Business Context and Reporting Period
Sunstone Hotel Investors, Inc. (Sunstone) is a Maryland corporation operating as a Real Estate Investment Trust (REIT). As of June 30, 2008, the Company owned 44 hotels in the United States, primarily luxury, upper upscale, and upscale properties managed by third parties including Interstate SHP, Marriott, and Hyatt. The Company leases its properties to a taxable REIT subsidiary (TRS) to comply with REIT regulations. This filing covers the quarterly period ended June 30, 2008.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2008 | Six Months Ended June 30, 2007 |
|---|---|---|
| Total Revenues | $479.7 million | $448.2 million |
| Operating Income | $67.0 million | $59.3 million |
| Net Income | $70.3 million | $79.3 million |
| Income Available to Common Stockholders | $58.6 million | $67.1 million |
| Diluted EPS (Common) | $1.00 | $1.13 |
| Net Cash from Operating Activities | $87.5 million | $96.6 million |
| Total Debt (Notes Payable) | $1.718 billion | $1.748 billion (as of June 30, 2007) |
| Cash and Cash Equivalents | $38.9 million | $67.4 million (Dec 31, 2007) |
| Dividends Paid per Common Share | $0.70 | $0.64 |
Liquidity: As of June 30, 2008, the Company had $38.9 million in unrestricted cash and $361.0 million in cash proceeds held by an accommodator related to the sale of the Hyatt Regency Century Plaza. The Company had $194.7 million available under its $200.0 million credit facility, with no outstanding borrowings.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 7.0% year-over-year for the six months ended June 30, 2008, driven by a 7.1% increase in room revenue and a 5.9% increase in food and beverage revenue.
- Operating Performance: Operating income increased 12.8% to $67.0 million. This was supported by a 4.1% increase in Average Daily Rate (ADR) to $161.53, which offset a 80 basis point decrease in occupancy to 75.2%.
- Discontinued Operations: Net income decreased 11.4% primarily due to a reduction in income from discontinued operations ($52.2 million in 2008 vs. $63.6 million in 2007). The 2008 figure includes a $42.1 million gain on the sale of the Hyatt Regency Century Plaza, whereas 2007 included gains from the sale of seven hotels.
- Expense Management: Corporate overhead expenses decreased 28.3% to $12.0 million, largely due to one-time severance costs incurred in 2007 related to executive succession.
- Interest Expense: Interest expense increased 12.7% to $49.1 million due to new debt incurred for acquisitions and the issuance of exchangeable senior notes, partially offset by loan repayments.
Outlook, Risks, and Unusual Items
- Capital Deployment: The Company sold the Hyatt Regency Century Plaza for net proceeds of $358.8 million. Approximately $221.0 million of these proceeds are held as unrestricted cash pending reinvestment. The Company is evaluating options including hotel acquisitions, debt repayment, stock repurchases, or a special dividend.
- Stock Repurchases: In June 2008, the Company completed a tender offer purchasing 7.37 million shares for $129.0 million. As of July 8, 2008, approximately $9.2 million remained available under the 2008 repurchase program.
- Market Outlook: Management expects lodging demand growth to slow in the second half of 2008 due to a slowing U.S. economy. The Company plans to control costs while maintaining room rates.
- Risks: Key risks include general economic conditions affecting travel, rising operating expenses (labor, utilities, insurance), and the Company's significant level of outstanding debt. All outstanding debt as of June 30, 2008, carried fixed interest rates.
- Unusual Items: The financial results are significantly impacted by the classification of the Hyatt Regency Century Plaza sale as discontinued operations. Additionally, the Company recognized a $6.1 million gain on the sale of a 50% interest in BuyEfficient, LLC in late 2007, which is now accounted for as an unconsolidated joint venture.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the extent to which Net Income is driven by the one-time gain on the Hyatt Regency Century Plaza sale versus recurring operating performance.
- Capital Allocation Strategy: Confirm the Company's plan for the $221.0 million in unrestricted cash proceeds from the hotel sale (acquisition vs. dividend vs. buyback).
- Debt Maturity Profile: Review the maturity schedule of the $1.718 billion in notes payable, noting that the majority is fixed-rate but subject to specific covenants.
- Occupancy Trends: Monitor the trend of declining occupancy (down 160 bps in the comparable portfolio for the six months) against the rising ADR to assess pricing power sustainability.
- Preferred Stock Obligations: Note the quarterly dividend obligations on Series A and Series C preferred stock, which reduce income available to common stockholders.