Business Context and Reporting Period
Company: Sunstone Hotel Investors, Inc. (Sunstone)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Sunstone is a Maryland corporation operating as a Real Estate Investment Trust (REIT). As of December 31, 2009, the company owned 38 hotels. However, 11 of these were in the process of being transferred to court-appointed receivers or were already in receivership (discontinued operations). The company reported on 29 hotels held for investment (10,966 rooms) across 13 states and Washington, D.C., primarily in the upper upscale and upscale segments. The portfolio is managed by third parties, including Interstate SHP, Marriott, Fairmont, Hilton, and Hyatt.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total Revenues | $717.8 million | $881.5 million |
| Net Income (Loss) | $(269.6) million | $71.2 million |
| Loss Attributable to Common Stockholders | $(290.8) million | $49.5 million |
| Cash Flow from Operating Activities | $70.1 million | $160.0 million |
| Cash and Cash Equivalents (Ending) | $358.6 million | $176.1 million |
| Total Debt (Principal) | $1.51 billion | $1.62 billion |
| Weighted Average Interest Rate | 5.6% | 5.5% |
| Adjusted EBITDA | $168.6 million | $285.1 million |
| Adjusted FFO | $47.3 million | $157.6 million |
Note: The filing text does not provide a specific "profit margin" percentage; however, the company reported a significant operating loss of $87.9 million for 2009 compared to an operating income of $129.8 million in 2008.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 18.6% to $717.8 million, driven by a 19.0% drop in room revenue and a 19.8% drop in food and beverage revenue. This was primarily due to a 520 basis point decrease in occupancy (to 69.3%) and a 12.1% decrease in Average Daily Rate (ADR) to $147.32.
- Impairment Charges: The company recorded significant non-cash impairment losses totaling approximately $217.7 million. This included $25.4 million for properties held for investment, $97.1 million for operations held for non-sale disposition, and $95.2 million for discontinued operations.
- Debt Restructuring: Sunstone initiated a secured debt restructuring program, electing to cease subsidizing debt service on several non-recourse mortgages. This led to the transfer of 11 hotels to receivership or "operations held for non-sale disposition" status.
- Equity Issuance: To bolster liquidity, the company issued 43.7 million shares of common stock in 2009, raising approximately $257.1 million in net proceeds.
- Debt Reduction: The company repurchased $187.5 million of its Senior Notes, recognizing a gain on extinguishment of debt of $54.5 million.
Guidance, Outlook, and Risks
- Outlook: Management believes the lodging cycle is entering a recovery phase in 2010. The company intends to deploy excess cash toward selective acquisitions of upper upscale hotels, capitalizing on dysfunction in commercial mortgage markets.
- Deed-in-Lieu Negotiations: The company is negotiating with Massachusetts Mutual Life Insurance Company (Mass Mutual) regarding an $246.0 million loan secured by 11 hotels. Sunstone has offered to deed back eight hotels in satisfaction of the debt while seeking to release three others. Resolution is expected in the first quarter of 2010, though no assurance is given.
- Financial Covenants: The company faces potential financial ratio violations under its Series C preferred stock if operations do not improve in 2010. A violation could restrict common stock dividends and increase preferred stock dividends.
- Risks: Key risks include the uncertainty of the lodging industry recovery, volatility in debt and equity markets, the potential for further asset impairments, and the illiquidity of real estate investments.
Investor Verification Checklist
- Deed-in-Lieu Status: Verify the final outcome of the negotiations with Mass Mutual regarding the 11 hotels and the potential release of the three remaining properties.
- Impairment Accuracy: Review the fair value assumptions used for the $217.7 million in impairment charges, particularly regarding the "operations held for non-sale disposition" segment.
- Liquidity Position: Confirm the company's ability to meet debt maturities, specifically the $81.0 million maturing in 2010, given the current cash balance of $358.6 million.
- Series C Covenants: Monitor quarterly results to assess the risk of breaching financial covenants on Series C preferred stock, which could impact dividend policy and board composition.
- Management Agreements: Note the Request for Proposal (RFP) issued to hotel management companies for properties currently managed by Interstate SHP, which may lead to operational changes in 2010.