 and a $3.7 working-capital advance, with related gains deferred until repayment. It also retained potential pension-plan liability of up to $14.0.
- Issued 25.3 million common shares in February for net proceeds of approximately $294.9. Used proceeds to redeem all Series A preferred stock for $178.6 and all Series C preferred stock for $101.1, and to support acquisitions. Series D preferred stock remained outstanding: 4.6 million shares with an 8.0% stated dividend.
- Q3 common dividends declared were $0.05 per share; none were declared in the comparable 2012 periods. The common share count increased to 160.9 million at quarter-end from 135.2 million at year-end 2012.
- Nine-month income tax expense was $6.7, including a $4.7 accrual related to resolution of IRS issues concerning leases with taxable REIT subsidiaries and $1.5 related to uncertain tax positions.
Outlook, commentary and risks
Management described the lodging market as being in the middle phase of a recovery, citing improving demand and constrained national hotel supply. It expected demand to remain strong over the next several quarters if the U.S. economy and employment continued to improve; no quantified earnings or revenue guidance was provided. Strategy emphasized selective portfolio growth, asset renovations and gradual deleveraging, with near-term acquisitions expected to rely more on equity than debt.
After quarter-end, Sunstone agreed to acquire the 802-room Hyatt Regency San Francisco for an investment value of $262.5, subject to closing conditions. On November 1, it issued 20.0 million common shares for gross proceeds of $271.2, expecting to use net proceeds toward the acquisition and other corporate purposes.
Key disclosed risks include lodging and local economic conditions, operating-cost inflation, reliance on hotel managers and brands, renovations and capital needs, geographic concentration, debt and interest-rate exposure, REIT compliance, access to capital, and completion and performance of acquisitions. Four hotels underwent major room renovations in early 2013, substantially completed by June 30; these affected operating results. The company reported effective disclosure controls and no material change in internal control over financial reporting. It reported no legal proceedings in the listed section.
Important facts for investors to verify
- Separate underlying hotel growth from the effects of acquired and sold properties and Marriott’s reporting-calendar change.
- Review the composition and accessibility of restricted cash, cash-trap receivables and other liquidity sources.
- Assess debt maturities, variable-rate exposure, covenants, and the remaining renovation commitments and lease obligations.
- Monitor the Rochester pension exposure and the timing and collectability of deferred gains, preferred-equity dividends and the working-capital advance.
- Confirm closing, funding and expected returns for the Hyatt Regency San Francisco acquisition, and consider dilution from the November equity issuance.