Sunstone Hotel Investors, Inc. — Q3 2023 Form 10-Q
Business context and period. Sunstone is a hotel-owning REIT. This unaudited filing covers the quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. At quarter-end, the company owned 15 hotels, including Boston Park Plaza, which was classified as held for sale. It sold that hotel on October 26, 2023.
Financial performance
Amounts below are in millions except per-share data and hotel statistics.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $247.7 | $244.3 | $767.3 | $667.9 |
| Net income | $15.6 | $20.5 | $79.7 | $73.3 |
| Income attributable to common stockholders | $12.3 | $17.1 | $69.0 | $58.9 |
| Basic and diluted EPS | $0.06 | $0.08 | $0.33 | $0.27 |
| Adjusted EBITDAre, excluding noncontrolling interest | $63.7 | $63.8 | $208.8 | $165.0 |
| Adjusted FFO attributable to common stockholders | $46.4 | $51.3 | $157.6 | $130.9 |
- Hotel operating indicators: Q3 occupancy was 72.8%, ADR was $305.69 and RevPAR was $222.54. For the nine-month existing portfolio, occupancy was 73.6%, ADR was $313.88 and RevPAR was $231.02; RevPAR rose 11.1% year over year.
- Cash flow: Nine-month operating cash flow was $168.7 million, versus $149.7 million. Investing activities used $60.2 million, including $73.9 million of hotel renovations and additions. Financing activities used $80.7 million. Cash and restricted cash increased $27.8 million to $185.0 million.
- Debt and liquidity: September 30 debt principal was $819.6 million ($814.7 million net of financing costs), compared with $816.1 million principal at year-end 2022. Unrestricted cash was $113.8 million; restricted cash was $71.2 million. The company had no revolver borrowings and $500 million of available revolving capacity, subject to financial covenants. 51.2% of debt was fixed-rate or swapped to fixed; weighted-average interest rate was approximately 5.8%.
- Margins and expenses: Q3 revenue grew 1.4%, while operating expenses grew 3.0%; net income fell 24.1%. Nine-month revenue grew 14.9% and operating expenses grew 11.0%. The filing does not present a directly comparable GAAP operating-margin measure in its summary tables.
Material changes and unusual items
- Q3 room revenue was nearly flat: occupancy improved 140 basis points, offset by a 1.9% decline in ADR. Adjusted EBITDAre was down 0.2% and adjusted FFO down 9.6% year over year.
- Nine-month comparisons reflect recovery from Omicron-affected 2022 operations, the 2022 acquisition of The Confidante Miami Beach, and the 2022 sale of three Chicago hotels. Management cautions that these factors make periods less comparable.
- Nine-month interest expense increased 72.1% to $34.9 million, primarily due to higher variable-rate borrowing costs and additional term-loan borrowing. The company entered a $225 million variable-rate Term Loan 3 in May 2023 and used $220 million to repay the Hilton San Diego Bayfront mortgage.
- Nine-month income included a $9.9 million gain on extinguishment of debt, mainly from release of Hilton Times Square employee-obligation escrow, and $3.7 million of Hurricane Ida property-damage insurance proceeds. These items affect comparisons; the 2022 period included $22.9 million of hotel-sale gains.
- Boston Park Plaza sold after quarter-end for a gross price of $370 million. The company received a $10 million disposition deposit during the first nine months; the filing does not state the net sale proceeds.
- The company repurchased 3.8 million common shares for $35.5 million during the first nine months; $475.5 million remained authorized at September 30. Subsequent to quarter-end, it repurchased another 233,692 shares for $2.1 million.
Outlook, risks and contingencies
- No quantified earnings or operating guidance is provided. Management expects ongoing capital spending, including completion of the Confidante Miami Beach renovation and rebranding to Andaz Miami Beach; $40.4 million of renovation commitments remained at September 30.
- Management says inflation and higher interest rates have raised labor, food, materials, insurance, property-tax, utility and borrowing costs. Rate increases at hotels have mitigated some expense pressure, but variable-rate debt raises interest costs. A 50-basis-point change in variable rates would affect annual interest expense and cash flow by approximately $2.0 million.
- Management identifies risks from economic slowdown or recession, hotel competition and alternative lodging, travel demand, inflation, severe weather and climate impacts, renovations, capital-market availability, interest-rate volatility, leverage and debt covenants, and reliance on hotel managers and brands. It notes that future capital may be less available or more costly.
- The company reported no legal proceedings under the relevant filing item and no additional risk factors under Item 1A. It is nevertheless subject to ordinary-course claims and proceedings; management does not expect identifiable uninsured liabilities to materially adversely affect results, while noting litigation outcomes are uncertain.
- There were no hotel impairment losses in the periods presented. Renovation commitments, environmental indemnities, and employee-related obligations and escrow arrangements remain relevant contingencies.
Key facts for investors to verify
- Final net proceeds and use of proceeds from the October 2023 Boston Park Plaza sale, including any debt repayment or capital allocation decisions.
- Progress, costs, timing and operating disruption associated with the Andaz Miami Beach renovation and rebranding.
- Whether hotel rate growth can continue to offset wage, insurance, property-tax, utility and other operating-cost inflation.
- Variable-rate debt exposure, refinancing needs and continued compliance with credit-facility and term-loan covenants.
- Underlying operating trends apart from acquisition, disposition, recovery and unusual gains or insurance proceeds; review both GAAP results and the company’s non-GAAP reconciliations.
- Capital returns and liquidity after common-stock repurchases, dividends and the hotel sale, while accounting for restricted cash and construction commitments.