Sunstone Hotel Investors, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Sunstone is a lodging REIT with interests in 18 hotels at quarter-end, including one classified as held for sale; 17 were held for investment.
Financial performance and operating metrics
- Q3 revenue: $167.4 million, up 479% from $28.9 million in Q3 2020. Room revenue was $118.1 million, food and beverage $27.3 million, and other operating revenue $22.0 million.
- Q3 results: Net loss was $22.1 million versus $91.1 million; loss attributable to common stockholders was $29.3 million, or $0.13 per share, versus $92.5 million, or $0.43 per share.
- Q3 adjusted operating measures: Adjusted EBITDAre, excluding noncontrolling interest, was $35.4 million versus negative $36.2 million. FFO attributable to common stockholders was $2.9 million versus negative $61.1 million; adjusted FFO was $21.3 million versus negative $54.7 million. These are non-GAAP measures.
- Nine-month results: Revenue was $335.3 million versus $230.5 million; net loss was $105.3 million versus $371.1 million; common-stockholder loss was $121.0 million versus $376.3 million. Operating cash flow was positive $8.4 million versus negative $87.3 million.
- Hotel performance: Existing Portfolio Q3 occupancy was 52.7% versus 11.9%, ADR was $248.40 versus $149.70, and RevPAR was $130.91 versus $17.81. Management cautioned that comparisons are affected by pandemic shutdowns and portfolio changes.
- Cash and debt: September 30 cash and cash equivalents were $179.5 million, with $42.1 million restricted. Debt principal was $745.5 million; $87.4 million net carrying value was current. The $500 million revolving facility was undrawn. About 70.5% of debt was fixed-rate or swapped to fixed.
- Capital spending and liquidity: Nine-month hotel renovations and additions used $41.9 million; hotel acquisitions and other assets used $195.7 million, mainly for Montage Healdsburg. Cash, including restricted cash, declined by $194.5 million to $221.6 million.
Changes versus the prior comparable period
- Results improved substantially as hotel operations reopened and travel demand recovered from the exceptionally weak 2020 comparison. For the nine months, existing-portfolio RevPAR rose 69.7% year over year, but demand remained below pre-pandemic levels.
- Q3 hotel operating expenses rose with revenues and reopening activity; total Q3 operating expenses increased 69% to $181.6 million. Nine-month total operating expenses fell 24.8%, largely because 2020 included $133.5 million of impairment losses.
- Interest expense declined 37% in Q3 and 45% for the first nine months, primarily reflecting prior debt repayments and lower variable-rate interest, partly offset by amended debt terms.
- Sunstone issued Series G preferred shares as partial consideration for the $265 million Montage Healdsburg acquisition; issued Series H and I preferred stock and redeemed Series E and F; and issued common shares through its ATM program for $38.4 million gross proceeds.
Outlook, risks, contingencies, and unusual items
- Management said leisure demand led the recovery; business-transient and group demand were improving but remained well below pre-pandemic levels. It cited future group bookings as encouraging and expected portfolio performance to be significantly better in 2022 and 2023, while warning that COVID-19 and labor challenges could materially affect results and liquidity into 2022. No quantified financial guidance was provided.
- The company did not expect to pay a common-stock dividend in 2021; resumption is subject to board review. The common dividend and stock repurchase program had been suspended to preserve liquidity.
- Unsecured-debt covenant testing was waived through Q1 2022, with testing scheduled to resume for the quarter ending March 31, 2022. Management warned that covenant compliance could be challenging. Cash traps remained in place on three hotel loans, although only nominal excess cash was in lockboxes at quarter-end.
- After quarter-end, Sunstone sold Renaissance Westchester for $18.8 million gross, agreed to sell Embassy Suites La Jolla for $226.7 million, and planned to acquire Four Seasons Resort Napa Valley for $177.5 million, subject to closing conditions. It also notified the lender of its intent to extend the $220 million Hilton San Diego Bayfront loan to December 2022.
- Unusual Q3 items included $9.1 million of CEO transition costs, $4.6 million of severance at Renaissance Westchester, $1.6 million of Hurricane Ida restoration expense, and a $1.0 million impairment at Hilton New Orleans St. Charles. Insurance recoveries for Ida had not been recognized pending settlement.
- Key risks include uncertain travel recovery and COVID-19 variants, labor availability and costs, hotel operating expenses, debt covenant and refinancing risks, renovation commitments, and exposure to severe weather. The filing reported no legal proceedings in Part II, Item 1.
Important facts for investors to verify
- Whether business-transient and group travel recover as management expects, and the resulting hotel occupancy, ADR, RevPAR, and cash flow.
- Whether covenant testing resumes in March 2022 without breach, and whether the Hilton San Diego Bayfront loan extension and other maturities are completed on the expected terms.
- Whether the Embassy Suites La Jolla sale and Four Seasons Napa Valley acquisition close, and their effects on liquidity, leverage, and the portfolio.
- Potential additional Hurricane Ida costs and the timing and amount of any insurance recovery.
- Required funding for $68.6 million of renovation commitments, preferred dividends, and any future common dividend or share repurchases.