Sunstone Hotel Investors, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2020. Sunstone owned interests in 19 U.S. hotels. COVID-19 and related restrictions sharply reduced travel demand; 15 hotels temporarily suspended operations during the first nine months. Twelve had reopened by November 1, while three remained suspended. All operating hotels were at reduced capacity.
Financial performance and condition
- Q3 revenue: $28.9 million, down 89.7% from $281.6 million a year earlier. Room revenue fell 91.9%; food and beverage revenue fell 96.6%.
- Q3 earnings: Net loss of $91.1 million versus net income of $33.5 million; loss attributable to common stockholders was $92.5 million, or $0.43 per share, versus income of $27.8 million, or $0.12 per share.
- Nine-month revenue and earnings: Revenue was $230.5 million, down 72.6%. Net loss was $371.1 million versus net income of $97.4 million; common-stockholder loss was $376.3 million, or $1.74 per share, versus income of $81.7 million, or $0.36 per share.
- Hotel operating metrics: Portfolio Q3 occupancy was 12.1% versus 86.7% and ADR was $145.33 versus $239.03. RevPAR declined 91.5% to $17.58. For the first nine months, RevPAR declined 74.3% to $52.44. Management said comparable-portfolio comparisons were not meaningful given suspensions and other unusual items.
- Cash flow: Operating activities used $87.3 million in the first nine months, compared with $210.6 million provided in 2019. Investing activities provided $31.3 million, including $76.9 million in hotel-sale proceeds, and financing activities used $305.3 million. Cash, cash equivalents and restricted cash fell $361.3 million to $503.6 million.
- Liquidity and debt: At September 30, unrestricted cash was $461.3 million; restricted cash was $42.3 million. Debt principal was $934.7 million, of which $189.2 million was classified as current. The revolver had no balance and $500 million of available capacity. Total assets were $3.25 billion and total liabilities $1.12 billion.
- Margins: The filing does not provide a single portfolio operating-margin figure; reported operating expenses substantially exceeded revenue in Q3 and the first nine months.
Material changes and unusual items
- COVID-19 drove steep revenue declines, hotel closures and operating cost reductions. The company incurred $28.9 million of COVID-related employee wage, benefit and severance costs in the first nine months, including $11.3 million in Q3.
- Recorded $133.5 million of impairment losses in the first nine months: Hilton Times Square, Renaissance Westchester, Renaissance Harborplace, and an abandoned expansion project. No impairment losses were recorded in Q3.
- Sold Renaissance Harborplace in July for net proceeds of $76.9 million and a reported gain of $0.2 million; the hotel had incurred an $18.1 million impairment before sale.
- Repurchased 9.77 million common shares for $103.9 million in Q1, then suspended the repurchase program. The common dividend was also suspended; preferred dividends continued.
- Amended unsecured debt in July, providing covenant relief through Q1 2021, with quarterly testing scheduled to resume for the period ending June 30, 2021. Amendments increased certain borrowing costs and imposed additional restrictions. In September, the company repaid $35 million of senior notes.
Outlook, risks and contingencies
- Management anticipated a net loss for full-year 2020 and said the pandemic’s duration and effects on demand, pricing and liquidity could not be reliably predicted. It expected recovery to depend particularly on returning group business; approximately 23% of canceled group business had rebooked into future periods.
- The $77.2 million Hilton Times Square mortgage was in default and matured November 1, 2020. The company had stopped debt payments in April and ground-lease payments in March, received default notices, and was negotiating possible resolution, including a transfer or discounted payoff. The filing reported $1.7 million in accrued default interest and penalties, which the company did not intend to pay as part of resolution.
- The company warned it might not satisfy unsecured-debt covenants when testing resumes and was seeking an extension of covenant relief. Failure to obtain relief or meet covenants could allow lenders to demand repayment and could raise substantial doubt about the company’s ability to continue as a going concern.
- The $220 million Hilton San Diego Bayfront mortgage initially matured in December 2020; the company had notified the lender it intended to exercise the first one-year extension and planned to exercise the remaining options.
- Other risks include renewed hotel closures, weak travel demand, cash needs for fixed hotel costs and debt service, lease defaults, further impairments, and the availability of capital markets. The company had $17.4 million of renovation commitments and had deferred some nonessential capital improvements.
Key facts for investors to verify
- Resolution and status of the Hilton Times Square mortgage and related ground-lease defaults after its November 1 maturity.
- Whether lenders extend covenant relief and whether the company can meet covenant tests beginning in 2021.
- Cash burn, unrestricted liquidity, revolver availability and any cash-sweep restrictions as hotel demand evolves.
- Reopening progress, occupancy, ADR, group-business rebookings and the timing of any recovery.
- Whether hotel valuations or operating conditions lead to additional impairments, and when common dividends or repurchases might resume.