Sunstone Hotel Investors, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Sunstone is a hotel-owning REIT with interests in 14 hotels at quarter-end.
Financial and operating results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $172.3 million | $50.6 million |
| Net income (loss) | $15.1 million | $(55.3) million |
| Income (loss) attributable to common stockholders | $10.2 million; $0.05 per share | $(56.5) million; $(0.26) per share |
| Cash from (used in) operating activities | $13.1 million | $(38.2) million |
| Adjusted EBITDAre, excluding noncontrolling interest | $27.2 million | $(14.7) million |
| FFO attributable to common stockholders | $17.5 million | $(27.1) million |
| Adjusted FFO attributable to common stockholders | $16.4 million | $(26.1) million |
Room revenue rose 217.9%; food and beverage revenue rose 696.3%. At the 12 hotels owned in both periods, Q1 occupancy was 53.1% versus 23.4%, ADR was $279.95 versus $206.44, and RevPAR increased 207.7% to $148.65. Results reflect substantial recovery from pandemic-depressed 2021 comparables and are not directly comparable due to acquisitions and dispositions.
Operating expenses were $179.1 million, exceeding revenue by $6.8 million before other income and gains. Net income included $22.9 million of gains on hotel sales. Interest expense was $5.1 million, down from $7.6 million.
Cash, debt, and capital
- March 31 cash and cash equivalents were $214.9 million; restricted cash was $39.5 million. Cash and restricted cash together were $254.4 million.
- Debt principal was $575.9 million, down from $611.4 million at year-end. Approximately 61.8% of debt was fixed-rate or fixed through swaps. The company reported no borrowings on its $500 million revolving facility.
- Current debt carrying value was $109.7 million. Major maturities include the $220 million Hilton San Diego Bayfront mortgage in December 2022, for which the company said it intended to exercise a one-year extension, and unsecured term loans classified as current. The company said it could exercise one-year extension options on both term loans.
- Operating, investing, and financing cash flows were $13.1 million, $164.4 million, and $(85.8) million, respectively. Investing cash inflows included $191.3 million of hotel-sale proceeds; financing outflows included $43.5 million of common-stock repurchases and $35.5 million of debt payments.
- The company repurchased 3.9 million common shares for $43.5 million during the quarter. It had not reinstated its common dividend and said a 2022 common dividend might not be required.
Material developments, outlook, and risks
- Sold three Chicago-area hotels for combined net proceeds of approximately $195.3 million and recorded $22.9 million in gains. Repayed $35 million of unsecured senior notes using part of the proceeds.
- Management reported demand recovery from February after Omicron-related weakness. Corporate transient and group demand were strengthening; management expected both to become more significant during 2022, but said visibility remained limited.
- Labor shortages, recruitment, training, retention, and higher payroll-related costs continued to pressure operations. Management also cited inflation and potential increases in wages, utilities, insurance, food, taxes, and borrowing costs.
- The company ended unsecured-debt covenant relief early after meeting specified covenants; original covenants are to be phased in over five quarters. It said it was no longer subject to certain relief-period restrictions on debt, investment, repurchases, and distributions.
- The JW Marriott New Orleans cash trap remained in effect until hotel profitability meets the release criteria. In April, the company informed the Hilton San Diego Bayfront lender it had met the criteria to exit that cash trap.
- Hurricane Ida restoration and insurance claims remain relevant: Q1 included $4.4 million of property-damage insurance proceeds and $1.0 million of business-interruption proceeds. Additional costs or recoveries may arise; further recoveries are not recognized until settlement.
- Renovation and construction commitments totaled $75.2 million. The Renaissance Washington, D.C. renovation supports a planned Westin conversion in 2023; a Hyatt Regency San Francisco room renovation was expected to finish later in 2022.
- Subsequent event: on May 3, 2022, Sunstone agreed to acquire the 339-room Confidante Miami Beach for $232 million, with an anticipated Q2 close, subject to customary conditions. Management expected to fund it with cash and revolver proceeds.
- Key risks include continuing pandemic effects, recession and inflation, labor and operating-cost pressures, travel demand, weather and climate events, hotel competition, renovation needs, debt covenants and access to capital. The filing reported no legal proceedings in the relevant section and no material change to internal control over financial reporting.
Important facts for investors to verify
- Whether the recovery in occupancy, ADR, and group and corporate travel continued after Q1, and whether hotel margins improved as costs rose.
- Whether the company exercised the mortgage and term-loan maturity extensions, and its ability to meet phased-in debt covenants and maintain revolver availability.
- Final costs and insurance recoveries for Hurricane Ida, and the status of the remaining New Orleans cash trap.
- Whether the Confidante acquisition closed, its financing, and expected operating contribution.
- Capital allocation priorities, including share repurchases, renovation commitments, preferred dividends, and any resumption of common dividends.