Sunstone Hotel Investors, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; it also provides unaudited quarterly results. Dollar amounts below are in millions unless otherwise stated.
Business context
Sunstone is a lodging REIT that owns, renovates and asset-manages upper-upscale hotels in urban and resort markets. At year-end it held interests in 20 hotels with 10,610 rooms across nine states and Washington, D.C.; third-party operators manage all properties. Sunstone sold one hotel in 2019 and made no hotel acquisitions.
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $1,115.2 | $1,159.1 |
| Operating income | $137.4 | $181.9 |
| Net income | $142.8 | $259.1 |
| Income attributable to common stockholders | $122.9 | $237.6 |
| Diluted earnings per common share | $0.54 | $1.05 |
| Cash provided by operating activities | $290.9 | $305.3 |
| Adjusted EBITDAre, excluding noncontrolling interest | $320.2 | $331.8 |
| Adjusted FFO attributable to common stockholders | $254.0 | $264.2 |
- Revenue declined 3.8% year over year. The seven hotels sold in 2018–2019 reduced 2019 revenue by $69.9 million and Adjusted EBITDAre by $15.4 million versus 2018. Excluding those dispositions, management said Adjusted EBITDAre increased $3.8 million and Adjusted FFO increased $5.1 million.
- Comparable-portfolio RevPAR increased 1.9% to $196.08, with ADR up 1.8% to $234.26 and occupancy up 10 basis points to 83.7%. Renovations at four hotels disrupted results and displaced an estimated $4.7 million of room revenue.
- Approximate operating margin, calculated as operating income divided by revenue, was 12.3% in 2019 versus 15.7% in 2018. The filing does not present this margin as a reported metric.
- Net income fell 44.9%, principally reflecting lower gains on hotel sales ($42.9 million versus $117.0 million) and a $24.7 million impairment charge, partly offset by higher interest and other income. The impairment related to Renaissance Harborplace, where management cited weaker hotel and Baltimore-market demand and its estimated hold period.
- Interest expense rose 13.7% to $54.2 million, mainly due to noncash derivative fair-value changes. Excluding those noncash changes, interest expense decreased $0.7 million.
Balance sheet, debt and liquidity
- Year-end cash and cash equivalents were $816.9 million; restricted cash was $48.1 million, for total cash and restricted cash of $865.0 million. The company cited $729.1 million of pro forma total cash after the January 2020 common and preferred dividend payment.
- Consolidated debt principal was $974.9 million (carrying value, net, was $971.1 million); total assets were $3.9 billion. The company reported an undrawn $500 million revolving credit facility, with potential capacity to increase it to $800 million subject to lender approval.
- Weighted-average debt interest rate was approximately 4.1%; 77.4% of debt was fixed-rate or swapped to fixed. The $220 million Hilton San Diego Bayfront mortgage was variable-rate, with a cap through December 2020. Management intended to exercise three one-year extensions through December 2023.
- The $77.7 million Hilton Times Square mortgage was due in November 2020, and the company said it was exploring options. The Hilton Times Square loan’s cash-trap provisions were triggered; $1.0 million of hotel cash was in a lender lockbox at year-end.
- Operating cash flow was $290.9 million; investing activities used $47.2 million, including $96.0 million of renovations and additions; financing activities used $241.2 million, including $170.2 million of dividends and distributions and $50.1 million of common-stock repurchases.
- Remaining construction commitments for ongoing renovations were $47.6 million. The company expected 2020 capital expenditures to be slightly lower than 2019.
Changes, outlook and risks
- Hotel sales reduced the portfolio from 21 to 20 hotels. The Courtyard by Marriott Los Angeles was sold in October 2019 for net proceeds of $49.5 million, generating a $42.9 million gain.
- The common dividend declared for 2019 was $0.74 per share, up from $0.69 in 2018. Management expected regular common dividends of $0.05 per share each quarter during 2020 and anticipated a possible January 2021 catch-up distribution to meet REIT requirements. Future dividends remain subject to board approval.
- In February 2020, the board increased the stock repurchase authorization to $500 million for common and preferred stock and reauthorized a common-stock ATM program of up to $300 million; neither authorization had a stated expiration date. These are post-year-end actions, not 2019 operating results.
- No numerical 2020 revenue, earnings or RevPAR guidance was provided. Management’s stated strategy was to prioritize long-term hotel value, active asset management, selective portfolio recycling, and balance-sheet flexibility.
- Material risks include economic downturns and reduced business or leisure travel; new hotel supply and alternative lodging; geographic concentration and severe weather; labor and operating-cost inflation; dependence on third-party managers and hotel brands; required renovations; refinancing and covenant risks; LIBOR transition; and REIT qualification and distribution requirements. The filing also identifies public-health outbreaks as a potential lodging-demand risk.
- The filing reports a $24.7 million hotel impairment and adoption of the new lease accounting standard in 2019. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Review the causes and assumptions behind the Renaissance Harborplace impairment, including its cash-flow forecasts, valuation inputs and planned hold period.
- Track refinancing or repayment plans for the Hilton Times Square mortgage and the planned extensions of the Hilton San Diego Bayfront loan.
- Assess whether comparable RevPAR and property-level profitability can offset disposition effects, renovation disruption, new supply and rising operating costs.
- Compare cash available for dividends and capital investment with the $47.6 million construction commitments, debt service and the expanded repurchase authorization.
- Reconcile reported GAAP earnings with Adjusted EBITDAre and Adjusted FFO; these are non-GAAP measures and depend on management-defined adjustments.