Business Context and Reporting Period
Company: Sunstone Hotel Investors, Inc. (Sunstone)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: Sunstone operates as a self-managed Real Estate Investment Trust (REIT) owning, acquiring, and managing upper upscale and upscale hotels in the United States. As of September 30, 2009, the company owned 38 hotels (excluding the W San Diego in receivership and the Marriott Ontario Airport held for non-sale disposition). The company leases its hotels to a taxable REIT subsidiary (TRS) which engages third-party managers (e.g., Marriott, Hyatt, Interstate SHP) to operate the properties.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Total Revenues | $176.0 million | $536.7 million |
| Operating Income (Loss) | $8.0 million | $(40.1) million |
| Net Income (Loss) | $(17.9) million | $(141.6) million |
| Loss Attributable to Common Stockholders | $(23.1) million | $(157.7) million |
| Basic EPS (Loss) | $(0.31) | $(2.53) |
| Cash and Cash Equivalents | $202.6 million | $202.6 million (Balance Sheet) |
| Net Cash Provided by Operating Activities | N/A | $53.3 million |
| Total Debt (Notes Payable) | $1.42 billion (Total contractual) | $1.42 billion (Total contractual) |
| Current Portion of Notes Payable | $288.9 million | $288.9 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 20.0% for the three months and 19.0% for the nine months ended September 30, 2009, compared to the same periods in 2008. This was driven by a 20.2% decline in RevPAR (Revenue Per Available Room) for the quarter, with occupancy down 490 basis points and Average Daily Rate (ADR) down 14.9%.
- Operating Loss: Operating income turned negative for the nine-month period ($(40.1) million) compared to a profit of $95.7 million in the prior year, primarily due to significant impairment charges and declining operating revenues.
- Impairment Charges: The company recorded $64.0 million in goodwill and other impairment losses for the nine months ended September 30, 2009, compared to zero in the prior year. Additionally, an $8.9 million impairment loss was recorded for operations held for non-sale disposition (Marriott Ontario Airport).
- Discontinued Operations: The company recorded a loss of $83.0 million from discontinued operations for the nine months ended September 30, 2009, compared to income of $54.6 million in 2008. This includes the deconsolidation of the W San Diego (transferred to a receiver) and losses on the sale of several hotels.
- Debt Restructuring: The company repurchased $187.5 million in aggregate principal amount of Senior Notes during the first nine months of 2009, recognizing a net gain of $54.6 million on the extinguishment of debt.
Guidance, Outlook, Risks, and Unusual Items
- Debt Restructuring Program: Sunstone initiated a secured debt restructuring program for five loans totaling $471.4 million where hotel values are significantly less than the debt principal.
- W San Diego: Transferred to a court-appointed receiver in September 2009; deconsolidated from financial statements.
- Marriott Ontario Airport: Company elected to cease subsidizing debt service; reclassified to "operations held for non-sale disposition" with intent to convey to lender.
- Renaissance Westchester: Company elected to cease subsidizing debt service, resulting in default; negotiations for modification ongoing.
- Mass Mutual Loan: Company elected not to make the November 1 payment on a $246.3 million loan secured by 11 hotels, expecting default and seeking amendment.
- Renaissance Baltimore: Finalizing an amendment to eliminate amortization for up to 30 months.
- Financial Covenants: As of September 30, 2009, the company failed one financial covenant regarding its Series C preferred stock. If non-compliance continues for three more quarters, a financial ratio violation will occur, potentially restricting common stock dividends and increasing preferred dividends.
- Liquidity Strategy: Management intends to maintain higher-than-historical cash balances to preserve capital during the cyclical decline. The company completed a common stock offering in October 2009 (post-period) raising approximately $158.6 million.
- Outlook: Management expects lodging demand to remain weak for the remainder of 2009, with potential year-over-year increases beginning in 2010-2011 assuming economic recovery. New hotel supply is expected to be limited due to financing constraints.
Investor Verification Checklist
- Debt Default Status: Verify the outcome of negotiations for the Mass Mutual ($246.3M), Renaissance Westchester ($29.4M), and Marriott Ontario Airport ($25.5M) loans, as defaults could lead to asset forfeiture.
- Series C Preferred Stock Covenant: Monitor compliance with Series C financial covenants to assess the risk of dividend restrictions on common stock.
- Impairment Volatility: Review future quarterly reports for additional goodwill or asset impairments given the depressed market conditions and the company's quarterly impairment testing policy.
- Discontinued Operations: Confirm the final accounting treatment and gain/loss recognition upon the transfer of title for the W San Diego.
- Capital Markets Access: Assess the company's ability to raise additional equity or debt capital given the current market volatility and the company's leverage profile.