Business context and reporting period
Sunstone Hotel Investors, Inc. is a self-managed REIT that owns and renovates U.S. hotels operated by third-party managers. This unaudited Form 10-Q covers the three months ended March 31, 2017, compared with the first quarter of 2016. At quarter-end, the company held interests in 27 hotels.
Key financial results
Amounts below are in millions of dollars except per-share and hotel operating data.
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $280.7 | $274.3 | +2.4% |
| Operating income | $30.3 | $21.1 | +43.7% |
| Net income | $63.8 | $1.2 | +$62.6 |
| Income (loss) attributable to common stockholders | $58.6 | $(3.2) | +$61.8 |
| Diluted earnings (loss) per share | $0.27 | $(0.02) | — |
| Cash from operating activities | $44.1 | $43.1 | +$1.1 |
| Adjusted EBITDA | $69.6 | $61.8 | +$7.7 |
| FFO attributable to common stockholders | $53.9 | $35.9 | +$18.0 |
| Adjusted FFO attributable to common stockholders | $53.2 | $44.2 | +$8.9 |
Comparable portfolio RevPAR rose 5.5% to $158.10, with ADR up 5.7% to $203.48 and occupancy down 10 basis points to 77.7%. Operating income was 10.8% of revenue versus 7.7% a year earlier. Net income and common-stockholder earnings were materially boosted by the $44.3 million gain on the Fairmont Newport Beach sale; the comparison also benefited from a $7.1 million year-over-year swing in derivative results (a $0.7 million gain in 2017 versus a $6.4 million loss in 2016).
Liquidity, debt and capital resources
- At March 31, 2017, cash and cash equivalents were $441.8 million and restricted cash was $64.4 million. Total assets were $3.73 billion and total equity was $2.58 billion.
- Notes payable totaled $997.3 million in principal; reported carrying value was approximately $991.4 million. The company reported that 77.8% of debt was fixed-rate, including swaps, with an average debt rate of 4.2% and weighted average maturity of about six years. A 100-basis-point move in variable rates was estimated to affect annual earnings and cash flows by about $2.0 million before the joint-venture noncontrolling interest.
- In January, Sunstone issued $240 million of unsecured notes: $120 million at 4.69%, due 2026, and $120 million at 4.79%, due 2028. Proceeds were used in part to repay the $176 million Marriott Boston Long Wharf loan, which carried a 5.58% rate and was due in April 2017.
- Cash from investing activities was $92.7 million, including $123.1 million of asset-sale proceeds, partly offset by $29.9 million of hotel renovations and additions. Financing activities used $64.6 million, including $119.8 million in dividends and distributions. Cash increased $72.3 million during the quarter.
- Outstanding construction commitments were $46.1 million. The company reported $62.7 million of restricted cash in FF&E reserve accounts.
Material changes, outlook and risks
- Sunstone sold the 444-room Fairmont Newport Beach in February for net proceeds of $122.8 million and recognized a $44.3 million gain. The sale was not treated as a discontinued operation. The property’s removal, together with the 2016 Sheraton Cerritos sale, reduced year-over-year revenue and expenses.
- Revenue growth reflected stronger room and food-and-beverage revenue. Management attributed improved results and Adjusted EBITDA partly to post-repositioning performance at Boston Park Plaza and Wailea Beach Resort and strong demand in Park City, Orlando, San Diego and Washington, D.C. Weak Boston and Chicago markets, New York competition and a weak Houston energy market offset some gains.
- The board authorized up to $300 million of common and preferred stock repurchases, and the company established a $300 million at-the-market common-stock program. No shares were sold under the ATM program or repurchased under the plan by March 31; employee tax-withholding share cancellations are separate.
- No numeric earnings or operating guidance was provided. Management said it expects cash needs to include operations, hotel capital spending, debt service, distributions and possible acquisitions or repurchases; expected funding sources include operating cash, cash on hand, debt, asset sales and equity offerings. It emphasized maintaining low leverage, liquidity and balance-sheet flexibility.
- Risks include lodging demand and economic cycles, new hotel and alternative lodging supply, rising labor and other operating costs, renovations and capital needs, geographic concentration, reliance on hotel brands and managers, leverage and financing access, REIT compliance, and interest-rate exposure. Six of the 27 hotels were subject to ground, building or air leases. The filing reports $0.5 million of letters of credit and customary environmental indemnities; management said pending ordinary-course claims are not expected to have a material adverse effect, while noting litigation outcomes remain uncertain.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting. Part II reports no legal proceedings or new risk factors.
Important facts for investors to verify
- Separate recurring hotel performance from the $44.3 million property-sale gain and the derivative-result swing when assessing earnings growth.
- Review the debt maturity schedule, covenants, variable-rate exposure and the terms and capacity of the $400 million credit facility; the filing’s stated cash balance includes $64.4 million of restricted cash.
- Track the $46.1 million construction commitments, ongoing renovation requirements and the effect of completed repositionings on hotel performance.
- Monitor whether the company uses the ATM program or executes the authorized repurchase plan, and how these choices affect liquidity and per-share results.
- Assess demand, new supply and operating-cost trends in the company’s concentrated markets, including the disclosed market-specific weakness and competition.