Sunstone Hotel Investors, Inc. quarterly report, Q2 FY2020

Business context and reporting period

Sunstone Hotel Investors, Inc. is a lodging REIT that owns and asset-manages hotels operated by third-party managers. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020. The portfolio comprised interests in 20 hotels at quarter-end, including one classified as held for sale; 19 hotels were held for investment. COVID-19 and associated travel restrictions sharply curtailed hotel operations.

Financial and operating performance

Amounts below are in millions except per-share and hotel operating statistics.

• Q2 total revenue declined 96.6% year over year; six-month revenue declined 64.0%. Q2 room revenue fell 98.1% and food and beverage revenue fell 99.7%.
• For the 20 hotels, Q2 occupancy was 3.7% versus 87.3%, ADR was $107.78 versus $244.99, and RevPAR was $3.99 versus $213.88, a 98.1% RevPAR decline. Six-month RevPAR fell 65.3% to $67.96.
• Impairment losses were $18.1 million in Q2 and $133.5 million for the first half. The first-half charges included Hilton Times Square ($107.9 million), Renaissance Westchester ($5.2 million), Renaissance Harborplace ($18.1 million), and an abandoned hotel expansion project ($2.3 million).
• Net cash used in operating activities was $34.9 million for the first half, compared with $136.1 million provided in 2019. Investing activities used $30.8 million; financing activities used $212.9 million. Cash and restricted cash decreased $278.6 million to $586.4 million.
• At June 30, cash and cash equivalents were $540.4 million and restricted cash was $46.0 million. Debt principal was $1.021 billion, compared with $974.9 million at year-end 2019. Total assets were $3.424 billion.
• Common-stock loss per share was $0.55 for Q2 and $1.30 for the first half. The filing does not provide a single consolidated operating-margin figure in the supplied text.

Material changes and financing

• COVID-19-related suspensions and reduced hotel capacity drove the severe revenue and cash-flow deterioration. Fifteen hotels were temporarily suspended during the first half; six had resumed operations by July 31, while nine of the 19 investment hotels remained suspended. Operating hotels ran at reduced capacity.
• The company drew $300 million on its revolving credit facility in March and repaid $250 million in June, leaving $50 million drawn and $450 million of stated borrowing capacity at June 30.
• The company was out of compliance with unsecured-debt financial covenants at June 30, but had a temporary waiver. Amendments finalized July 15 provided covenant relief through Q1 2021, with testing to resume for the quarter ended June 30, 2021. Relief comes with added restrictions, a minimum-liquidity requirement of $150 million, and higher borrowing costs, including a 100-basis-point increase on senior notes during the relief period.
• The company repurchased 9.77 million common shares for $103.9 million in Q1, then suspended its repurchase program. It also suspended the common quarterly dividend and said it did not expect to pay one for the remainder of 2020. Preferred dividends were permitted to continue under the amended agreements.
• Renaissance Harborplace was sold on July 7, 2020, for a gross price of $80 million, excluding customary prorations.

Outlook, risks and unusual items

• Management said COVID-19 effects could materially pressure results and liquidity through the remainder of 2020 and possibly into 2021. It anticipated a net loss for full-year 2020, could not reliably estimate the pandemic’s duration or impact, and expected a cautious reopening of additional hotels. Group cancellations were extensive; about 23% of group business cancelled to date had rebooked for future periods.
• Management cited $540.4 million of unrestricted cash and access to the revolving facility as liquidity resources, while acknowledging uncertainty over operating cash needs and access to capital markets. The company had $24.0 million of renovation commitments and deferred some non-essential capital work.
• The $77.2 million Hilton Times Square mortgage was in default: payments had not been made since April, and the hotel’s ground-lease payments had not been made since March. The company had received default notices and was exploring options ahead of the November 2020 maturity, including a negotiated transfer or discounted payoff. It also reported not making payments under certain ground lease and PILOT obligations and was negotiating land-value-based rent and tax adjustments.
• The filing identifies risks from renewed closures, weak travel demand, further impairment charges, hotel operating costs, employee claims, debt covenant compliance when testing resumes, and potential cash sweeps on mortgage loans. The $7.4 million deferred-tax asset valuation allowance and impairment charges were significant unusual items.

Key facts for investors to verify

• Current hotel reopening status, demand, occupancy, ADR, RevPAR, and the pace of group-business rebookings.
• Liquidity runway after operating cash burn, required debt and lease payments, and restricted-cash limitations; confirm available revolver capacity and compliance with the amended minimum-liquidity covenant.
• Resolution and financial exposure related to the Hilton Times Square mortgage and unpaid ground-lease obligations.
• Ability to meet covenants when testing resumes in June 2021, including the effect of amendment-related interest-rate increases and restrictions.
• Further asset impairments, final proceeds and accounting effects of the Harborplace sale, and decisions on common dividends and capital spending.