Sunstone Hotel Investors, Inc. — Q1 2011 10-Q
Reporting period: Three months ended March 31, 2011. Sunstone is a self-managed REIT that owns and asset-manages hotels, which are leased to its taxable subsidiary and operated by third-party managers. At quarter-end, it owned 33 hotels, including one held for sale; 32 were held for investment.
Financial and operating performance
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total revenue | $162.6 million | $140.9 million |
| Operating income (loss) | $(1.6) million | $2.5 million |
| Net income (loss) | $51.3 million | $(21.1) million |
| Income (loss) available to common stockholders | $45.7 million; $0.39 per diluted share | $(26.3) million; $(0.27) per diluted share |
| Cash provided by (used in) operating activities | $23.4 million | $(1.5) million |
| Cash and cash equivalents | $153.2 million | $275.9 million at Dec. 31, 2010 |
| Debt, net of discount | $1.452 billion | $1.143 billion at Dec. 31, 2010 |
Restricted cash was $61.4 million, making cash plus restricted cash approximately $214.6 million at quarter-end. The company reported $32.2 million of Adjusted EBITDA versus $31.0 million a year earlier, and $8.3 million of Adjusted FFO versus $3.9 million. These are company-defined non-GAAP measures and are not substitutes for GAAP results or cash flow.
Comparable Portfolio RevPAR increased 5.3%: occupancy rose 40 basis points to 68.5%, and average daily rate increased 4.7% to $152.74. Revenue growth was partly acquisition-driven: the acquired hotels contributed $13.2 million of room revenue in the quarter. Operating expenses increased 18.6%, faster than revenue growth of 15.4%; operating margin declined from approximately 1.7% to negative 1.0%.
Material changes and unusual items
- Net income included a $69.2 million gain from remeasuring previously held interests in the Doubletree Guest Suites Times Square and BuyEfficient acquisitions. The gain was noncash and was excluded from Adjusted EBITDA and Adjusted FFO; it was the principal reason reported net income swung to a profit.
- Sunstone acquired the outside 62% interest in the Doubletree Guest Suites Times Square joint venture for $37.5 million and assumed $270.0 million of debt, and bought the remaining 50% of BuyEfficient for approximately $9.0 million. It also acquired the JW Marriott New Orleans for approximately $51.6 million cash and assumed $42.2 million of mortgage debt.
- Corporate overhead rose 67.3% to $7.7 million, primarily due to $2.7 million of costs for completed acquisitions and additional costs for in-process or abandoned projects.
- Investing cash outflow was $137.1 million, including $102.2 million for acquisitions and deposits and $32.6 million for renovations and additions. Financing cash outflow was $8.9 million. Cash and cash equivalents declined $122.7 million during the quarter.
Debt, liquidity, outlook and risks
- At March 31, 2011, 81.4% of debt was fixed-rate, with a 5.5% weighted-average interest rate and 5.5-year weighted-average maturity. Approximately $303.1 million of debt was scheduled to mature in 2012, including the $270.0 million Doubletree loan due in January 2012. Management expected to refinance that debt during 2011 and said any refinancing shortfall would be funded with existing cash.
- Management said cash, operating cash flow, capital-market access and unencumbered properties should provide sufficient liquidity for at least 12 months. This depends in part on continued access to financing; the filing cautions that capital may not be available on favorable terms or at all.
- Management viewed the lodging industry as being in an early recovery and expected demand to strengthen through the remainder of 2011. It cited constrained new hotel development as a potential support for existing properties. No specific earnings or RevPAR guidance was provided.
- Management intended to pursue selective acquisitions while prioritizing credit-ratio improvement, liquidity and gradual deleveraging; it expected near-term acquisitions to use proportionally more equity than debt. Rising labor, benefit, utility, property-tax and other operating costs were identified as margin pressures.
- In April 2011, Sunstone sold the Royal Palm Miami Beach for $130.0 million, including $40.0 million cash and a $90.0 million seller-financed loan, and acquired a 75% interest in the Hilton San Diego Bayfront for $180.9 million. The Hilton joint venture took on a new $240.0 million floating-rate mortgage. Sunstone also issued $115.0 million gross of Series D preferred stock in April.
- Potential obligations include up to $19.6 million of franchise termination fees related to five hotels previously deeded back; $31.2 million of remaining renovation and construction commitments; and environmental indemnities. California represented about 24% of portfolio rooms and revenue, creating geographic concentration risk.
- The company reported no legal proceedings, no defaults upon senior securities, effective disclosure controls, and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Confirm the noncash, one-time nature and accounting basis of the $69.2 million remeasurement gain, and assess recurring performance using operating cash flow and appropriately reconciled non-GAAP measures.
- Track refinancing progress and terms for the $270.0 million Doubletree debt due January 2012, as well as the company’s post-acquisition leverage and liquidity.
- Review the Hilton San Diego Bayfront acquisition, its floating-rate financing, and the effect of subsequent acquisitions and the Series D issuance on cash, debt and equity.
- Monitor comparable hotel operating trends and whether expense growth, renovation spending and property taxes limit margin recovery.
- Confirm resolution of the franchise agreements and any resulting change to the potential $19.6 million termination-fee liability.