Sunstone Hotel Investors, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015. Sunstone is a U.S. hotel-owning REIT with interests in 29 hotels (13,850 rooms), primarily urban, upper-upscale properties. Financial figures below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Total revenue | $274.3 | $284.4; down 3.5% |
| Operating income | $21.1 | $17.7; up 19.3% |
| Operating margin | 7.7% | 6.2% |
| Net income | $1.2 | $1.2 |
| Loss attributable to common stockholders | $(3.2), or $(0.02) per share | $(3.3), or $(0.02) per share |
| Net cash from operating activities | $43.1 | $38.2 |
| Cash used in investing activities | $(49.1), including $48.8 of hotel renovations and additions | $(47.4) |
| Cash used in financing activities | $(96.4), including $186.3 in dividends paid | $(55.9) |
| Cash and cash equivalents | $396.7 | $499.1 at December 31, 2015 |
| Debt principal | $1,083.9 | $1,101.5 at December 31, 2015 |
Restricted cash was $68.3 million, including $53.2 million in hotel replacement reserves. The company reported $465.0 million of cash and cash equivalents including restricted cash. At March 31, 2016, 79.3% of debt was fixed-rate, including swaps; weighted average debt interest was 4.42%, and weighted-average maturity was approximately four years. A 100-basis-point change in variable rates was estimated to affect annual earnings and cash flows by approximately $2.1 million before, or $1.6 million after, the Hilton San Diego Bayfront noncontrolling interest.
Hotel operating statistics: total-portfolio occupancy was 77.9% versus 79.1%, ADR was $190.68 versus $186.52, and RevPAR was $148.54 versus $147.54. Comparable-portfolio RevPAR rose 1.5%, as ADR growth of 2.8% more than offset a 100-basis-point occupancy decline. Adjusted EBITDA was $61.8 million versus $65.7 million; FFO attributable to common stockholders was $35.9 million versus $37.2 million; adjusted FFO was $44.2 million versus $45.1 million. These are non-GAAP measures defined by the company.
Material changes and unusual items
- Revenue declined partly because the Doubletree Guest Suites Times Square, sold in December 2015, and BuyEfficient, sold in September 2015, contributed revenue in the prior-year quarter. Existing-portfolio room revenue increased $3.7 million, mainly from higher ADR, but was affected by fewer group and transient room nights, renovations, a weak Chicago market, and lost Houston airline-crew business.
- Operating income improved despite lower revenue, with lower total operating expenses and corporate overhead. The $7.5 million year-over-year reduction in corporate overhead largely reflected $6.9 million of former-CEO departure costs recorded in Q1 2015.
- Interest expense increased to $20.0 million from $17.3 million, principally because of a $6.4 million noncash loss on interest-rate derivatives. This was partly offset by lower cash interest costs following debt repayments and refinancing.
- The company drew a $100 million unsecured term loan and used the proceeds, together with cash, to repay the $114.2 million Boston Park Plaza mortgage. The new loan matures in January 2023 and, at current leverage, bears interest at 3.653% after the interest-rate swap.
- In March, Sunstone issued $115 million of 6.95% Series E preferred stock, incurring $4.0 million of offering costs. On April 6, 2016, it redeemed all Series D preferred shares at $25 per share plus accrued dividends. The filing says redemption was funded with Series E proceeds and cash on hand.
- Sunstone early adopted new share-based compensation guidance in Q1 2016. It adjusted prior-year balance-sheet equity by approximately $0.2 million and reclassified $9.2 million of employee-share withholding payments from operating to financing cash flows for Q1 2015.
Outlook, risks and contingencies
No specific earnings or operating guidance is provided. Management described the lodging cycle as mature and emphasized asset management, disciplined capital recycling, selective acquisitions and dispositions, and maintaining low leverage and balance-sheet flexibility. It expects near-term acquisitions, if any, to be funded primarily with equity or asset-sale proceeds. Planned cash uses include operating costs, hotel investment, debt service, dividends and possible acquisitions.
Renovations and repositionings remain significant: the company invested $48.8 million in Q1 and reported $80.7 million of remaining construction commitments at March 31. Management cited weak conditions in Chicago, higher costs at San Diego hotels, renovation-related disruption, and elevated new hotel supply in markets including New York City, Washington, D.C., and Chicago. Risks also include economic and lodging-demand weakness, rising labor and other operating costs, brand and manager relationships, lease obligations, capital-market access, leverage, interest rates, property impairment, competition from alternative lodging, and cyber and other external events.
The portfolio is concentrated geographically; California accounted for 36% of trailing-12-month consolidated revenue. Eight of the 29 hotels are subject to ground, building or air leases. Contractual obligations totaled $1.84 billion, including debt, interest, leases, and construction commitments. The filing reports routine legal claims and customary environmental indemnities, but management did not expect aggregate uninsured legal liabilities to materially adversely affect financial condition or results. Outstanding workers’ compensation letters of credit were $0.6 million; none had been drawn. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor facts to verify
- Whether comparable RevPAR and hotel-level margins sustain improvement despite declining occupancy and market-specific weakness.
- How much of the $6.4 million derivative loss is noncash, and the subsequent fair-value and cash-interest effects of the swaps.
- Execution, timing, and funding of the $80.7 million renovation commitments, including expected operating disruption and returns.
- Liquidity after the April 2016 Series D redemption, including remaining cash, debt maturities, credit-facility availability, and dividend requirements.
- The assumptions underlying management’s low-leverage and capital-recycling strategy and any future acquisition or disposition plans.