Sunstone Hotel Investors, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed February 28, 2012. The filing also reports fourth-quarter results. Sunstone is a hotel-owning REIT. At year-end it held interests in 32 hotels with 13,208 rooms, operated by third-party managers.
Financial performance
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $834.7 million | $624.5 million |
| Operating income | $58.7 million | $39.4 million |
| Operating margin | 7.0% | 6.3% |
| Net income | $81.3 million | $38.5 million |
| Income available to common stockholders | $53.0 million | $17.8 million |
| Diluted earnings per common share | $0.45 | $0.18 |
| Cash from operating activities | $156.4 million | $43.6 million |
| Capital improvements | $100.4 million | $57.0 million |
Fourth-quarter 2011 continuing-operations revenue was $245.1 million and operating income was $28.6 million. Net income was $7.6 million; earnings available to common stockholders per share were reported as $0.00 for the quarter.
Comparable-portfolio RevPAR rose 7.2% in 2011 to $123.91, with occupancy up 260 basis points to 74.3% and average daily rate (ADR) up 3.5% to $166.77. Adjusted EBITDA, a non-GAAP measure, was $212.5 million; Adjusted FFO, also non-GAAP, was $102.1 million. The company cautions that these measures are not substitutes for GAAP results, cash flow, or liquidity and may not be comparable with other issuers’ measures.
Balance sheet and liquidity
- Total assets were $3.10 billion; total liabilities were $1.68 billion and total equity was $1.33 billion at December 31, 2011.
- Debt was approximately $1.57 billion. Unrestricted cash was $150.5 million; restricted cash was $67.9 million, for total cash and cash equivalents including restricted cash of $218.4 million.
- Weighted-average debt maturity was approximately six years. The company reported that 73.4% of debt was fixed-rate, with a 5.5% weighted-average rate on that portion; the weighted-average rate on all debt, including derivatives, was 5.0%.
- Contractual principal and amortization due was $53.9 million in 2012, $86.6 million in 2013, $30.4 million in 2014, and $259.1 million in 2015. Separately, management’s stated four-year maturity estimate assumed repayment of the Senior Notes at their 2013 put date and excluded scheduled amortization.
- Net cash used in investing activities was $249.1 million and net cash used in financing activities was $32.8 million. The company said available cash, operating cash flow, capital-market access, and unencumbered properties should cover needs for at least 12 months.
Material changes and notable items
- Revenue increased 33.7%, reflecting both stronger hotel performance and a larger portfolio. The four recently acquired or reacquired hotels contributed $127.1 million of room revenue; the existing portfolio also grew room revenue by $26.2 million.
- Net income included a $69.2 million non-cash gain from remeasuring previously held interests in the Doubletree Guest Suites Times Square and BuyEfficient when Sunstone acquired the remaining interests. The company also recorded a $10.9 million impairment on the Royal Palm buyer note.
- Sunstone acquired the remaining 62% of Doubletree Guest Suites Times Square, bought the JW Marriott New Orleans, acquired a 75% interest in the Hilton San Diego Bayfront joint venture, and bought the remaining 50% of BuyEfficient. It sold the Royal Palm Miami Beach and Valley River Inn and sold the Royal Palm note.
- The Doubletree Times Square debt was refinanced from $270 million of senior mortgage and mezzanine debt to a $180 million floating-rate mortgage maturing in 2018. The new loan has a LIBOR cap through October 2015. The Hilton San Diego Bayfront joint venture also entered into a $240 million floating-rate mortgage.
- Cash from operations increased to $156.4 million from $43.6 million. Adjusted EBITDA and Adjusted FFO rose substantially, but reported earnings were affected by acquisitions, discontinued operations, and the remeasurement gain.
- The company issued $115 million of Series D preferred stock, receiving net proceeds of $110.9 million. It paid no common dividends in 2011 and stated that leverage reduction remains a priority; preferred dividends continued.
Outlook, risks, and contingencies
Management characterized the lodging market as in an early recovery, expected demand to remain strong over the next several quarters, and anticipated below-historical new hotel supply for roughly two to four years. It planned selective acquisitions in 2012, with near-term purchases expected to use a greater proportion of equity than debt, alongside debt repayment, capital investment, and possible asset sales. No specific financial earnings or RevPAR guidance was provided.
- Seven hotels were subject to lender cash-trap provisions, with $14.7 million held by lenders at year-end; management expected one hotel to qualify for release in the first quarter of 2012.
- Key risks include lodging-cycle and economic weakness, refinancing and interest-rate exposure, debt covenants and cash traps, hotel operating costs, dependence on third-party managers and brands, required renovations, and geographic concentration. California represented about 32% of rooms and revenue; New York represented about 10% of rooms and 16% of revenue.
- A 100-basis-point move in rates on variable-rate debt was estimated to change annual interest expense and cash flows by approximately $4.3 million. The filing describes floating-rate loans and caps, so the fixed-rate percentage and exposure estimates merit review.
- The company accrued litigation costs related to employee claims at four hotels. Two tentative settlements totaling approximately $0.9 million awaited court approval; it expected up to $0.7 million in further costs on a third claim. The notes describe total accrued costs of approximately $1.7 million, including a previously accrued $0.1 million.
- In February 2012, Sunstone repurchased $4.5 million of Senior Notes for $4.57 million plus accrued interest, leaving $58.0 million outstanding. It retained an earn-out right of up to $20 million from the Royal Palm sale, contingent on return hurdles.
- Management reported effective disclosure controls and internal control over financial reporting. Ernst & Young issued unqualified opinions on the financial statements and internal controls.
Investor verification points
- Separate recurring operating improvement from acquisition contributions, the $69.2 million remeasurement gain, discontinued operations, and impairment charges.
- Reconcile unrestricted versus restricted cash, lender-held cash traps, contractual debt maturities, scheduled amortization, and the February 2012 note repurchase.
- Review floating-rate debt, derivative terms and accounting, covenant headroom, and the stated $4.3 million sensitivity to a 100-basis-point rate change.
- Assess acquisition economics and financing, including the 75% Hilton San Diego Bayfront interest, related debt, and the non-controlling partner’s rights.
- Confirm the status and final cost of employee litigation settlements, the Royal Palm earn-out, and the company’s common-dividend policy and REIT distribution requirements.