Sunstone Hotel Investors, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Business context
Sunstone is a lodging REIT that owned interests in 17 hotels at quarter-end. COVID-19 continued to sharply constrain hotel demand and operations. Fifteen hotels were open and two were temporarily closed at March 31; 13 of the 14 hotels suspended during 2020 had resumed operations by May 1, 2021. All operating hotels were running at reduced capacity.
Financial and operating metrics
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Total revenue | $50.6 million | $191.2 million | Down 73.5% |
| Room revenue | $34.2 million | $127.4 million | Down 73.1% |
| Food and beverage revenue | $5.0 million | $48.0 million | Down 89.6% |
| Net loss | $55.3 million | $162.5 million | Q1 2020 included $115.4 million of impairment losses |
| Loss attributable to common stockholders | $56.5 million | $165.3 million | Loss per share: $0.26 vs. $0.75 |
| Adjusted EBITDAre, excluding noncontrolling interest | $(14.7) million | $14.1 million | Down $28.8 million |
| Adjusted FFO attributable to common stockholders | $(28.9) million | $(1.4) million | Worsened by $27.5 million |
| Net cash used in operating activities | $38.2 million | $2.5 million | Higher cash use amid suspended and reduced hotel operations |
- Portfolio RevPAR fell 69.5% year over year to $42.19; occupancy was 21.6% versus 59.6%, and ADR was down 16.0% to $195.32. Management said quarter-to-quarter comparisons were affected by hotel suspensions, dispositions and other unusual conditions.
- Operating expenses declined 70.4% to $98.1 million, less than the 73.5% revenue decline. Interest expense decreased 56.3% to $7.6 million, including favorable noncash derivative valuation changes.
- Cash and cash equivalents were $320.3 million and restricted cash was $45.0 million at March 31. Combined cash and restricted cash was $365.3 million, down from $416.1 million at year-end 2020.
- Debt principal was $747.1 million; total liabilities were $885.1 million. The company had no revolver borrowings and reported $500 million of available capacity, subject to covenant compliance. About 70.6% of debt was fixed-rate or effectively fixed.
Material changes and notable items
- Revenue and operating performance remained severely affected by pandemic-related travel restrictions, low occupancy and limited hotel services. Revenue also declined because three hotels were disposed of or assigned to a mortgage holder during 2020.
- No hotel impairment was recorded in Q1 2021; Q1 2020 included impairment charges of $115.4 million. Q1 2021 also included a $0.2 million gain related to reassessment of an employee-related obligation associated with the Hilton Times Square assignment.
- Cash-flow from operations was negative $38.2 million. Investing cash outflow was $6.5 million, primarily for renovations and additions; financing cash outflow was $6.2 million.
- In January 2021, cash-trap provisions were triggered on loans secured by Embassy Suites La Jolla and JW Marriott New Orleans. Unsecured-debt covenant relief was in place through Q1 2022, with testing scheduled to resume for the quarter ending March 31, 2022.
- After quarter-end, on April 22, Sunstone acquired Montage Healdsburg for $265.0 million, funded with approximately $198.8 million of cash and $66.3 million of Series G preferred stock. Management reported pro forma unrestricted cash of $121.5 million after the acquisition.
Outlook, risks and contingencies
- Management expected the pandemic and downturn to materially pressure results and liquidity through at least Q2 2021. Leisure demand was improving; business transient and group demand were recovering more slowly. Management expected portfolio performance to improve significantly in the second half of 2021, particularly Q4, while noting recovery could extend beyond 2021.
- The company did not expect to pay a common-stock dividend during 2021. Preferred dividends continued. The board reauthorized a stock repurchase program of up to $500 million, but no program repurchases had occurred by March 31; repurchases remained dependent on liquidity, financing restrictions and share prices.
- Management cited uncertainty around the duration and effects of COVID-19, the return of group and business travel, operating costs, hotel renovations, competition, hotel leases, debt covenants and access to capital. It cautioned that forecasts and liquidity assumptions could prove inaccurate.
- Renovation and construction commitments totaled $23.4 million. The filing also describes customary environmental indemnities, $0.3 million of letters of credit, and ordinary-course claims and litigation; management did not expect identified litigation liabilities to have a material adverse effect, but outcomes remain uncertain.
Important facts for investors to verify
- Whether hotel occupancy, RevPAR and group bookings recover as management expected, and how many properties remain closed or capacity-constrained.
- Post-acquisition unrestricted cash, ongoing operating cash burn, and the availability of the $500 million revolver under applicable covenants.
- The status of the triggered mortgage cash traps and whether covenant testing can be met when it resumes in 2022.
- The capital and dividend implications of the Montage Healdsburg acquisition, Series G preferred terms, and the $23.4 million of renovation commitments.
- Whether management’s expectation of no common dividend in 2021 changes, and whether any stock repurchases are made under the reauthorized program.