Sunstone Hotel Investors, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; comparisons are primarily with 2012. Sunstone is a hotel-owning REIT. At year-end it held interests in 29 hotels, totaling 13,744 rooms across 12 states and Washington, D.C.; nearly all were branded full-service properties.
Financial and operating performance
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $923.8 million | $829.1 million |
| Operating income | $99.2 million; 10.7% margin | $79.0 million; 9.5% margin |
| Net income | $70.0 million | $49.6 million |
| Income available to common stockholders | $46.5 million; $0.29 per share | $17.8 million; $0.14 per share |
| Adjusted EBITDA | $240.8 million | $242.5 million |
| Adjusted FFO | $151.2 million | $128.6 million |
| Cash provided by operating activities | $171.1 million | $171.5 million |
| Cash and cash equivalents at year-end | $104.4 million unrestricted; $193.7 million including restricted cash | $157.2 million unrestricted |
| Debt at year-end | $1.404 billion | $1.363 billion |
Revenue rose 11.4%, reflecting acquisitions and higher comparable-hotel results. Comparable-portfolio RevPAR increased 4.3% to $148.09, with occupancy up 80 basis points to 80.2% and ADR up 3.3% to $184.65. The total portfolio’s RevPAR rose 3.7% to $147.36. Management reported a 39% comparable-portfolio operating flow-through for 2013, down from 48% in 2012.
Net cash used in investing was $371.4 million, including $450.5 million for acquisitions and $117.7 million for renovations, partly offset by $195.6 million in sale proceeds. Financing provided $147.4 million, including $565.8 million of net common-stock proceeds and $276.3 million used to redeem Series A and C preferred shares. Cash and cash equivalents decreased $52.9 million during the year.
At year-end, 70.7% of debt was fixed-rate; the weighted-average interest rate was 4.9% and average remaining term was approximately four years. Management’s debt-to-EBITDA ratio, including preferred equity as debt, was 5.4x. The $150 million revolving credit facility had no borrowings outstanding; $0.8 million of letters of credit was outstanding.
Material changes versus 2012
- Operating income increased 25.6%; net income rose 41.3%. Common-stockholder income also benefited from lower preferred dividends after the Series A and C redemptions.
- Adjusted EBITDA declined $1.7 million, as earnings from acquisitions were largely offset by room renovations at four hotels. Adjusted FFO increased $22.5 million, supported by acquisitions and lower preferred dividends and interest expense.
- Sunstone acquired three hotels in 2013: Hilton New Orleans St. Charles, Boston Park Plaza and Hyatt Regency San Francisco. It sold the Rochester portfolio of four hotels and a laundry facility, recognizing a $51.6 million gain.
- Common shares increased through offerings totaling 45.3 million shares in 2013. The company reinstated a common dividend, declaring $0.05 per share in each of the third and fourth quarters.
Outlook, risks and unusual items
- Management described lodging as in the middle phase of a recovery and expected demand to remain strong over the next several years if the U.S. economy and employment continued to improve. It planned selective acquisitions, portfolio investment and gradual deleveraging; near-term acquisitions were expected to rely more on equity than debt. No quantified earnings or RevPAR guidance was provided.
- Management expected 2014 capital investment to increase, particularly for recently acquired hotels. Year-end construction commitments were $43.5 million. Higher renovations may disrupt room availability and revenue.
- Hotel performance is economically sensitive and exposed to competition, new supply, operating-cost inflation, seasonality, travel disruptions and reliance on third-party managers and brands. Geographic concentration is notable: California produced 34% of 2013 hotel revenue; New York, Massachusetts and the greater Washington, D.C. area each also represented material exposure.
- Approximately $790.6 million of debt principal was scheduled to mature in 2015–2017, excluding scheduled amortization. Refinancing availability and terms are a material risk. A 100-basis-point change in rates on variable-rate debt was estimated to affect annual interest expense by approximately $4.4 million before non-controlling interests.
- The IRS challenged aspects of the company’s leases with its taxable REIT subsidiary. Sunstone recorded $4.7 million of tax expense, including interest, for 2008–2010 and additional expense related to 2012 uncertain tax positions; total 2013 income-tax provision was $8.1 million.
- The Rochester sale left a pension-related liability of up to $14.0 million, which could be triggered in specified circumstances. Sunstone also retained a $25.0 million preferred-equity investment yielding 11% and a $3.7 million working-capital advance; related sale gains are deferred until repayment.
- Sunstone reported that cash-trap provisions at a previously sold hotel held $4.4 million at year-end; the lender released and returned it in February 2014. A separate $9.4 million cash trap was released in January 2014. The company also expected an approximately $4.0 million property-tax refund following a successful appeal.
- The company reported no material adverse effect expected from ordinary-course legal proceedings. The financial-statement auditor gave an unqualified opinion, and management and the auditor reported effective internal controls over financial reporting.
Investor verification points
- Reconcile acquisition-driven revenue growth with comparable RevPAR, margins and the nearly flat Adjusted EBITDA.
- Review debt maturity, amortization and refinancing requirements, including the company’s leverage measure and available liquidity.
- Assess the capital needs and expected returns for recently acquired hotels, 2014 renovation plans and outstanding construction commitments.
- Track the IRS matter, the Rochester pension liability, and repayment or realization of the retained preferred-equity investment and working-capital advance.
- Confirm the sustainability and board discretion around common dividends, which were reinstated in 2013 after a period without common dividends.