Sunstone Hotel Investors, Inc. — Q1 2013 Form 10-Q
Business and period: Hotel-owning REIT with interests in 26 branded U.S. hotels at March 31, 2013. This summary covers the three months ended March 31, 2013, compared with the same period in 2012; balance-sheet figures are as of March 31, 2013, unless noted. Dollar amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Total revenue | $194.9 | $178.2 | Up 9.4% |
| Operating income | $3.6 | $5.2 | Down 30.7%; operating margin was about 1.8% versus 2.9% |
| Continuing-operations loss | $(19.5) | $(14.3) | Worsened by $5.1 |
| Net income (loss) | $28.9 | $(13.0) | Includes $51.6 gain on Rochester Portfolio sale in 2013 |
| Income (loss) available to common stockholders | $17.5 | $(21.0) | Basic and diluted EPS: $0.12 versus $(0.18) |
| Cash from operating activities | $13.4 | $17.7 | Lower, primarily due to timing of payroll and benefit payments |
| Adjusted EBITDA | $38.4 | $43.1 | Down $4.7 |
| Adjusted FFO | $14.0 | $13.7 | Up $0.4 |
- Hotel trends: Comparable Portfolio RevPAR increased 2.1%, with ADR up 4.1% to $168.25 and occupancy down 140 basis points to 74.2%. Renovations at several hotels constrained available rooms and revenue.
- Cash and liquidity: Balance-sheet cash was $208.3; restricted cash was $69.4; and $139.4 of sale proceeds was held by an accommodator for a potential tax-deferred exchange. Management reported $417.2 of cash, including restricted cash and accommodator proceeds, and said liquidity should cover anticipated needs for at least 12 months.
- Debt: Notes payable totaled $1,300.9; the company also reported $15.6 of long-term capital lease obligations. Approximately 68.2% of debt was fixed-rate; the weighted-average rate was 4.9% and average maturity about four years. The company repurchased or redeemed $58.0 of Senior Notes during the quarter.
- Capital spending: Renovations and additions used $37.1 of cash in Q1; remaining construction commitments were $33.2. FF&E reserve accounts held $38.0.
Material changes and unusual items
- Revenue growth reflects the two Chicago hotels acquired in 2012, as well as a Marriott reporting-calendar change that added nine days to Q1 2013 results for its managed hotels, contributing approximately $5.4 of room revenue. Thus, reported year-over-year revenue is not fully comparable.
- Adjusted EBITDA declined as earnings lost to major room renovations at four hotels outweighed contributions from the acquired hotels. Adjusted FFO rose modestly, supported by acquired-hotel earnings and lower interest expense.
- The January sale of the Rochester Portfolio generated $195.6 of net proceeds and a reported $51.6 gain. The company retained a $25.0 preferred equity investment yielding 11%, advanced $3.7 in working cash to the buyer, and retained potential pension-plan exposure capped at $14.0. The related gains are deferred until specified repayment or release conditions are met.
- The February common-stock offering generated approximately $294.9 of net proceeds. The company used proceeds to redeem all Series A preferred stock for $178.6, including accrued dividends; a $4.6 redemption charge was recorded.
- The company recorded a $6.2 income-tax provision, including a $4.7 accrual related to an IRS challenge to aspects of its TRS leases for tax years 2008–2010 and a $1.5 adjustment for uncertain tax positions. Management expected to pay the $4.7 in Q2 2013.
Outlook, risks, and contingencies
- Management described the lodging market as in a recovery phase and expected demand to remain strong over coming quarters if the U.S. economy continues to grow. It also expected new hotel supply to remain constrained overall, while noting elevated openings in some markets, including New York City. No quantified earnings or revenue guidance was provided.
- The company’s stated priorities are portfolio improvement, disciplined acquisitions, capital investment, maintaining liquidity, and gradual deleveraging. Management expected near-term acquisitions to use a greater proportion of equity than debt.
- Subsequent to quarter-end, the company acquired the 250-room Hilton New Orleans St. Charles Avenue for $59.4 on May 1. It also announced a $250.0 agreement to acquire the 1,053-room Boston Park Plaza, expected to close in Q3 2013, with an anticipated $119.5 assumed mortgage.
- On May 6, the company announced plans to redeem all Series C preferred stock on May 31, at $24.375 per share plus accrued dividends.
- Key risks include lodging-cycle and travel-demand sensitivity; operating-cost inflation; renovation disruption and capital needs; reliance on third-party managers and hotel brands; acquisition and financing execution; debt and preferred-stock covenants; geographic concentration; and exposure to floating rates. A 100-basis-point change in rates was estimated to change annual cash flows by approximately $4.4.
- Other disclosed exposures include $33.2 of construction commitments, environmental indemnities without stated term or damages caps, and $3.7 of letters of credit. The Rochester pension liability may be triggered in specified circumstances. The filing reported no legal proceedings.
Important facts for investors to verify
- How much of the revenue increase reflects underlying comparable-hotel performance versus acquisitions and Marriott’s added reporting days.
- Whether hotel renovations conclude on schedule and whether occupancy, RevPAR, and operating margins recover afterward.
- Available liquidity after the announced Series C redemption and planned acquisitions, including use of accommodator-held proceeds.
- Potential cash obligations or deferred-gain effects from the Rochester buyer advances and pension-plan exposure.
- Whether acquisition financing, debt levels, and planned equity funding remain consistent with management’s deleveraging objectives.