Sunstone Hotel Investors, Inc. — Q3 2018 Form 10-Q
Business context and reporting period
Reports the three and nine months ended September 30, 2018. Sunstone is a hotel-owning REIT; at quarter-end it had interests in 24 hotels, including two Houston hotels classified as held for sale, and 22 hotels held for investment. Financial amounts below are in millions unless noted.
Financial and operating performance
| Metric | Q3 2018 | Q3 2017 | First 9 months 2018 | First 9 months 2017 |
|---|---|---|---|---|
| Revenue | $289.3 | $303.9 | $878.2 | $903.4 |
| Operating income | $48.1 | $13.1 | $136.4 | $106.1 |
| Net income | $91.6 | $17.1 | $181.3 | $132.3 |
| Income attributable to common stockholders | $86.0 | $11.7 | $164.5 | $116.4 |
| Diluted earnings per common share | $0.38 | $0.05 | $0.73 | $0.52 |
| Adjusted EBITDAre, excluding noncontrolling interest | $84.6 | $87.6 | $248.2 | $259.4 |
| Adjusted FFO attributable to common stockholders | $67.9 | $70.4 | $197.5 | $208.5 |
- Q3 revenue declined 4.8%; nine-month revenue declined 2.8%. Q3 room revenue fell 3.8%, food and beverage revenue 7.1%, and other operating revenue 8.2%.
- Comparable Portfolio RevPAR rose 3.7% in Q3 and 1.9% year to date, driven by ADR growth of 4.8% and 3.0%, respectively; occupancy declined 90 basis points in both periods.
- Q3 GAAP net income included a $53.1 million gain on the sale of Hyatt Regency Newport Beach. Nine-month income included that gain and a $15.7 million gain on the January hotel sales. The prior-year comparisons included a $34.4 million Houston impairment charge in both Q3 and nine-month periods, and $7.0 million of discontinued-operation income.
- Adjusted EBITDAre and Adjusted FFO decreased despite higher comparable RevPAR. Management attributed the declines mainly to hotel dispositions and renovation disruption, partly offset by stronger results at existing hotels and Oceans Edge Resort & Marina.
- Operating cash flow was $219.5 million for the first nine months, versus $230.4 million a year earlier. Investing cash flow was positive $75.7 million, including $231.1 million of asset-sale proceeds, offset partly by $125.9 million of renovations. Financing cash flow was negative $135.0 million, including $163.0 million of dividends and distributions.
- At September 30, cash and cash equivalents were $650.7 million; restricted cash was $68.8 million. Debt principal was $984.9 million, total liabilities $1,158.2 million, and total assets $3,918.6 million. About 77.7% of debt was fixed-rate or swapped to fixed, and the reported weighted average debt rate was 4.2% including variable-rate debt.
- Common distributions declared were $0.05 per share for Q3 and $0.15 per share year to date. Preferred dividends were $3.2 million for Q3 and $9.6 million year to date.
Material changes, outlook, and risks
- During 2018, Sunstone sold Marriott Philadelphia and Marriott Quincy for net proceeds of $137.0 million, and Hyatt Regency Newport Beach for net proceeds of $94.0 million. It also purchased the Renaissance Washington DC building-use rights for $18.4 million and JW Marriott New Orleans land for $15.1 million; management said these purchases reduce annual rent by about $1.3 million and $0.6 million, respectively.
- After quarter-end, the Houston hotels were sold on October 17 for gross proceeds of $33.0 million. Their sale did not qualify as a discontinued operation. The hotels had incurred a $1.4 million impairment charge in 2018 amid continued Houston market weakness.
- On October 17, the company amended its credit facility: revolving capacity increased to $500 million, with an option to increase total commitments to $800 million; maturity extended to April 2023; and pricing spreads were reduced. Based on current leverage, rates on the $85 million and $100 million term loans fell to 2.941% and 3.203%. Management stated the weighted average debt rate would be 4.1% after the amendment.
- No specific earnings or operating guidance is provided in the supplied filing text. Management expects to fund operations, capital investment, debt service, and distributions through operating cash flow, cash on hand, credit facilities, asset sales, and potential securities offerings; it emphasizes balance-sheet flexibility and selective portfolio growth.
- Key operating pressures include renovation-related room closures at four hotels, wage and benefit, utility, insurance and property-tax inflation, new hotel and alternative-lodging supply, and market concentration and severe-weather exposure. The four renovation hotels lost 36,324 room nights and an estimated $8.0 million of room revenue in the first nine months. A 100-basis-point change in variable rates was estimated to affect future earnings and cash flow by about $2.2 million before the Hilton San Diego Bayfront noncontrolling-interest adjustment.
- The company reported $72.9 million in outstanding renovation and construction commitments. It disclosed routine litigation and environmental indemnities, but said it did not expect claims in excess of insurance to materially affect financial condition or results. Disclosure controls were deemed effective; no material internal-control change was reported.
Important facts for investors to verify
- Separate recurring hotel operating performance from GAAP earnings materially affected by property-sale gains, prior-year impairment, and tax items; review the non-GAAP reconciliations and definitions.
- Track comparable RevPAR, occupancy and ADR trends, and assess how renovation disruption and disposed properties affect reported versus comparable results.
- Confirm the final Houston sale proceeds and any resulting gain or loss, and evaluate the credit amendment’s actual interest cost, covenants, and available liquidity.
- Assess the funding and expected returns for the $125.9 million of year-to-date capital spending and remaining $72.9 million commitments, alongside cash distributions and future capital needs.
- Monitor exposure to variable rates, lease obligations, market concentration, and potential operating-cost or supply pressures.