Sunstone Hotel Investors, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. Sunstone is a self-managed REIT that owned 15 hotels as of June 30, 2023. The filing covers the quarter and six months ended June 30, 2023; financial comparisons are with the corresponding 2022 periods. Unless noted otherwise, amounts below are in millions.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $276.1 | $251.3 | $519.6 | $423.6 |
| Net income | $43.1 | $37.7 | $64.2 | $52.8 |
| Income attributable to common stockholders | $39.3 | $31.6 | $56.6 | $41.8 |
| Basic and diluted earnings per share | $0.19 | $0.15 | $0.27 | $0.19 |
| EBITDAre | $85.5 | $74.6 | $153.1 | $103.3 |
| Adjusted EBITDAre, excluding noncontrolling interest | $85.1 | $74.0 | $145.1 | $101.2 |
| FFO attributable to common stockholders | $71.6 | $61.4 | $121.1 | $78.9 |
| Adjusted FFO attributable to common stockholders | $67.4 | $63.2 | $111.2 | $79.6 |
Q2 revenue increased 9.9%, while net income rose 14.3% and common-stockholder income rose 24.5%. For the six months, revenue increased 22.7%, net income 21.5%, and common-stockholder income 35.5%. Calculated net margin was approximately 15.6% in Q2 versus 15.0% a year earlier, and 12.3% for the six months versus 12.5%; the six-month comparison includes differing unusual items. Adjusted EBITDAre margin was approximately 30.8% in Q2 versus 29.4%, and 27.9% for the six months versus 23.9%.
Hotel operating indicators: For the 14-hotel existing portfolio, Q2 occupancy was 77.7% (up 340 basis points), ADR was $321.42 (up 0.5%), and RevPAR was $249.74 (up 5.1%). For the six months, occupancy was 73.4% (up 970 basis points), ADR was $316.57 (up 1.4%), and RevPAR was $232.36 (up 16.8%).
Cash flow and liquidity: Six-month operating cash flow was $107.0 million, versus $90.7 million; investing cash outflow was $49.2 million, versus $99.5 million; financing cash outflow was $51.5 million, versus $1.0 million. Cash and cash equivalents were $107.8 million and restricted cash was $55.7 million at quarter-end, totaling $163.5 million. The company reported $500 million of available capacity on its unsecured revolving credit facility, with no amount drawn, subject to financial covenants.
Debt: Debt principal was $820.1 million at June 30, 2023, compared with $816.1 million at December 31, 2022. The weighted average interest rate was approximately 5.9%, versus 3.6% at June 30, 2022. About 51.2% of debt was fixed or hedged to fixed rates. Six-month interest expense was $23.0 million, versus $11.0 million. The filing estimates that a 50-basis-point change in variable rates would change annual interest expense by approximately $2.0 million.
Material changes and unusual items
- Existing-portfolio revenue growth reflected stronger demand and improved occupancy; Q2 2022 and the first half of 2022 were affected by COVID-19 Omicron disruption.
- The Confidante Miami Beach, acquired in June 2022, contributed additional 2023 revenue and expenses. Three Chicago hotels sold in early 2022 reduced the comparable 2023 portfolio.
- Interest expense rose substantially, primarily from higher variable rates and additional term-loan borrowing. In May 2023, Sunstone drew $225 million on Term Loan 3 and used $220 million to repay the Hilton San Diego Bayfront mortgage.
- Six-month 2023 results included a $9.9 million gain on extinguishment of debt, principally from release of Hilton Times Square employee-obligation escrow funds. Six-month 2022 included $22.9 million of gains on hotel sales. Hurricane Ida-related insurance activity included $3.7 million of property-damage proceeds recognized in Q2 2023 and $0.5 million of business-interruption proceeds.
- Sunstone invested $49.2 million in renovations and additions during the first half and had $49.6 million of contracted construction commitments at quarter-end. A substantial renovation and rebranding of The Confidante Miami Beach to Andaz Miami Beach is expected to continue through 2023 and 2024.
- The company repurchased 2.27 million common shares for $21.5 million in the first half. The repurchase program had $489.5 million remaining; no shares were issued under the $300 million at-the-market offering agreements.
Outlook, risks, and contingencies
The filing provides no quantified earnings or operating guidance. Management expected continued capital needs for hotel operations, debt service, renovations, dividends, and potential repurchases or acquisitions. It said inflation and higher interest rates had increased wages, food, materials, insurance, property taxes, utilities, and borrowing costs; hotel pricing had partly mitigated operating-cost pressure, while higher rates increased variable-rate debt costs. Management stated that available cash and revolver capacity should support operations, while warning that capital sources could be less available or more expensive amid inflation, rising rates, and possible recession.
Key disclosed risks include economic downturns and weaker travel demand, inflation, interest-rate and refinancing risk, hotel renovations disrupting operations, competition and new supply, severe weather and climate-related events, cybersecurity threats, geographic concentration, hotel-manager and franchisor relationships, debt covenants, and REIT qualification requirements. No hotel impairment was recorded in the periods presented. Renovation commitments were $49.6 million. The company disclosed routine legal claims and environmental indemnities; management did not expect identifiable litigation liabilities beyond insurance to materially harm results, while acknowledging uncertainty. No material legal proceedings were listed under Part II.
Important facts for investors to verify
- Whether occupancy, ADR, and RevPAR trends persist after adjusting for COVID recovery, the Confidante acquisition, and prior-year hotel dispositions.
- How rising interest expense and the mix of fixed, swapped, and floating-rate debt affect cash flow, covenants, and refinancing needs.
- The timing, total cost, and operating disruption of the Confidante-to-Andaz renovation and other capital commitments.
- The sustainability of reported earnings and FFO after excluding the debt-resolution gain and insurance-related items.
- Availability of the $500 million revolver under its covenants, and how capital allocation among repurchases, dividends, renovations, and debt service evolves.