Sunstone Hotel Investors, Inc. — 2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015, not a standalone fourth quarter. Sunstone is a U.S. hotel REIT that owns, asset-manages and renovates hotels operated by third-party managers. At year-end it held interests in 29 hotels with 13,845 rooms across 13 states and Washington, D.C.; about 87% of 2015 hotel revenue came from gateway markets.
Financial and operating performance
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $1,249.2 million | $1,142.0 million |
| Operating income | $180.4 million | $156.7 million |
| Operating margin | 14.4% | 13.7% |
| Net income | $355.5 million | $87.9 million |
| Income attributable to common stockholders | $338.2 million | $72.0 million |
| Net cash from operating activities | $300.1 million | $278.6 million |
| Adjusted EBITDA | $351.3 million | $312.7 million |
| Adjusted FFO attributable to common stockholders | $271.7 million | $225.3 million |
Comparable Portfolio occupancy was 82.3%, ADR was $197.35 and RevPAR was $162.42 in 2015. Year over year, occupancy increased 40 basis points, ADR increased 5.1% and RevPAR increased 5.6%. Revenue growth was 9.4%; operating expenses increased 8.5%. The filing does not provide a standalone fourth-quarter cash flow figure.
At December 31, cash and cash equivalents were $499.1 million and restricted cash was $76.2 million. Debt was approximately $1.10 billion gross ($1.097 billion net); total assets were $3.86 billion and total equity was $2.35 billion. About 79.5% of debt was fixed-rate, with a 4.95% weighted average rate on fixed-rate debt; the weighted average rate across debt was 4.45%, and average maturity was about four years. The $400 million unsecured credit facility had no borrowings outstanding at year-end. The company reported that cash, operating cash flow, capital-market access and unencumbered properties were expected to support needs for at least 12 months.
Material changes versus the prior period
- Revenue rose $107.2 million; operating income rose $23.7 million and operating margin improved by about 0.7 percentage points.
- Net income included $226.2 million of gains on asset sales, principally the $214.5 million gain on the Doubletree Guest Suites Times Square sale and an $11.7 million gain on the sale of BuyEfficient. These gains materially boosted reported earnings and are not a measure of recurring hotel performance.
- The Times Square hotel was sold in December for $522.7 million net proceeds; BuyEfficient was sold in September for $26.4 million net proceeds. No hotel was acquired in 2015. The company repaid $175.0 million of debt secured by the Times Square property.
- Adjusted EBITDA increased $38.6 million and Adjusted FFO increased $46.4 million. Management attributed the gains to stronger hotel performance, the contribution of the 2014 Wailea acquisition and lower interest expense, partly offset by renovation-related disruption.
- Operating cash flow increased $21.5 million. Investing activities provided $399.4 million, largely reflecting sale proceeds, while financing activities used $422.4 million, primarily for debt repayments and dividends.
Outlook, commentary and risks
Management described the lodging cycle as mature and prioritized disciplined capital recycling, selective acquisitions and dispositions, balance-sheet flexibility and low leverage. It anticipated higher-than-historical capital expenditures in 2016, driven by previously announced renovations and repositionings. Capital improvements were $164.2 million in 2015, with $79.6 million of construction commitments at year-end. The filing gives no specific 2016 revenue, earnings or RevPAR forecast.
Management expected regular common dividends of $0.05 per share quarterly during 2016, with a possible January 2017 “catch-up” distribution to meet REIT distribution requirements. Dividends remain subject to board approval; payment may be in cash, stock or both. The 2015 common dividend declared was $1.41 per share, including a $1.26 distribution paid in a combination of cash and shares according to stockholder elections.
Material risks include hotel demand sensitivity to economic conditions, travel disruption and seasonality; market-specific concentration and new supply; labor and operating-cost inflation; dependence on third-party managers, brands and the TRS lessee; renovation costs and business interruption; refinancing and interest-rate risk; and environmental, insurance, cyber-security and REIT-qualification risks. Baltimore civil unrest reduced group business at the Renaissance Harborplace; Houston faced a weak energy-driven transient market. The former CEO’s departure resulted in $6.9 million of expenses. No cash-trap provisions were triggered at year-end. Management said pending ordinary-course legal matters were not expected to have a material adverse effect. The company reported effective disclosure controls and internal control over financial reporting; the auditor gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Separate recurring hotel operating results from the $226.2 million of asset-sale gains when evaluating 2015 earnings and the Q4 earnings surge.
- Review the cash available after dividends and the February 2016 repayment of the Boston Park Plaza mortgage: a $100 million term loan was drawn in January 2016 and combined with cash to repay the $114.2 million mortgage.
- Check the debt-maturity schedule, covenant headroom, refinancing requirements and the effects of interest-rate changes; a 100-basis-point move in variable rates was estimated to affect annual earnings by about $1.6 million after the Hilton San Diego Bayfront noncontrolling interest.
- Assess whether the planned 2016 renovations and $79.6 million of committed construction work can be funded without impairing liquidity, hotel performance or distributions.
- Confirm the composition and timing of common-stock and preferred-stock distributions, including the potential catch-up dividend, and account for the 2015 common dividend partly paid in shares.