Business Context and Reporting Period
Company: Sunstone Hotel Investors, Inc. (Sunstone)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: Sunstone operates as a self-managed Real Estate Investment Trust (REIT) owning and managing upper upscale hotels in the United States. As of March 31, 2010, the Company owned 29 hotels held for investment. Additionally, the Company is in the process of transferring 11 hotels to lenders or receivers pursuant to a 2009 secured debt restructuring program. These include three hotels in receivership (classified as discontinued operations) and eight hotels held for non-sale disposition (Mass Mutual eight).
Key Financial Metrics
| Metric (in thousands) | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenues | $160,733 | $171,393 |
| Operating Income | $4,258 | $5,374 |
| Net Income (Loss) | $(21,091) | $6,510 |
| Loss Attributable to Common Stockholders | $(26,278) | $876 |
| Adjusted EBITDA | $30,997 | $38,870 |
| Cash and Cash Equivalents | $333,519 | $132,658 |
| Total Debt (Notes Payable) | $1,385,419 | $1,387,918 |
| Net Cash Used in Operating Activities | $(1,516) | $10,951 |
Note: Total debt includes $184.1 million related to operations held for non-sale disposition and $119.7 million related to discontinued operations.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 6.2% to $160.7 million, driven by a 6.5% drop in room revenue and a 6.9% drop in food and beverage revenue. This was primarily due to an 8.4% decrease in Average Daily Rate (ADR), partially offset by a 140 basis point increase in occupancy.
- Net Loss: The Company reported a net loss of $21.1 million compared to net income of $6.5 million in Q1 2009. The prior year included a $28.0 million gain on the extinguishment of debt which was not present in the current period.
- Impairment Charges: Goodwill and other impairment losses were zero in Q1 2010, compared to $3.7 million in Q1 2009.
- Interest Expense: Interest expense remained relatively flat at approximately $20.0 million. However, interest expense for operations held for non-sale disposition increased 86.9% due to elective defaults on the Mass Mutual loan, resulting in higher default rates and penalties (though these are non-recourse and expected to be forgiven upon deed back).
- Cash Position: Cash and cash equivalents increased significantly to $333.5 million from $132.7 million in the prior year, bolstered by equity offerings in 2009 and reduced debt repayments.
Guidance, Outlook, and Risks
- Outlook: Management believes the lodging cycle is in the early stages of a recovery phase. The Company plans to deploy excess cash toward selective hotel acquisitions in 2010, potentially targeting assets outside its typical profile to capitalize on market opportunities.
- Debt Restructuring: In April 2010 (subsequent to the reporting period), the Company finalized an agreement with Mass Mutual to pay $83.0 million to release three hotels from a $246.0 million loan. The remaining eight hotels are expected to be deeded back to the lender in satisfaction of the remaining debt balance during 2010.
- Receivership: Three hotels (W San Diego, Renaissance Westchester, Marriott Ontario Airport) are held in receivership and classified as discontinued operations. The Company expects to record gains on extinguishment of debt once title transfers are completed.
- Risks: Key risks include the prolonged U.S. recession, rising operating expenses, the ability to complete the debt restructuring program, and potential failure to meet financial covenants on Series C preferred stock if operations deteriorate.
Investor Verification Checklist
- Deed Back Completion: Verify the timeline and accounting treatment for the deed back of the "Mass Mutual eight" hotels and the three hotels in receivership, specifically regarding the recognition of gains on debt extinguishment.
- Non-Recourse Defaults: Confirm that the increased interest expense and penalties recorded for defaulted loans (Mass Mutual) are non-recourse and will be reversed upon debt forgiveness.
- Acquisition Strategy: Monitor the deployment of the $333.5 million cash balance for acquisitions and the specific criteria for new assets.
- Preferred Stock Covenants: Review compliance with financial ratios required by Series C preferred stock to avoid dividend restrictions or board representation changes.
- Operating Metrics: Track RevPAR trends for the 29 hotels held for investment to validate the management's assertion of an early recovery phase.