Sunstone Hotel Investors, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2019. Sunstone is a self-managed REIT that owns, asset-manages and renovates hotels. At quarter-end it had interests in 21 hotels, including one classified as held for sale; 20 hotels were held for investment. The Courtyard by Marriott Los Angeles was sold on October 23, 2019, for a gross price of $50.0 million.
Financial and operating performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $281.6 million | $289.3 million | $842.2 million | $878.2 million |
| Net income | $33.5 million | $91.6 million | $97.4 million | $181.3 million |
| Income attributable to common stockholders | $27.8 million | $86.0 million | $81.7 million | $164.5 million |
| Basic and diluted EPS | $0.12 | $0.38 | $0.36 | $0.73 |
| Adjusted EBITDAre, excluding noncontrolling interest | $81.2 million | $84.6 million | $244.8 million | $248.2 million |
| Adjusted FFO attributable to common stockholders | $65.7 million | $67.9 million | $195.0 million | $197.5 million |
Revenue declined 2.7% in Q3 and 4.1% year to date. Comparable Portfolio RevPAR increased 0.9% in Q3 and 2.3% year to date; occupancy fell 20 basis points in Q3 and was unchanged year to date, while ADR rose 1.1% and 2.3%, respectively. The filing does not present a single conventional profit-margin measure; operating income before interest and taxes was $42.3 million in Q3 and $126.1 million year to date.
Operating cash flow was $210.6 million for the first nine months, versus $219.5 million in 2018. Investing activities used $75.5 million, chiefly reflecting $75.3 million of hotel renovations and additions; financing activities used $221.3 million. Cash and restricted cash ended the period at $776.2 million, including $730.0 million of unrestricted cash.
At September 30, total assets were $3.90 billion, total liabilities $1.19 billion and total equity $2.71 billion. Debt principal was $977.1 million; there were no borrowings outstanding under the credit facility. About 77.5% of debt was fixed-rate or swapped to fixed, and the weighted-average interest rate was approximately 4.2%. A 100-basis-point change in market rates was estimated to affect future consolidated earnings and cash flows by approximately $2.2 million.
Material changes versus the prior comparable period
- Reported earnings fell sharply in part because 2018 included gains on hotel sales of $53.1 million in Q3 and $68.8 million year to date; no such gains were recorded in 2019.
- Revenue comparisons were affected by six hotel sales during 2018. Those sales reduced 2019 year-to-date room revenue by $40.6 million and food and beverage revenue by $17.1 million versus the comparable 2018 period, according to management.
- Renovations at four hotels disrupted 2019 operations; management estimated 19,678 room nights were out of service year to date, displacing approximately $4.7 million in room revenue.
- Interest expense increased to $13.3 million in Q3 and $43.4 million year to date, primarily due to noncash changes in derivative fair values. Excluding those noncash changes, management said interest expense decreased slightly versus the comparable periods.
- Sunstone repurchased 3.78 million common shares for $50.0 million year to date. The company reported approximately $250.1 million of remaining capacity under its $300 million repurchase authorization.
Outlook, risks and unusual items
- The filing provides no quantified earnings or operating guidance. Management expects cash needs to include hotel operations, renovations, debt service, dividends and distributions, and potentially acquisitions or share repurchases. It expects cash, operating activities, financing and asset dispositions to remain potential funding sources, but cautions that capital markets may not be available on favorable terms.
- Outstanding renovation and construction commitments were $53.3 million. Management also disclosed substantial future lease payments; at quarter-end, operating lease obligations had a present value of $55.6 million and finance lease obligations $15.6 million, excluding the lease obligation associated with the hotel held for sale.
- Risks include lodging-demand and economic weakness, new hotel and alternative-lodging supply, wage and other operating-cost inflation, renovation disruption, weather and other travel interruptions, market concentration, brand and manager relationships, REIT compliance, debt and covenant exposure, and access to capital. The company noted geographic concentration, including California representing 33% of trailing 12-month consolidated revenue.
- Routine claims and legal proceedings were disclosed; management did not expect identifiable uninsured liabilities in aggregate to materially affect financial condition or results, while noting outcomes remain uncertain. No legal proceedings were listed as reportable in Part II.
- Adoption of the new lease accounting standard in January 2019 brought operating lease right-of-use assets and obligations onto the balance sheet; the initial net balance-sheet adjustment was $45.7 million. No impairment loss was recorded in 2019; 2018 included a $1.4 million impairment charge.
- Management cited continuing U.S. hotel supply growth and above-average new openings in markets including Boston, New York City, Orlando and Portland. It also cautioned that results are seasonal and can be affected by renovations, severe weather, public-health events and other disruptions.
Important facts for investors to verify
- Whether comparable hotel trends, particularly RevPAR and occupancy, remain positive as renovation disruption eases and portfolio changes affect reported comparisons.
- Whether operating cash generation supports renovation commitments, dividends, repurchases and debt service while maintaining the company’s liquidity position.
- The realized proceeds and any gain or loss from the October 2019 Courtyard by Marriott Los Angeles sale, compared with its $50.0 million gross sale price and reported held-for-sale balances.
- The effect of derivative fair-value movements and variable-rate exposure on reported interest expense and future cash costs.
- How hotel operating costs, geographic concentration, new supply and lease obligations affect margins and the company’s stated balance-sheet flexibility.