Sunstone Hotel Investors, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparative period is Q1 2023. Sunstone is a REIT investing in and operating upper-upscale and luxury hotels through third-party managers. It owned 14 hotels at quarter-end, versus 15 a year earlier.
Financial and operating performance
- Revenue: $217.2 million, down 10.8% from $243.4 million. Room revenue fell 10.9% to $135.8 million; food and beverage revenue fell 13.4% to $61.3 million.
- Profit: Operating income was $17.3 million, or 7.9% of revenue, versus $24.8 million, or 10.2%, a year earlier. Net income was $13.0 million, down 38.2%; income attributable to common stockholders was $9.4 million, down 46.0%. Basic and diluted EPS were $0.05 versus $0.08.
- Hotel metrics: The comparable portfolio’s RevPAR increased 2.0%, as occupancy rose 300 basis points to 72.5% while ADR declined 2.2% to $329.75. The two hotels undergoing renovations had a 61.7% RevPAR decline.
- Supplemental measures: Adjusted EBITDAre was $54.5 million, down 9.2%; Adjusted FFO attributable to common stockholders was $37.5 million, down 14.4%. These are non-GAAP measures and should be considered alongside GAAP results.
- Cash flow and investment: Operating cash flow was $38.5 million, versus $47.2 million. Capital spending was $27.7 million, versus $22.5 million. Cash, cash equivalents and restricted cash totaled $471.0 million at quarter-end, including $400.7 million of unrestricted cash.
- Debt and liquidity: Debt principal was $818.5 million ($814.4 million net of financing costs), with $500 million available under the revolving credit facility and no amount drawn on it. Approximately 51.1% of debt was fixed-rate or swapped to fixed. A 50-basis-point change in variable rates would change annualized interest expense by about $2.0 million.
- Distributions: The company declared common distributions of $0.07 per share for the quarter and paid $29.8 million in total dividends and distributions during the period.
Material changes and unusual items
- Reported revenue and expenses were affected by the October 2023 sale of Boston Park Plaza and renovations at The Confidante Miami Beach and Renaissance Long Beach. The two renovation hotels reduced room revenue by $9.4 million; the Boston Park Plaza sale reduced it by $11.2 million. Excluding those effects, comparable-portfolio room revenue rose $4.0 million.
- The Confidante suspended operations on March 25, 2024 for renovation and rebranding as Andaz Miami Beach; reopening is expected in Q4 2024. Remaining work at Marriott Long Beach Downtown was expected to finish in Q2 2024.
- Interest and other income rose to $5.5 million from $0.5 million, principally due to higher cash balances and interest rates. Reported interest expense declined to $11.0 million from $13.8 million, largely because derivative fair-value changes reduced expense by $2.0 million in 2024, compared with increasing it by $1.8 million in 2023.
- Q1 2023 included a $9.9 million gain on extinguishment of debt related primarily to release of Hilton Times Square escrow obligations; the corresponding 2024 gain was only $21,000. Q1 2024 also included a $0.5 million gain from resolving a prior hotel-sale contingency.
- No hotel impairment was recorded in either comparative quarter. The company received a $1.3 million COVID-19 relief grant at Marriott Boston Long Wharf in Q1 2024, with no comparable grant in Q1 2023.
Outlook, risks and contingencies
- No quantified full-year earnings or operating guidance is provided. Management cautions that quarterly results are not necessarily indicative of full-year results and expects significant remaining-2024 capital spending for the Andaz Miami Beach renovation.
- On April 23, 2024, Sunstone acquired Hyatt Regency San Antonio Riverwalk for a contractual $230 million, funded from available cash. Hyatt is to contribute $8 million of key money, subject to conditions. Management estimated pro forma unrestricted cash after the acquisition at $170.7 million.
- Management says inflation and higher interest rates have increased wages, benefits, food, renovation materials, property taxes, insurance, utilities and borrowing costs. Room-rate increases have partly mitigated operating-cost pressure, but rate-setting may be constrained and variable-rate debt remains exposed.
- Renovation and construction commitments totaled $85.4 million at March 31, 2024. The JW Marriott New Orleans mortgage, with $73.5 million outstanding, matures in December 2024; management expects to refinance or repay it by maturity.
- Risks highlighted include hotel demand and seasonality, recession and inflation, competitive supply and alternative lodging, concentrated exposure to California, Florida and Hawaii, severe weather and climate effects, labor and operating costs, renovation execution, cybersecurity, litigation, and debt covenant, refinancing and variable-rate risks.
- The filing reports routine claims and proceedings, but management does not expect identifiable uninsured liabilities to have a material adverse effect. It also describes uncapped customary environmental indemnities and $0.2 million of letters of credit collateralized by restricted cash.
Important facts for investors to verify
- Whether renovation schedules, reopening dates and the expected recovery in performance at the two affected hotels are achieved.
- Post-acquisition liquidity, the final accounting and operating contribution for Hyatt Regency San Antonio Riverwalk, and whether the contingent $8 million key money is received.
- Plans to refinance or repay the December 2024 JW Marriott New Orleans maturity and maintain access to the $500 million revolving facility under applicable covenants.
- Whether comparable-portfolio RevPAR and operating margins can improve enough to offset cost inflation, variable-rate interest exposure and renovation-related disruption.
- Execution of the $85.4 million renovation commitment and the ultimate cash requirements for remaining 2024 capital projects and distributions.