Sunstone Hotel Investors, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report, not a standalone quarterly filing; fourth-quarter results are noted below. Sunstone is a U.S. hotel REIT focused on owning, managing as an asset owner, and renovating primarily urban and resort upscale and upper-upscale hotels. At year-end it held interests in 28 hotels, including one classified as held for sale; the 27 investment hotels had 13,222 rooms. The Fairmont Newport Beach was sold in February 2017.
Financial performance and position
| Metric | 2016 | 2015 | Change / context |
|---|---|---|---|
| Total revenue | $1,189.3 million | $1,249.2 million | Down 4.8%; hotel dispositions and the sale of BuyEfficient reduced reported revenue. |
| Operating income | $170.4 million | $180.4 million | Down 5.6%; operating margin was approximately 14.3%, versus 14.4%. |
| Net income | $140.7 million | $355.5 million | Down 60.4%; 2015 included $226.2 million of gains on asset sales, mainly the Doubletree Guest Suites Times Square. |
| Income attributable to common stockholders | $118.2 million; $0.55 per share | $338.2 million; $1.62 per share | Down 65.0%; results also reflect preferred dividends and the 2016 Series D redemption charge. |
| Adjusted EBITDA | $330.0 million | $351.3 million | Down $21.3 million, or about 6.1%. |
| Adjusted FFO attributable to common stockholders | $260.8 million | $271.7 million | Down $11.0 million, or about 4.0%. |
| Net cash from operating activities | $305.4 million | $309.3 million | Down $3.9 million. |
| Capital improvements | $182.2 million | $164.2 million | Revenue disruption from major renovations was estimated at $8.0 million in 2016. |
- Hotel operating metrics: Comparable Portfolio RevPAR increased 1.3% to $163.75, with occupancy up 10 basis points to 82.4% and ADR up 1.2% to $198.73. Across the total 28-hotel portfolio, RevPAR rose 0.7% to $164.22; occupancy fell 30 basis points to 81.9%, while ADR rose 1.1% to $200.51.
- Fourth quarter: Revenue was $289.6 million versus $300.9 million in Q4 2015; operating income was $37.1 million versus $41.1 million; net income was $34.3 million versus $237.6 million. Common-stockholder earnings were $0.14 per share versus $1.12, with the prior-year quarter benefiting from major asset-sale gains.
- Cash and liquidity: Year-end cash and cash equivalents were $369.5 million and restricted cash was $67.9 million, for total cash including restricted cash of $437.5 million. Management stated pro forma total cash after specified January 2017 payments and debt transactions would be $381.7 million.
- Debt: Notes payable were $935.9 million principal ($931.3 million net carrying amount); total debt including the capital lease was approximately $951.5 million. The weighted-average debt maturity was about four years. Including swaps, 76.2% of debt was fixed at an average 4.74%; the average rate across fixed and variable debt was 4.29%. There were no borrowings under the $400 million unsecured credit facility at year-end.
- Balance sheet: Total assets were $3.74 billion, total liabilities $1.21 billion, and total equity $2.53 billion. The company reported 22 unencumbered hotels following year-end debt repayments.
Changes versus the prior comparable period
- Reported revenue fell 4.8%, while Comparable Portfolio RevPAR still grew modestly. Dispositions (including Sheraton Cerritos in 2016 and Doubletree Guest Suites Times Square in 2015) and the prior sale of BuyEfficient materially affect year-over-year revenue comparisons.
- Adjusted EBITDA and Adjusted FFO declined, reflecting the asset sales, weak Houston and Chicago trading, additional New York City hotel supply, and renovation disruption at the Boston Park Plaza and Wailea Beach Resort. Stronger performance at selected Orlando, Washington, San Francisco, and Los Angeles hotels partly offset weakness.
- Interest expense decreased 24.4% to $50.3 million, primarily due to lower debt balances and refinancing activity. Debt declined from $1.10 billion at year-end 2015 to $935.9 million principal at year-end 2016.
- 2016 net income was much lower than 2015 principally because the prior year recorded $226.2 million of gains on asset sales. In 2016, asset-sale gains were $18.4 million.
Capital actions, outlook, and risks
- During 2016, Sunstone issued $115 million of 6.95% Series E preferred stock and $75 million of 6.45% Series F preferred stock, and redeemed all $115 million of Series D preferred stock. It also issued 3.56 million common shares through its at-the-market program for $55.1 million gross proceeds.
- Debt actions included repaying the Boston Park Plaza, Renaissance Orlando at SeaWorld, and Embassy Suites Chicago mortgages, and drawing a $100 million unsecured term loan to help refinance the Boston Park Plaza mortgage. In January 2017, the company issued $240 million of senior unsecured notes at fixed rates of 4.69% and 4.79%, due in 2026 and 2028, and used $176 million of proceeds to repay the Marriott Boston Long Wharf mortgage.
- Management expected capital expenditures to be moderate in 2017 after completing much of the renovations and repositionings at recently acquired hotels. It intended to continue focused asset management and selective capital recycling, including possible acquisitions and dispositions, while maintaining low leverage and financial flexibility. The filing provides no quantified 2017 earnings or RevPAR guidance; management expected a regular common dividend of $0.05 per share quarterly during 2017, with a possible January 2018 catch-up distribution to meet REIT requirements.
- Risks include hotel demand sensitivity to economic conditions, new supply and alternative lodging; concentration in key markets and brands; labor, operating-cost and renovation risks; reliance on third-party managers and the TRS lessee; refinancing and interest-rate exposure; and REIT qualification and tax risks. A 100-basis-point move in variable rates was estimated to affect annual earnings and cash flows by approximately $2.0 million before the Hilton San Diego Bayfront noncontrolling interest, or $1.5 million after it.
- Other exposures include long-term ground, building, and air leases; $38.0 million in construction commitments; environmental indemnities without stated term or damage limits; and $0.5 million of outstanding letters of credit. Management did not expect pending legal matters to have a material adverse effect. No cash-trap provisions were triggered at year-end.
Unusual items and investor verification points
- 2016 included a $5.0 million manager performance-guarantee payment for Wailea Beach Resort, a $4.1 million noncash Series D preferred-stock redemption charge, and a $1.6 million tax benefit from reversing a prior tax accrual after the statute of limitations expired.
- Verify the composition and calculation of adjusted EBITDA and adjusted FFO, including excluded items, and distinguish recurring hotel performance from asset-sale gains and other adjustments.
- Verify comparable-hotel RevPAR trends and the expected recovery from renovation disruption, especially at Wailea Beach Resort and the Boston Park Plaza, alongside weak Chicago and Houston markets.
- Verify post-2016 liquidity and leverage after the January 2017 note issuance and mortgage repayment, the February 2017 Fairmont Newport Beach sale, and the $119.8 million dividend payment referenced in the pro forma cash discussion.
- Verify 2017 capital spending, debt maturities and amortization, refinancing needs, and whether the expected common dividend and any catch-up distribution are supported by cash generation and REIT taxable income.
- Verify the effects of the planned adoption of new revenue-recognition and lease-accounting standards; the filing said those impacts were still being evaluated.