Business Context and Reporting Period
Company: Sunstone Hotel Investors, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: January 25, 2013
Reporting Period: The filing reports on a material asset disposition completed on January 25, 2013, and references preliminary financial results for the three months and year ended December 31, 2012.
Key Financial Metrics and Transaction Details
Asset Disposition (The "Portfolio"):
- Assets Sold: Four-hotel portfolio (1,222 rooms) and a commercial laundry facility in Rochester, Minnesota (Kahler Grand, Kahler Inn & Suites, Marriott Rochester, Residence Inn by Marriott Rochester).
- Gross Sale Price: $230.0 million.
- Net Proceeds: Approximately $195.3 million (after estimated closing costs of $6.1 million and a $3.7 million working cash advance).
- Preferred Equity Investment: Retained $25.0 million perpetual preferred equity yielding an 11% dividend.
- Pension Liability: Retained a $14.0 million liability related to the Portfolio's pension plan, contingent on specific triggers such as plan termination.
- Working Capital Advance: Provided a $3.7 million cash advance to the Buyer, repayable from Portfolio cash flow.
- Defeasance: Defeased $26.7 million mortgage secured by the Kahler Grand at a total cost of approximately $30.0 million.
- Prepayment: Prepaid a $0.4 million loan secured by the commercial laundry facility.
- Write-offs: Wrote off $51,000 in deferred financing fees.
- Total Assets: Increased from $3.14 billion (historical) to $3.18 billion (pro forma) due to cash inflow exceeding asset book value removal.
- Total Liabilities: Decreased from $1.53 billion (historical) to $1.51 billion (pro forma) following debt repayment.
- Stockholders' Equity: Increased from $1.46 billion (historical) to $1.52 billion (pro forma), reflecting the net gain on sale.
Material Changes Versus Prior Period
The filing presents unaudited pro forma financial statements adjusting historical results for the nine months ended September 30, 2012, and the years ended December 31, 2011, 2010, and 2009, to reflect the Portfolio sale as if it occurred at the beginning of those periods.
Pro Forma Adjustments (Nine Months Ended Sept 30, 2012):
- Revenues: Reduced by $46.7 million (from $642.8M to $596.1M).
- Operating Expenses: Reduced by $38.1 million (from $584.2M to $546.1M).
- Operating Income: Reduced by $8.6 million (from $58.7M to $50.0M).
- Interest Expense: Reduced by $1.2 million due to debt defeasance.
- Net Result: Historical loss from continuing operations of $0.7 million adjusted to a pro forma loss of $8.1 million, primarily due to the removal of operating income from the sold assets.
Guidance, Outlook, and Risks
Management Commentary:
- The transaction was completed with an unaffiliated third party.
- The Company retains a significant income stream via the 11% dividend on the $25.0 million preferred equity investment.
- Costs associated with debt defeasance and prepayment ($2.9 million) and the write-off of financing fees ($60,000) are expected to be included in discontinued operations in the first quarter of 2013.
- Pension Liability: The Company retains a $14.0 million pension liability that could be triggered by the termination of the pension plan or other specific circumstances.
- Pro Forma Limitations: The pro forma financial statements are for informational purposes only and do not represent actual future financial positions or results.
- The sale structure involves a "sale-leaseback" style retention of preferred equity rather than a full cash-out, creating a hybrid debt/equity instrument for the Company.
Investor Verification Checklist
- Preferred Equity Terms: Verify the specific terms of the $25.0 million preferred equity investment, including dividend payment schedules and redemption rights.
- Pension Liability Triggers: Review the specific conditions under which the retained $14.0 million pension liability would become payable.
- Working Capital Advance: Confirm the repayment schedule and security for the $3.7 million cash advance provided to the Buyer.
- Discontinued Operations: Monitor the Q1 2013 financial statements for the recognition of the $2.9 million debt extinguishment costs and $60,000 fee write-off.
- Pro Forma vs. Actual: Compare the pro forma adjustments against the actual Q4 2012 and Q1 2013 results to assess the accuracy of the transaction's impact on earnings.