Business Context and Reporting Period
Company: Sunstone Hotel Investors, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: The Company is a self-managed Real Estate Investment Trust (REIT) owning and operating upper upscale hotels. As of September 30, 2010, the portfolio consisted of 31 hotels held for investment and 8 hotels ("Mass Mutual eight") classified as "operations held for non-sale disposition" pending a deed-back to the lender. The Company operates under a 2009 secured debt restructuring program to address cash flow deficits on specific non-recourse mortgages.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Total Revenues | $177.7 million | $519.5 million |
| Operating Income (Loss) | $4.8 million | $24.5 million |
| Net Income (Loss) | $23.7 million | $2.9 million |
| Income Available to Common Stockholders | $18.3 million | $(12.6) million |
| Adjusted EBITDA | $38.9 million | $113.3 million |
| Cash and Cash Equivalents | $71.1 million | $71.1 million (Balance Sheet) |
| Total Debt (Notes Payable) | $1.14 billion (excl. non-sale disposition) | $1.14 billion (excl. non-sale disposition) |
| Weighted Average Interest Rate | 5.6% | 5.6% |
Note: Net Income for the three and nine months ended September 30, 2010, includes significant gains from discontinued operations related to debt extinguishment ($40.5 million and $47.2 million, respectively).
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 4.5% ($7.6 million) for the three months ended September 30, 2010, compared to the same period in 2009, driven primarily by a 6.5% increase in room revenue. For the nine-month period, revenues were relatively flat, up 0.4% ($1.9 million).
- Operating Expenses: Corporate overhead increased significantly by 167.6% ($7.3 million) in the third quarter, primarily due to $6.6 million in due diligence costs for the Royal Palm Miami Beach acquisition and abandoned projects. Hotel operating expenses increased 5.6% in the quarter.
- Impairment Charges: Property and goodwill impairment losses dropped to zero for the three months ended September 30, 2010, compared to $2.2 million in the prior year quarter. For the nine-month period, impairments were $1.9 million, a significant decrease from $30.9 million in 2009.
- Discontinued Operations: The Company recorded a $40.5 million gain on extinguishment of debt in the third quarter of 2010 (vs. a loss in 2009) related to the deed-back of the W San Diego and the sale of the Marriott Ontario Airport.
- Portfolio Changes: The Company acquired the Royal Palm Miami Beach in August 2010 for approximately $117.6 million (economic net price) and reacquired the Renaissance Westchester in June 2010 for $26.0 million.
Guidance, Outlook, and Risks
- Outlook: Management believes the lodging cycle is in the early stages of a recovery phase. The Company plans to deploy cash toward selective acquisitions and renovations. RevPAR for the Comparable Portfolio increased 3.3% in the third quarter of 2010 compared to the prior year.
- Debt Restructuring Completion: On November 1, 2010 (subsequent to the reporting period), the Company completed the deed-back of the "Mass Mutual eight" hotels to the lender, satisfying a $163.0 million loan balance. A gain on extinguishment of debt is expected to be recorded in the fourth quarter of 2010.
- New Financing: On November 1, 2010, the Company entered into a new $150.0 million senior corporate credit facility and refinanced the Hilton Times Square mortgage with a new $92.5 million non-recourse loan at 4.97% fixed interest.
- Risks and Contingencies:
- Franchise Termination Fees: Seven of the Mass Mutual hotels are subject to franchise agreements with corporate guaranties. If terminated, the Company could be liable for up to $21.5 million in termination fees.
- Liquidity: While the Company maintains a strong cash position, future access to capital markets depends on general market conditions.
- Financial Covenants: The Company is subject to financial ratio covenants under its Series C preferred stock; a violation could restrict common stock dividends and increase preferred dividends.
Key Facts for Investor Verification
- Debt Extinguishment Gains: Verify the timing and magnitude of the expected gain on extinguishment of debt for the Mass Mutual eight hotels in the Q4 2010 filing, as this will significantly impact net income.
- Franchise Liability: Confirm the status of the franchise agreements for the seven Mass Mutual hotels and the potential exposure to the $21.5 million termination fee liability.
- Acquisition Integration: Monitor the performance and renovation costs associated with the newly acquired Royal Palm Miami Beach and the reacquired Renaissance Westchester.
- Capital Deployment: Track the utilization of the new $150 million credit facility and the Company's ability to execute further acquisitions in the recovery phase.
- Preferred Stock Covenants: Review upcoming quarterly reports to ensure compliance with financial ratios required to avoid a financial ratio violation on the Series C preferred stock.