Sunstone Hotel Investors, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Sunstone is a hotel-owning REIT with interests in 18 hotels at quarter-end. Comparisons with 2020 are heavily affected by COVID-19 closures and exceptionally weak hotel demand; management cautions that results are not necessarily indicative of full-year performance.
Financial performance and liquidity
- Q2 revenue: $117.2 million, versus $10.4 million in Q2 2020. Room revenue was $84.6 million; food and beverage revenue was $15.2 million.
- Q2 loss: Net loss was $27.9 million, compared with $117.5 million a year earlier. Loss attributable to common stockholders was $35.1 million, or $0.16 per share, versus $118.5 million, or $0.55 per share.
- First-half revenue and loss: Revenue was $167.8 million, down 16.8% from $201.6 million. Net loss was $83.2 million, versus $280.0 million; loss attributable to common stockholders was $91.6 million, or $0.43 per share, versus $283.8 million, or $1.30 per share.
- Operating measures: Q2 2021 Adjusted EBITDAre, excluding noncontrolling interest, was $15.3 million versus a loss of $47.0 million in Q2 2020. First-half Adjusted EBITDAre was $0.7 million versus a loss of $32.9 million. These are non-GAAP measures. Q2 operating results include a $3.1 million reimbursement for losses at the Hyatt Regency San Francisco.
- Hotel demand: At the 17 comparable hotels, Q2 occupancy was 43.6%, ADR was $219.82 and RevPAR was $95.84; RevPAR increased 3,182.2% year over year from the pandemic-depressed comparison. For the first half, RevPAR declined 1.9% to $69.25, as occupancy gains were more than offset by a 6.7% ADR decline.
- Cash flow: Net cash used in operating activities was $13.9 million in the first half, improved from $34.9 million used in 2020. Investing used $212.4 million, including the Montage Healdsburg acquisition; financing provided $20.6 million. Cash and restricted cash decreased $205.8 million to $210.4 million.
- Liquidity and debt: At June 30, unrestricted cash was $162.9 million and restricted cash was $47.5 million. Consolidated debt was $746.3 million; $500 million was available on the undrawn revolving credit facility, subject to covenants. About 70.5% of debt was fixed-rate or swapped to fixed-rate.
- Balance sheet: Total assets were $3.02 billion and total liabilities were $912.1 million. Current assets were $242.8 million and current liabilities were $113.7 million.
Material changes and notable items
- Sunstone acquired the 130-room Montage Healdsburg in April for $265.0 million, funded with $198.8 million of cash and $66.3 million liquidation preference of Series G preferred stock.
- In May, it issued $115.0 million of 6.125% Series H preferred stock and used the proceeds to redeem $115.0 million of 6.95% Series E preferred stock. The redemption included a $4.0 million charge for previously capitalized issuance costs.
- In June, the company issued 2.9 million common shares through its at-the-market program for gross proceeds of $38.4 million.
- No hotel impairment was recorded in the first half of 2021, compared with $133.5 million in the first half of 2020.
- Seventeen hotels were open at quarter-end; Renaissance Westchester remained temporarily suspended. The company had suspended operations at 14 hotels during 2020 as the pandemic curtailed travel.
Outlook, risks and contingencies
- Management expected COVID-19 and the economic downturn to continue materially affecting results and liquidity through at least Q3 2021. It expected the portfolio to perform significantly better in the second half, particularly Q4, as leisure, business-transient and group demand recovered, but said recovery timing remained uncertain.
- The company did not expect to pay a common-stock dividend for the remainder of 2021. The board would determine any resumption based on liquidity, covenants, taxable income, capital needs and business risks.
- Management reported labor shortages at some hotels, particularly in Florida. Risks also include COVID-19 variants and travel restrictions, operating-cost inflation, hotel competition, renovation needs, weather and geographic concentration, and the uncertain return of business and group travel.
- Cash-trap provisions had been triggered on loans secured by Embassy Suites La Jolla, JW Marriott New Orleans and Hilton San Diego Bayfront; they remain until specified hotel profitability levels are reached. Unsecured-debt covenant testing was waived through Q1 2022, with testing expected to resume thereafter; management noted the possibility of not meeting covenants when testing resumes.
- Outstanding renovation and construction commitments totaled $36.5 million. The filing also describes environmental indemnities and ordinary-course claims; management did not expect identified litigation liabilities beyond insurance to materially affect results, while acknowledging uncertainty.
- Subsequent to quarter-end, Sunstone issued $100.0 million of 5.70% Series I preferred stock and announced plans to use $75.0 million to redeem Series F preferred stock in August. It also amended unsecured-debt agreements in July and was under contract for a West Coast hotel acquisition below $200 million, subject to due diligence and cancellation without penalty.
Important facts for investors to verify
- Whether hotel occupancy, ADR and group bookings recover as management anticipated, and how results compare with pre-pandemic levels.
- Cash burn, the availability and covenant conditions of the $500 million revolver, and the effect of restricted cash and hotel cash traps on usable liquidity.
- The timing and terms of covenant testing after March 31, 2022, and the company’s capacity to comply.
- The cash, earnings and preferred-dividend implications of the Montage acquisition and the Series G, H and I issuances and planned Series F redemption.
- Whether the common dividend remains suspended and whether the proposed West Coast acquisition proceeds.