Sunstone Hotel Investors, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Sunstone is a hotel-owning REIT with interests in 21 hotels. Unless otherwise noted, financial amounts are in millions of dollars.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $302.9 | $317.4 | $560.6 | $588.9 |
| Net income | $45.9 | $51.3 | $63.8 | $89.7 |
| Income attributable to common stockholders | $40.8 | $45.7 | $53.9 | $78.5 |
| Basic and diluted EPS | $0.18 | $0.20 | $0.24 | $0.35 |
| Adjusted EBITDAre, excluding noncontrolling interest | $99.1 | $101.2 | $163.6 | $163.6 |
| Adjusted FFO attributable to common stockholders | $81.7 | $83.7 | $129.2 | $129.6 |
- Q2 comparable-portfolio RevPAR increased 2.1%, with occupancy of 87.4% (up 30 basis points) and ADR of $243.43 (up 1.7%). For the first half, RevPAR rose 3.1%.
- Net cash from operating activities was $136.1, versus $143.3 in the prior-year half. Investing used $52.9, while financing used $157.8. Cash and restricted cash declined $74.7 to $787.7; unrestricted cash was $741.5 at June 30.
- Debt principal was $979.0; no amounts were drawn under the credit facility. About 77.5% of debt was fixed-rate, including debt swapped to fixed rates. Management reported a 4.2% weighted-average interest rate.
- Current assets were $844.7 and current liabilities $121.2. Total liabilities were $1,187.7 and total equity $2,738.1.
Changes versus the prior comparable period
- Revenue fell 4.6% in Q2 and 4.8% in the first half. The primary drag was the sale of hotels during 2018: those dispositions reduced Q2 room revenue by $16.0 and first-half room revenue by $31.5.
- Despite those sales, revenue from the continuing 21-hotel portfolio increased: room revenue rose $4.4 in Q2 and $11.5 in the first half. Renovations at four hotels reduced available room nights and management estimated foregone room revenue of $2.6 in Q2 and $4.7 in the first half.
- Common-stockholder income declined 10.8% in Q2 and 31.4% in the first half. First-half comparison also included a $15.7 gain on hotel sales in 2018, which did not recur.
- Interest expense rose to $15.8 in Q2 and $30.1 for the half, largely due to noncash changes in derivative fair values. Excluding those noncash effects, interest expense was approximately flat year over year in Q2 and increased $0.2 for the half.
- Adjusted EBITDAre and adjusted FFO were broadly stable year over year for the first half. Management said excluding the sold hotels, adjusted EBITDAre would have increased $11.0 and adjusted FFO $9.2 for the half.
Outlook, commentary, risks and unusual items
- The filing provides no numerical earnings or operating guidance. Management emphasized maintaining low leverage, liquidity and balance-sheet flexibility, with future acquisitions potentially funded through cash, debt, equity or asset-sale proceeds.
- Sunstone invested $52.7 in renovations and additions in the first half and had $42.8 of remaining construction commitments at June 30. Renovation disruption is a near-term operating consideration.
- A cash-trap provision was triggered in Q2 on the Hilton Times Square loan; beginning in July 2019, excess hotel cash was to be deposited in a lender-benefit lockbox and classified as restricted cash.
- From July 1 through August 2, 2019, the company repurchased 3.34 million common shares for $44.2, leaving $250.1 of authorization under its $300 million repurchase program.
- Adoption of the new lease standard in January 2019 added operating-lease right-of-use assets and obligations, with approximately $45.7 of net balance-sheet adjustments. At June 30, reported operating-lease obligations were $56.7 and finance-lease obligations $27.1.
- Risks include lodging-demand and economic cycles, new hotel and alternative-lodging supply, labor and other expense inflation, weather and other disruptions, renovation execution, lease exposure, debt and covenant obligations, and capital-market access. Management cited market-by-market supply pressure, including in Boston, New York City, Orlando and Portland. Legal proceedings were reported as none; the filing nevertheless describes ordinary-course claims and litigation.
Important facts for investors to verify
- How much of the revenue and earnings decline reflects hotel dispositions versus same-property trends, renovation disruption and operating costs.
- Whether comparable RevPAR growth translates into sustained property-level cash flow amid wage, insurance, tax and other cost increases.
- The cash-trap terms and effect on access to Hilton Times Square cash, alongside the company’s high cash balance and planned capital uses.
- Derivative valuation effects on reported interest expense and the company’s remaining exposure to variable rates; management estimated a 100-basis-point rate change would affect future earnings and cash flows by about $2.2 before the joint-venture noncontrolling interest.
- Progress and total cost of renovations, remaining construction commitments, and the scale and timing of subsequent share repurchases.