Sunstone Hotel Investors, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. Sunstone is a hotel-owning REIT with interests in 30 hotels.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $284.4 | $243.5 |
| Operating income | $17.7 | $14.3 |
| Operating margin | 6.2% | 5.9% |
| Net income (loss) | $1.2 | $(3.5) |
| Loss attributable to common stockholders | $(3.3); $(0.02) per diluted share | $(8.0); $(0.04) per diluted share |
| Operating cash flow | $29.0 | $39.3 |
| Adjusted EBITDA | $65.7 | $49.4 |
| Adjusted FFO available to common stockholders | $45.1 | $27.6 |
Comparable-portfolio RevPAR rose 6.7% to $150.12, with occupancy up 130 basis points to 79.6% and ADR up 5.0% to $188.59. At March 31, cash and cash equivalents were $157.0, restricted cash was $87.3, and total assets were $3.88 billion. Total notes payable were $1.42 billion; 71.6% of debt was fixed-rate. The weighted-average debt rate was 4.5%, and the weighted-average maturity was about four years. Current notes payable were $236.0 million. The common dividend declared was $0.05 per share, unchanged from Q1 2014.
Changes versus the prior period
- Revenue increased 16.8%; room revenue rose 15.0%, food and beverage revenue 20.5%, and other operating revenue 22.4%.
- Comparable RevPAR growth reflected both stronger occupancy and ADR. The Marriott Wailea, acquired in July 2014, contributed additional revenue and expenses.
- Operating income rose 23.6%, but expenses also increased 16.4%. Corporate overhead more than doubled, primarily due to $6.9 million of costs related to the former CEO’s January 2015 departure.
- Common-stockholder loss narrowed from $8.0 million to $3.3 million. Adjusted EBITDA and Adjusted FFO increased, while operating cash flow declined $10.3 million, chiefly reflecting higher receivables and lower accrued payroll and benefits.
- Interest expense fell 5.2%, reflecting debt repricing and lower balances and rates. Common shares outstanding increased during the quarter; the filing reports 207.5 million at March 31 versus 204.8 million at year-end.
Outlook, commentary, and risks
- No specific numerical earnings or operating guidance is provided. Management expects lodging demand to remain strong if the U.S. economy and employment continue to improve, and describes the lodging cycle as middle to mature. Its stated priorities include selective capital recycling, balance-sheet flexibility, and funding near-term acquisitions with more equity than debt.
- Management believes cash, operating cash flow, capital-market access, the credit facility, and unencumbered properties will provide sufficient liquidity for at least 12 months. The filing identifies $214.9 million of debt maturities within 12 months as of March 31.
- Subsequent events: a new $400 million senior unsecured credit facility replaced the $150 million facility on April 2, with an accordion option up to $800 million. Sunstone drew $18 million on April 28 and repaid $99.1 million of mortgages on May 1; after repayment it reported 18 unencumbered hotels.
- Renovation and construction commitments were $52.6 million; Q1 hotel renovation and addition spending was $36.1 million. The Boston Park Plaza renovation displaced an estimated $1.3 million of room revenue during the quarter.
- Hotel performance is exposed to economic and travel demand, new supply and competition, operating-cost inflation, renovations, hotel-manager and brand relationships, geographic concentration, leases, leverage and interest rates, and capital-market access. A 100-basis-point change in variable rates was estimated to affect annual interest expense by about $3.7 million before non-controlling interests.
- USALI accounting presentation adopted January 1, 2015 reclassified about $4.5 million of banquet service charges from a reduction of food and beverage revenue to food and beverage expense; this affected reported revenue and expense classification.
- No impairment indicators were identified in the quarter. The filing reports no legal proceedings and no material change in internal control over financial reporting. Management reported disclosure controls were effective.
Important facts for investors to verify
- Debt maturity schedule, repayment funding, and compliance with debt and credit-facility covenants.
- Cash available after distinguishing unrestricted cash from restricted reserves, and the level and timing of renovation spending and commitments.
- Whether RevPAR growth and operating-cost control persist after the Marriott Wailea acquisition and Boston Park Plaza renovation effects.
- The size and nonrecurring nature of former-CEO departure costs, and the treatment of other adjustments in non-GAAP measures.
- The impact of the USALI reclassification when comparing revenue and expenses with prior periods.
- Potential exposure to variable interest rates as interest-rate caps expire, including the Doubletree cap scheduled to mature in October 2015.