Sunstone Hotel Investors, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Sunstone is a hotel-owning REIT with interests in 21 hotels, operated by third-party managers.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $257.7 million | $271.4 million | Down 5.1% |
| Net income | $17.9 million | $38.5 million | Down 53.4% |
| Income attributable to common stockholders | $13.1 million; $0.06/share | $32.8 million; $0.15/share | Down 60.0% |
| Net cash from operating activities | $31.6 million | $30.6 million | Up $1.0 million |
| Adjusted EBITDAre, excluding noncontrolling interest | $64.5 million | $62.4 million | Up 3.3% |
| Adjusted FFO attributable to common stockholders | $47.5 million | $45.9 million | Up 3.5% |
Comparable portfolio RevPAR rose 4.3% to $177.23, entirely from a 4.3% increase in ADR to $223.78; occupancy was unchanged at 79.2%. The filing does not provide a single headline operating-margin measure.
At March 31, 2019, cash and cash equivalents were $684.0 million, restricted cash was $50.7 million, and total debt principal was $981.0 million. There were no borrowings under the credit facility. 77.6% of debt was fixed-rate or swapped to fixed; a 100-basis-point rate change was estimated to affect future earnings and cash flows by about $2.2 million, or $1.7 million after the Hilton San Diego Bayfront noncontrolling interest. Total assets were $3.9 billion and total liabilities were $1.18 billion. Q1 capital spending was $24.5 million; financing cash outflow was $134.7 million, including $126.5 million of dividends and distributions.
Changes versus prior year and unusual items
- Reported revenue declined partly because six hotels sold during 2018 contributed $23.6 million of Q1 2018 revenue. Revenue from the current 21-hotel portfolio increased, while renovations at two hotels disrupted Q1 2019 operations and displaced an estimated $2.1 million of room revenue.
- GAAP net income included a $15.7 million gain on hotel sales in Q1 2018 and none in Q1 2019. Q1 2019 interest expense rose $5.5 million to $14.3 million, largely because noncash derivative and finance-lease interest moved from a benefit in Q1 2018 to expense in Q1 2019.
- Operating cash flow increased modestly, but total cash and restricted cash fell $127.6 million during Q1 2019, primarily reflecting distributions and other financing outflows. Q1 2018 investing cash flow had benefited from $137.0 million of asset-sale proceeds.
- Adoption of lease accounting on January 1, 2019 added operating lease right-of-use assets and obligations; the reported balance sheet includes $63.2 million of operating lease assets and $57.8 million of operating lease obligations at quarter-end. This accounting change affects comparability with prior periods.
Outlook, risks and contingencies
The filing gives no numerical earnings or RevPAR guidance. Management expects cash needs for hotel operations, capital investment, debt service and distributions, and expects funding sources to include operating cash flow, cash on hand, credit facilities, asset sales and potential debt or equity issuance. Management emphasizes liquidity, balance-sheet strength and disciplined capital recycling, while noting capital markets may not be available on favorable terms.
Key disclosed risks include lodging demand and economic conditions, new hotel and alternative-lodging supply, labor and other operating-cost inflation, renovations and their operational disruption, hotel-manager and brand relationships, geographic and severe-weather concentration, ground/building/air leases, leverage and interest rates, and access to capital. The company had $56.0 million of remaining renovation and construction commitments. It reported routine legal claims but did not expect uninsured liabilities to materially affect results; Part II reports no legal proceedings and no new risk factors.
The portfolio is geographically concentrated: California accounted for 34% of trailing-12-month consolidated revenue, Massachusetts 15%, and the greater Washington, D.C. area 12%. The company reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the GAAP earnings decline reflects the 2018 hotel sales and gain, versus underlying performance of the retained portfolio?
- Whether comparable RevPAR and adjusted EBITDAre growth can continue after renovation disruptions and amid expected new hotel supply and rising costs.
- Cash availability after distributions, restricted reserves and the $56.0 million renovation commitment; confirm near-term debt maturities and credit-facility capacity.
- The effect of derivative fair-value changes, variable-rate exposure and newly recognized lease obligations on future interest expense and cash flows.
- How concentrated hotel-market, weather, labor, tax and lease risks could affect results, and whether management’s capital and distribution plans remain consistent with its stated liquidity objectives.