Business context and reporting period
Sunstone Hotel Investors, Inc. filed this Form 10-K for the fiscal year ended December 31, 2022. It is a hotel REIT that owns and actively manages upper-upscale and luxury hotels, while third-party operators run day-to-day operations. At year-end, the portfolio comprised 15 hotels and 7,735 rooms in six states and Washington, D.C.
Results reflect a strong recovery in travel demand from pandemic-affected 2021, alongside acquisitions, dispositions and significant renovation spending. The filing reports full-year results; it does not provide a clear standalone fourth-quarter income statement in the supplied text.
Financial and operating performance
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $912.1 million | $509.2 million |
| Operating expenses | $816.2 million | $597.3 million |
| Operating income before interest and other items | $95.9 million (10.5% of revenue) | $(88.1) million |
| Net income | $90.8 million | $33.0 million |
| Income attributable to common stockholders | $73.0 million; diluted EPS $0.34 | $13.7 million; diluted EPS $0.06 |
| Adjusted EBITDAre, excluding noncontrolling interest | $233.8 million | $67.2 million |
| Adjusted FFO attributable to common stockholders | $184.6 million | $20.0 million |
| Net cash from operating activities | $209.4 million | $28.4 million |
| Cash and restricted cash | $157.2 million, including $101.2 million unrestricted | $162.7 million |
| Debt principal | $816.1 million | $611.4 million |
On the 12 hotels owned throughout both years, occupancy was 67.0% versus 44.8%, ADR was $288.41 versus $244.17, and RevPAR was $193.23 versus $109.39. The filing reports a 76.6% increase in comparable-portfolio RevPAR. Revenue growth was partly offset by higher hotel operating and property-level costs. Adjusted EBITDAre, Adjusted FFO and FFO are non-GAAP measures and should be considered alongside GAAP results.
Capital spending on hotels and other assets was $128.6 million, up from $63.7 million. Net cash used in investing activities was $165.7 million; net cash used in financing activities was $49.2 million. The company declared $0.10 per common share for 2022, reinstating its quarterly common dividend in the third quarter after suspending it in 2020.
Material changes versus 2021
- Revenue rose 79.1%, primarily with recovering hotel demand; operating cash flow increased by $181.0 million.
- Net income increased to $90.8 million, although gains on hotel sales fell to $22.9 million from $152.5 million in 2021. Thus, the prior-year comparison included unusually large disposition gains.
- The company acquired The Confidante Miami Beach for a contractual $232.0 million and bought the remaining 25% interest in the Hilton San Diego Bayfront for a contractual $102.0 million plus adjustments. It sold three Chicago-area hotels for combined gross proceeds of $197.0 million and recorded total gains of $22.9 million.
- Debt increased, including through expansion of term loans to $350.0 million in aggregate. The July 2022 credit agreement provides a $500.0 million revolving facility, undrawn at year-end; term loans mature in 2027 and 2028.
- Both mortgage cash traps that had restricted cash from the JW Marriott New Orleans and Hilton San Diego Bayfront were released in 2022 as hotel performance improved. The company also ended its unsecured-debt covenant relief period early after meeting required tests.
- The company repurchased 10.25 million common shares for $108.4 million during 2022. Year-end common shares outstanding were 209.3 million, down from 219.3 million.
Outlook, risks and unusual items
Management expects hotel operations to continue normalizing in 2023, assuming no new critical COVID-19 variant, and expects business travel to keep increasing. It cautions that visibility remains limited. Inflation, labor and other operating costs, insurance, utilities and higher borrowing costs remain pressures; management expects increased interest payments on variable-rate debt in 2023.
The $220.0 million Hilton San Diego Bayfront mortgage matures in December 2023; management expects to refinance some or all of it before maturity. At year-end, 42.4% of debt was fixed or swapped to fixed, and 27.0% was subject to an interest-rate cap. A 50-basis-point move in variable rates was estimated to change annual interest expense and cash flows by approximately $2.4 million. The filing identifies $57.6 million of outstanding renovation construction commitments.
Unusual and nonrecurring items included $10.0 million of COVID-related business-interruption proceeds and $1.0 million related to Hurricane Ida in other operating revenue, plus $4.4 million of Hurricane Ida property-insurance proceeds in other income. Additional COVID-related proceeds were uncertain and would not be recognized until received. A $3.5 million noncash impairment related to the former headquarters was recorded as part of a relocation intended to reduce future annual corporate costs by about $1.1 million through August 2028.
Key risks include a possible recession or renewed travel disruption; inflation and interest-rate exposure; refinancing and covenant risk; geographic concentration and natural disasters; insurance limitations; reliance on third-party managers and major hotel brands; and the capital needs of renovations. The company reported that pending legal matters were not expected to have a material adverse effect. The auditor issued an unqualified opinion on the financial statements and internal controls; no hotel-property impairment was recorded in 2022.
Important facts for investors to verify
- Whether comparable occupancy, ADR and RevPAR—and especially corporate and group demand—continue to recover, and how performance compares with pre-pandemic levels.
- The refinancing terms and cost for the $220.0 million mortgage due in December 2023, as well as the effect of SOFR-linked and other variable-rate debt.
- How much of the $57.6 million construction commitments and future renovation spending can be funded without reducing liquidity or distributions.
- Whether additional insurance recovery is obtained for COVID-related business interruption and Hurricane Ida claims; the filing does not assure further recovery.
- How much reported improvement depends on non-GAAP adjustments, insurance proceeds and asset sales, versus recurring hotel operations; also verify future dividend and repurchase decisions against debt covenants and capital needs.