Sunstone Hotel Investors, Inc. — 2020 Form 10-K
Business and reporting period. Annual report for the year ended December 31, 2020; figures below are in U.S. dollars. Sunstone is a lodging REIT that owns, asset-manages and renovates hotels operated by third parties. At year-end, it had interests in 17 hotels with 9,017 rooms across eight states and Washington, D.C. The year’s results were severely affected by COVID-19 and temporary hotel closures.
Financial and operating results
| Metric | 2020 | 2019 / change |
|---|---|---|
| Total revenue | $267.9 million | $1,115.2 million; down 76.0% |
| Net income (loss) | $(410.5) million | $142.8 million |
| Loss attributable to common stockholders | $(417.5) million; $(1.93) per diluted share | $122.9 million; $0.54 per diluted share |
| Operating expenses | $661.8 million | $977.8 million; down 32.3% |
| Impairment losses | $146.9 million | $24.7 million |
| Net cash from operating activities | $(116.7) million | $290.9 million provided |
| Cash from investing activities | $113.8 million provided | $47.2 million used |
| Cash from financing activities | $445.9 million used | $241.2 million used |
| Cash and restricted cash | $416.1 million, including $368.4 million unrestricted | $865.0 million |
| Debt | $747.9 million principal; $744.8 million net carrying value | $974.9 million principal |
| Total assets | $3.0 billion | $3.9 billion |
Hotel operating performance. Portfolio occupancy fell to 22.5% from 83.9%; ADR declined 15.0% to $204.52, and RevPAR fell 77.2% to $46.02. The filing says 2020 comparisons are not meaningful for its Comparable Portfolio measure because of closures, reduced operations and unusual items.
Quarterly context. Fourth-quarter revenue was $37.4 million and net loss was $39.4 million, compared with $273.0 million revenue and $45.4 million net income in Q4 2019. Q4 loss attributable to common stockholders was $41.2 million, or $0.19 per share.
Liquidity and capital structure. The company had $500 million of undrawn capacity under its revolving credit facility at year-end. Approximately 70.6% of debt was fixed-rate or fixed through swaps; weighted-average debt interest rate was 3.8%. Total cash included $47.7 million of restricted cash. Current assets were $435.1 million and current liabilities were $90.8 million.
Material changes and unusual items
- COVID-19 drove a 77.2% RevPAR decline. Sunstone suspended operations at 14 hotels during 2020; 12 had reopened by year-end, leaving two closed. Most open hotels operated at reduced capacity.
- Recorded $146.9 million of impairment losses, including $107.9 million for Hilton Times Square, $18.7 million for Renaissance Westchester, $18.1 million for Renaissance Harborplace and $2.3 million of abandoned development costs.
- Sold Renaissance Harborplace for $76.9 million net proceeds and Renaissance Los Angeles Airport for $89.9 million; also transferred its Hilton Times Square leasehold interest to its mortgage lender in an assignment-in-lieu transaction. The Times Square transaction generated a $6.4 million debt-extinguishment gain and included a $20 million payment and $11.6 million of retained employee-related obligations held in escrow.
- COVID-related expenses were $29.1 million, net of $5.2 million in employee retention credits and industry grants; this included $11.0 million of severance.
- Net loss attributable to common stockholders and cash flow were also affected by hotel sales, lower interest income, and the write-off of deferred tax assets through a full valuation allowance.
Outlook, management commentary and risks
- Management expected the pandemic and economic downturn to continue materially affecting results and liquidity through at least the first half of 2021. It could not reliably predict when demand, pricing or hotel operations would return to normal, and warned that a net loss in 2021 was possible.
- Sunstone expected to continue cash-preservation measures, including deferring some nonessential capital projects; it did not expect to pay a common-stock dividend in 2021. Common dividends and the stock-repurchase program were suspended to preserve liquidity. Preferred dividends continued under the debt amendments.
- Unsecured debt amendments waived financial covenant tests through Q1 2022, with testing resuming for the quarter ending March 31, 2022 and covenants phased in thereafter. Amendments also increased interest costs, set a minimum liquidity requirement of $180 million during the relief period, and restricted certain repurchases, debt incurrence and uses of cash. Capital improvements were limited to $100 million in 2021.
- Management intended to extend the $220 million Hilton San Diego Bayfront mortgage to December 2023 using two remaining one-year options. If extended as planned, the first debt maturity would be the $85 million term loan due September 2022. Cash-trap provisions were triggered in January 2021 for Embassy Suites La Jolla and JW Marriott New Orleans; management expected another for Hilton San Diego Bayfront.
- Key risks include an uncertain recovery in travel and group business, continuing operating cash burn, covenant compliance after relief ends, cash traps restricting hotel cash, refinancing and debt-maturity exposure, property impairments, and geographic and natural-disaster concentration. California represented 30% of rooms and 36% of 2020 revenue.
Important facts for investors to verify
- Actual recovery in occupancy, ADR, RevPAR and group bookings, including reopening plans for the two hotels still suspended at year-end.
- Unrestricted cash runway and the availability of the $500 million credit facility, considering restricted cash, hotel cash traps and the $180 million minimum-liquidity covenant.
- Progress toward covenant testing in March 2022, scheduled debt maturities and the planned Hilton San Diego Bayfront loan extensions.
- Whether the $11.6 million Hilton Times Square employee-related escrow obligation is resolved, and whether further impairments or asset dispositions occur.
- Board decisions on common dividends and repurchases, and the company’s continuing ability to pay preferred dividends.