Sunstone Hotel Investors, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Sunstone owns interests in 20 U.S. hotels and operates as a REIT. Results reflect the initial COVID-19 disruption, particularly the near-total collapse in hotel demand during March.
Financial results and liquidity
- Revenue: $191.2 million, down 25.8% from $257.7 million a year earlier. Room revenue fell 25.9% and food and beverage revenue fell 30.6%.
- Profitability: Net loss was $162.5 million versus net income of $17.9 million; loss attributable to common stockholders was $165.3 million, or $0.75 per diluted share, compared with income of $13.1 million, or $0.06 per share. Results included $115.4 million of impairment losses. Adjusted EBITDAre was $14.1 million versus $64.5 million; adjusted FFO attributable to common stockholders was a loss of $1.4 million versus income of $47.5 million.
- Hotel performance: Q1 occupancy was 60.1%, ADR was $219.54 and RevPAR was $131.94, down 1,880 basis points, 2.5% and 25.7%, respectively. March RevPAR fell 66.8% year over year as occupancy dropped to 29.9%. January–February RevPAR was essentially flat.
- Cash flow: Operating activities used $2.5 million, compared with $31.6 million generated in Q1 2019. Investing activities used $13.9 million; financing activities provided $52.3 million. Cash and restricted cash increased by $36.0 million to $900.9 million.
- Cash and debt at March 31: Unrestricted cash was $847.4 million; debt principal was $1.273 billion. The company had drawn $300 million on its revolving credit facility and reported $200 million of remaining capacity. Total assets were $3.800 billion.
- Other balance-sheet items: Current liabilities were $186.2 million, including $82.2 million of current debt. Debt fair value was reported as $1.248 billion. Approximately 59.2% of debt was fixed-rate or swapped to fixed-rate.
Changes versus the prior comparable period
- COVID-19 restrictions and travel cancellations sharply reduced March demand. Eleven hotels had suspended operations by March 31; by May 8, 14 of 20 were suspended, with the remaining hotels operating at reduced capacity.
- Impairment losses were $115.4 million, versus none in Q1 2019. Charges included $107.9 million for Hilton Times Square, $5.2 million for Renaissance Westchester and $2.3 million for an abandoned expansion project. The Times Square charge included an $18.5 million write-down of operating lease right-of-use assets.
- Sunstone repurchased 9.77 million common shares for $103.9 million during the quarter. The share repurchase program was subsequently suspended to preserve liquidity.
- Interest expense rose 22.2% to $17.5 million, principally because noncash derivative fair-value changes increased interest expense. Excluding that noncash effect, management said interest expense declined year over year.
- The company recorded a $7.4 million valuation allowance against deferred tax assets, citing uncertainty about the pandemic’s duration and its effect on hotel operations.
Outlook, risks and unusual items
- Management expected COVID-19 to materially affect results, cash flows and liquidity through the remainder of 2020 and possibly into 2021, and expected a net loss for 2020. It said the duration of the disruption and timing of demand recovery could not be reliably estimated.
- The company anticipated it might fail to meet unsecured debt financial covenants in Q2 or Q3 2020 and was seeking waivers through Q1 2021. Waivers were not assured; failure to obtain them could allow lenders to demand repayment. The company was in compliance at March 31.
- The $77.3 million Hilton Times Square mortgage matured in November 2020. Sunstone was exploring options, including surrendering the hotel to the lender. The filing also disclosed that the company had not made the hotel’s April rent payment (deferred to October), May rent payment, or May debt payment; deferral of May rent was uncertain.
- Management reported $10.1 million of Q1 additional wages and benefits for furloughed or laid-off hotel employees. Cost controls included reduced staffing, limited food and beverage services and closure of unoccupied floors.
- Sunstone suspended its common-stock quarterly dividend and did not expect to pay one for the remainder of 2020. The Q1 dividend and distributions, totaling $14.0 million, were paid April 15. Preferred-stock dividends remained among expected cash uses.
- The company deferred some non-essential capital improvements, suspended repurchases and had $32.7 million of renovation and construction commitments at quarter-end. Certain managers suspended FF&E reserve funding or permitted conditional use of reserve funds for operating expenses.
- Interest-rate exposure remained: management estimated a 100-basis-point change in variable rates would change future interest expense and cash flows by approximately $5.1 million, before the stated noncontrolling-interest adjustment.
Important facts for investors to verify
- Progress and terms of covenant waivers, and any related repayment or amendment requirements.
- Liquidity and cash burn as hotel suspensions continue, including access to restricted reserves and remaining credit-facility capacity.
- Hilton Times Square’s mortgage, missed rent and debt payments, and any lender resolution or potential surrender.
- Hotel reopening pace, occupancy, ADR and RevPAR recovery, and whether further impairments or receivable adjustments arise.
- Whether common dividends resume, preferred dividends remain payable, and how renovation commitments and capital spending are managed.