Sunstone Hotel Investors, Inc. — Q1 2012 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2012. Sunstone is a self-managed REIT that owns and asset-manages U.S. hotels leased to its taxable REIT subsidiary and operated by third-party managers. It had interests in 32 hotels with 13,208 rooms, versus 31 hotels with 12,010 rooms a year earlier. Results reflect the effect of 2011 acquisitions; hotel managers also use differing reporting calendars.
Financial and operating performance
- Total revenue was $205.2 million, up 29.0% from $159.1 million. Room revenue rose 28.2%, food and beverage revenue 32.0%, and other operating revenue 26.7%.
- Comparable-portfolio occupancy increased 4.2 percentage points to 73.8%; ADR declined 0.5% to $159.14; RevPAR rose 5.5% to $117.45.
- Operating income was $8.2 million, versus an operating loss of $1.6 million. Net loss was $13.0 million, compared with net income of $51.3 million; loss attributable to common stockholders was $21.0 million, or $0.18 per diluted share, versus income of $45.7 million, or $0.39 per share.
- Adjusted EBITDA, a non-GAAP measure, increased to $43.1 million from $32.4 million. Adjusted FFO increased to $13.6 million from $8.6 million. FFO was $12.9 million versus $74.8 million.
- Operating cash flow was $18.0 million, down from $23.1 million. Investing cash outflow was $23.7 million, chiefly $21.8 million for renovations and additions; financing cash outflow was $18.6 million. Cash and cash equivalents declined by $24.3 million to $126.2 million.
- At March 31, total assets were $3.06 billion and total liabilities $1.66 billion. Notes payable were $1.56 billion, including $111.3 million classified as current. Cash plus restricted cash totaled $198.2 million, of which $72.0 million was restricted.
- Weighted-average debt maturity was approximately 5.5 years. 73.3% of debt was fixed-rate, at a weighted-average rate of 5.5%; the weighted-average rate on all debt, including derivatives, was 5.0%. A 100-basis-point change in variable rates was estimated to affect annual earnings and cash flows by about $4.3 million.
Material changes versus the prior comparable period
- Growth in revenue and adjusted EBITDA primarily reflected the Hilton San Diego Bayfront, acquired in April 2011, and the Doubletree Guest Suites Times Square and JW Marriott New Orleans, along with improved results at existing hotels. Comparable RevPAR rose 5.5% and occupancy improved, while ADR edged lower.
- The 2011 comparison included a $69.2 million noncash gain from remeasuring equity interests in acquired joint ventures; there was no such gain in Q1 2012. This largely explains why reported net income and FFO fell despite improved hotel operations.
- Interest expense increased 20.9% to $21.5 million, mainly due to debt associated with acquisitions and additional financing-fee amortization. Preferred dividends rose to $7.4 million from $5.1 million, reflecting the Series D preferred issuance in 2011.
- Corporate overhead declined 30.8% to $5.3 million, largely due to lower acquisition and due diligence costs. Depreciation and amortization rose 32.5% to $34.8 million, partly from acquired hotels and renovation spending.
Outlook, commentary, risks and unusual items
- Management described the lodging market as being in the early stages of recovery. It cited Q1 comparable RevPAR growth and expected demand to remain strong over the next several quarters, while noting that growth may be uneven. No quantified earnings or RevPAR guidance was provided.
- Management stated that cash, operating cash flow, capital-market access and unencumbered properties should provide sufficient liquidity for at least the next 12 months. Its stated objectives include measured leverage reduction and maintaining liquidity; near-term acquisitions were expected to use a greater proportion of equity than debt.
- After quarter-end, Sunstone repaid the remaining $32.2 million mortgage on the Renaissance Long Beach using cash. On May 2 it announced an agreement to acquire the leasehold interest in the 417-room Wyndham Chicago for $88.4 million, funded with $30.0 million cash and $58.4 million of common stock; closing was expected in Q2.
- Q1 included a $0.2 million loss on repurchase and cancellation of $4.5 million principal amount of exchangeable senior notes. The company also recorded $0.4 million of discontinued-operations income, including Royal Palm-related recoveries and a gain.
- Renovation contracts outstanding totaled $33.3 million; $21.8 million was spent on renovations and additions during the quarter. The company reported a $1.6 million accrued settlement liability for employee litigation; two claims were settled, and it expected a maximum of $0.7 million in costs for the remaining claim.
- Risks include lodging-cycle and travel-demand sensitivity, rising labor, utility and insurance costs, renovations and franchise requirements, leverage and debt maturities, access to capital, and reliance on hotel managers. California represented about 35% of Q1 portfolio revenue and New York about 13%; these concentrations expose the portfolio to local economic, tax and natural-disaster risks. Management reported no impairment indicators for hotel assets or goodwill in the quarter and no expected Series C financial-ratio violation.
Most important facts for investors to verify
- Whether comparable hotel operating improvements persist, and whether ADR or occupancy drives future RevPAR growth.
- How much of revenue and adjusted EBITDA growth is attributable to acquisitions versus same-property performance; review non-GAAP definitions and reconciliations.
- Liquidity after the Long Beach mortgage repayment, the Wyndham Chicago transaction, renovation commitments and upcoming debt service.
- Debt maturities and refinancing exposure, variable-rate sensitivity, and compliance with debt and preferred-stock covenants.
- Progress on the remaining employee-litigation claim and any material change in the company’s stated 12-month liquidity outlook.