Sunstone Hotel Investors, Inc. — 2015 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Dollar amounts are in millions unless stated otherwise. The company is a hotel-owning REIT with interests in 30 hotels (14,313 rooms), primarily upper-upscale properties in the United States.
Key financial results
| Metric | Q3 2015 | Q3 2014 | First 9 months 2015 | First 9 months 2014 |
|---|---|---|---|---|
| Revenue | $324.6 | $307.8 | $948.2 | $852.1 |
| Operating income | $52.3 | $50.8 | $139.3 | $121.0 |
| Net income | $63.1 | $33.6 | $117.9 | $73.7 |
| Income attributable to common stockholders | $58.8 | $29.5 | $104.4 | $61.1 |
| Basic and diluted earnings per common share | $0.28 | $0.14 | $0.50 | $0.32 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $219.8 | $200.3 |
Operating margin was approximately 16.1% in Q3 2015 versus 16.5% in Q3 2014, and 14.7% for the first nine months versus 14.2%. Revenue and expense comparisons are affected by the company’s adoption of a revised lodging-industry accounting presentation in 2015, including a reclassification of banquet service charges.
Comparable Portfolio RevPAR rose 3.5% in Q3 and 5.6% for the first nine months. Q3 occupancy was 86.0%, down 40 basis points, while ADR increased 4.0% to $206.38. For the nine months, occupancy increased 50 basis points to 84.2% and ADR rose 5.0% to $202.78.
Non-GAAP measures: Adjusted EBITDA was $94.2 million in Q3 and $270.3 million year to date, versus $91.4 million and $235.2 million. Adjusted FFO attributable to common stockholders was $74.8 million in Q3 and $209.4 million year to date, versus $69.5 million and $169.3 million. These company-defined measures are not substitutes for GAAP results.
Liquidity, debt and capital
- At September 30, cash and cash equivalents were $176.2 million; restricted cash was $91.5 million. The company reported $1.313 billion of notes payable and $15.6 million of long-term capital lease obligations.
- Debt was approximately 69.4% fixed-rate, with a weighted-average interest rate of 4.5% and an average term to maturity of about 3.6 years. Management estimated that a 100-basis-point change in variable rates would affect annual earnings and cash flows by about $3.7 million before the joint-venture non-controlling interest.
- Operating cash flow was $219.8 million. Investing cash outflow was $73.0 million, including $106.6 million of hotel renovations and additions, partly offset by asset-sale proceeds. Financing cash outflow was $192.6 million, including $154.1 million of debt repayments and $64.8 million of dividends. Cash declined $45.9 million to $176.2 million.
- The new $400 million unsecured credit facility replaced a $150 million facility; it had no outstanding borrowings at September 30. Its pricing is 155–230 basis points over LIBOR, with an accordion option up to $800 million. The company also had $128.4 million remaining under its at-the-market share offering.
- Common dividends declared were $0.05 per share for Q3 and $0.15 per share year to date. Series D preferred stock carries an 8.0% dividend rate.
Material changes and unusual items
- September sale of BuyEfficient generated $26.4 million net proceeds and an $11.7 million gain. The company also wrote off $8.4 million of goodwill and $6.2 million of net intangible assets and recorded $1.6 million of severance costs. BuyEfficient remained in continuing operations.
- In July, the company received $16.0 million, plus accrued interest, from selling its Rochester Portfolio preferred equity investment and settling a working-capital loan. The resulting $16.0 million gain, net of tax, was reported in discontinued operations.
- These transactions materially lifted reported net income. Q3 income attributable to common stockholders increased 99.1% year over year; year-to-date it increased 70.9%. Adjusted EBITDA and Adjusted FFO also rose, reflecting hotel operating improvement, the 2014 Wailea acquisition and lower interest expense, among other factors.
- The company repaid $99.1 million of debt secured by four hotels in May. In October, after quarter-end, it borrowed $85.0 million under an unsecured term loan and used the proceeds plus cash to repay the $85.9 million Renaissance Harborplace mortgage scheduled to mature in January 2016. The new loan matures in September 2022 and was swapped to a stated fixed rate of 3.39%; the refinancing increased unencumbered hotels to 19.
Outlook, risks and contingencies
Management described the lodging cycle as middle-to-mature and said demand had improved; it expected demand to remain strong if the U.S. economy and employment continued to grow. It reported higher-than-average new-room supply in New York City, Washington, D.C. and Chicago. No quantified earnings or RevPAR guidance was provided.
Management’s strategy emphasizes selective capital recycling, focused asset management, disciplined acquisitions and maintaining low leverage and financial flexibility. It expected near-term acquisitions to be funded largely with equity. Management stated that available cash, operating cash flow, capital-market access, the credit facility and unencumbered properties should provide sufficient liquidity for at least the next 12 months.
- Hotel performance is exposed to economic and travel demand, market-specific new supply, competition, renovation disruption, operating-cost inflation, property taxes, labor and insurance costs, and dependence on third-party managers and brands.
- Twenty-one of 30 hotels were concentrated in California, New York, Illinois, Massachusetts and the greater Washington, D.C. area. Nine hotels were subject to ground, building or air leases.
- Renovation and construction commitments totaled $73.4 million; $60.2 million was held in FF&E reserve accounts. The filing also disclosed $513.9 million of operating lease obligations and customary environmental indemnities.
- At quarter-end, $188.2 million of debt was scheduled to mature within 12 months; following the October refinancing, management reported $103.0 million of maturities over the next 12 months. The debt schedule and subsequent refinancing should be reviewed together.
- The filing reported no legal proceedings and no newly identified risk factors. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- How much of earnings growth reflects recurring hotel operations versus the BuyEfficient sale and Rochester Portfolio gain; compare GAAP results with Adjusted EBITDA and Adjusted FFO reconciliations.
- Comparable hotel trends, including Q3 RevPAR growth, lower occupancy, ADR increases, renovation impacts and the accounting reclassification affecting food-and-beverage revenue and expense.
- Debt maturities, interest-rate exposure, the terms and fixed-rate economics of the October refinancing, and liquidity available after restricted cash and committed capital spending.
- The sustainability of operating-margin performance given rising property-level costs, market concentration and new hotel supply in certain markets.
- Dividend coverage, planned renovation spending and the company’s stated preference for equity-funded near-term acquisitions.