Sunstone Hotel Investors, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; balance-sheet comparisons are with December 31, 2016. Amounts are in millions except per-share data and operating statistics. The company is a hotel-owning REIT with interests in 27 U.S. hotels, managed by third parties.
Financial results and operating performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $303.9 | $303.3 | $903.4 | $899.8 |
| Operating income | $13.1 | $48.8 | $106.1 | $133.3 |
| Operating margin | 4.3% | 16.1% | 11.7% | 14.8% |
| Net income | $17.1 | $39.4 | $132.3 | $106.4 |
| Income attributable to common stockholders | $11.7 | $34.2 | $116.4 | $88.3 |
| Basic and diluted EPS | $0.05 | $0.16 | $0.52 | $0.41 |
| Net cash from operating activities | — | $234.2 | $228.5 | |
| Adjusted EBITDA | $87.6 | $87.9 | $259.4 | $250.9 |
| Adjusted FFO attributable to common stockholders | $70.4 | $71.1 | $208.5 | $198.6 |
Comparable-portfolio RevPAR increased 2.0% in Q3 and 3.3% year to date. ADR rose 2.4% and 3.6%, respectively, while occupancy declined 40 and 30 basis points. Management attributed rate growth in part to the Boston Park Plaza and Wailea Beach Resort repositionings; Houston weakness and hurricane-related cancellations were offsets.
- Q3 revenue was nearly flat year over year, while operating income fell sharply, primarily reflecting a $34.4 million impairment charge on the two Houston hotels and higher interest expense. Q3 common earnings also included a $7.0 million discontinued-operations gain from releasing a remaining liability tied to the 2013 Rochester Portfolio sale.
- Year-to-date common earnings benefited from $45.5 million of gains on hotel sales and a $12.5 million income tax benefit, including release of a $13.6 million valuation allowance. These items make reported net income and EPS less representative of recurring operations.
- Adjusted EBITDA was nearly unchanged in Q3 and rose $8.5 million year to date; Adjusted FFO declined $0.7 million in Q3 and increased $9.9 million year to date. These are non-GAAP measures and should be considered with GAAP results.
Cash, debt and capital
- At September 30, cash and cash equivalents were $466.5 million, with restricted cash of $71.5 million. Total assets were $3.85 billion; total liabilities were $1.16 billion.
- Notes payable had a $992.1 million principal balance, up from $935.9 million at year-end 2016. Including capital leases, debt-like obligations were higher. The company reported $10.4 million of current principal due within one year.
- Approximately 77.8% of debt was fixed-rate or swapped to fixed; weighted-average debt maturity was about five years. The weighted-average interest rate was 4.3%, or 4.5% for fixed-rate debt. A 100-basis-point move in variable rates was estimated to affect future earnings and cash flow by about $2.0 million before noncontrolling interest.
- Operating cash flow was $234.2 million. Investing cash use was $112.7 million, including $173.9 million for the Oceans Edge Hotel & Marina acquisition and $81.5 million for renovations, offset partly by $150.2 million in asset-sale proceeds. Financing cash use was $24.5 million; ending cash increased $97.0 million from year-end.
- The company issued $240 million of unsecured notes at 4.69% and 4.79%, maturing in 2026 and 2028, and used part of the proceeds to repay a $176 million, 5.58% mortgage. It also raised $77.9 million net through its ATM common-stock program, issuing 4.9 million shares.
- Common distributions declared were $0.05 per share for Q3 and $0.15 year to date. A board-authorized $300 million share-repurchase program had no purchases through September 30. The ATM program had $220.6 million of capacity remaining.
Material changes, outlook and risks
- The company acquired the 175-room Oceans Edge Hotel & Marina in Key West for $173.9 million in July. It sold the Fairmont Newport Beach for $122.8 million net proceeds and a $44.3 million gain, and Marriott Park City for $27.0 million net proceeds and a $1.2 million gain.
- Hurricanes Harvey and Irma affected four hotels. The Houston hotels sustained water damage and were also experiencing market weakness; Oceans Edge closed September 7, partially reopened September 27, and reopened all guestrooms October 19. Accrued hurricane-related restoration expense was $1.7 million. The company expected to file a business-interruption claim for Oceans Edge, but any recovery was uncertain.
- The $34.4 million Houston impairment followed weaker operating performance and Hurricane Harvey; carrying values were written down using Level 3 fair-value estimates. Future impairment remains a risk.
- Management described near-term capital priorities as hotel operations, renovations, debt service and distributions, with selective acquisitions funded largely through cash, equity or asset sales. No quantified earnings or RevPAR guidance is provided in the filing.
- Risks include lodging demand and economic conditions, new hotel and alternative-lodging supply, labor and operating-cost inflation, renovations, weather events, concentration in several geographic markets, REIT qualification, capital-market access and debt obligations. Contractual obligations totaled $1.72 billion, including $54.2 million of construction commitments; this includes scheduled principal, interest and lease payments over multiple years.
- The company reclassified the Courtyard by Marriott Los Angeles ground lease as a capital lease after identifying a future bargain-purchase option it expected to exercise. It treated the $4.5 million cumulative adjustment as immaterial and recorded it in current-period interest expense without revising prior periods.
Investor verification points
- Assess recurring operating performance separately from asset-sale gains, the Rochester liability release, the deferred-tax valuation-allowance release, impairment and hurricane costs.
- Verify the Houston hotels’ post-impairment outlook, ongoing market conditions and whether insurance claims recover any hurricane-related costs or business interruption losses.
- Review debt maturities, variable-rate exposure, lease obligations, renovation commitments and liquidity needs alongside the company’s stated balance-sheet objectives.
- Track comparable RevPAR, particularly occupancy and Houston performance, and the contribution and costs of Oceans Edge after its reopening.
- Monitor share issuance under the ATM program, potential repurchases and distributions, including their effect on per-share results and capital flexibility.