Sunstone Hotel Investors, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; balance sheet compared with December 31, 2011. Dollar amounts are in millions unless stated otherwise. Sunstone is a hotel-owning REIT that leases its hotels to a taxable subsidiary and uses third-party managers. At quarter-end it had interests in 33 hotels: 32 held for investment and Marriott Del Mar classified as held for sale.
Financial and operating performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $237.8 | $214.6 | $438.9 | $369.9 |
| Operating income | $32.8 | $27.9 | $40.5 | $26.0 |
| Operating margin | 13.8% | 13.0% | 9.2% | 7.0% |
| Net income (loss) | $11.9 | $38.9 | $(1.1) | $90.3 |
| Income (loss) available to common stockholders | $4.1 | $31.1 | $(16.9) | $76.8 |
| Basic and diluted EPS | $0.03 | $0.27 | $(0.14) | $0.66 |
| Adjusted EBITDA | $71.1 | $63.7 | $114.3 | $96.1 |
| Adjusted FFO | $42.1 | $35.3 | $55.8 | $43.9 |
- Comparable-portfolio RevPAR increased 7.6% in Q2 and 6.6% in the first half year over year. Q2 occupancy rose 280 basis points to 80.7%, while ADR increased 3.8% to $176.98.
- Six-month cash provided by operating activities was $80.6, versus $74.3 in 2011. Investing activities used $86.3, including $48.5 of renovations and additions; financing activities provided $59.8. Cash and cash equivalents ended at $204.5, up $54.0 from year-end.
- At June 30, cash plus restricted cash was $277.9. Total assets were $3.24 billion and total liabilities $1.65 billion. Notes payable were $1.48 billion in continuing operations, plus $47.2 of debt associated with Marriott Del Mar held for sale.
- Management reported a 5.0% weighted-average interest rate on debt, 5.4-year weighted-average maturity and 71.8% fixed-rate debt. A 100-basis-point change in rates on variable-rate debt was estimated to affect annual interest expense and cash flows by about $4.3.
Material changes versus comparable periods
- Q2 revenue rose 10.8% and operating income rose 17.6%; adjusted EBITDA increased $7.4. Growth reflected acquisitions, including Hilton San Diego Bayfront and the June 2012 Chicago hotel purchase, as well as improved performance at existing hotels.
- For the first half, revenue rose 18.6% and operating income rose 55.9%, but net income shifted from $90.3 income to a $1.1 loss. The 2011 comparison included a $69.2 gain on remeasurement of equity interests, $31.2 of discontinued-operations income, including gains on hotel sales and debt extinguishment, and other nonrecurring items. These substantially boosted 2011 reported earnings.
- Interest expense increased 11.0% for the first half to $41.7, reflecting debt associated with acquisitions and related financing costs. Preferred dividends rose to $14.9 from $12.4.
- In June, Sunstone acquired the 417-room Wyndham Chicago, rebranded as Hyatt Chicago Magnificent Mile, for a contractual price of $88.4, funded with cash and 5.45 million shares. The hotel contributed $2.7 of revenue and $0.9 of net loss after acquisition during the quarter.
- In June, the company issued 12.14 million common shares for approximately $126.2 net proceeds. Shares outstanding increased to 135.2 million from 117.3 million at year-end.
Outlook, risks and unusual items
- Management described lodging demand as improving and expected demand to remain strong over the next several quarters, supported by economic recovery and muted new hotel supply. It provided no formal earnings or RevPAR guidance.
- Management said liquidity, operating cash flow, capital-market access and unencumbered properties should be sufficient for operating needs and other expenses for at least the next 12 months. It expected near-term acquisitions to be funded with a greater proportion of equity than debt, consistent with its stated aim of gradually reducing leverage.
- On July 19, 2012, Sunstone acquired the 357-room Hilton Garden Inn Chicago Downtown/Magnificent Mile for $91.75, partly funded with June equity-offering proceeds. The company also planned a $25.0 renovation program at Hyatt Chicago Magnificent Mile, with Hyatt expected to fund part of it.
- Sunstone agreed to sell Marriott Del Mar for $66.0 gross, subject to customary conditions and assumption of its $47.2 mortgage. Closing was expected in Q3 2012; estimated net proceeds before transaction costs and credits were about $19.0. Completion was not assured.
- Contractual renovation commitments were $39.3; the company invested $48.5 in its portfolio in the first half. Risks include lodging-cycle and local economic weakness, rising operating costs, hotel-manager and brand requirements, renovations, debt and refinancing, variable rates, REIT compliance, and California/New York property concentration. Nine California hotels generated about 29% of portfolio revenue in Q2; three New York hotels generated about 16%.
- Other notable items: a $1.9 supplemental property-tax assessment at Hilton San Diego Bayfront included $1.1 relating to prior periods; Q2 included $0.3 of accrued legal settlement costs. The filing reported no impairment indicators for hotel properties or goodwill in the first half, no defaults upon senior securities, and effective disclosure controls.
Important facts for investors to verify
- Whether Marriott Del Mar’s sale closed, at what net proceeds, and how its debt and discontinued operations were ultimately treated.
- Post-acquisition operating results, renovation costs and financing for the two Chicago hotels, including actual Hyatt renovation support.
- Comparable hotel performance and operating-cost trends, especially property taxes, labor, insurance and franchise costs.
- Liquidity and debt maturity assumptions, particularly the planned repayment of the remaining $58.0 of exchangeable Senior Notes at the January 2013 put date, and sensitivity to interest-rate changes.
- The effect of the common-stock issuance on per-share results and future capital needs, and the distinction between GAAP earnings and company-defined adjusted EBITDA/FFO measures.