Sunstone Hotel Investors, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Sunstone is a hotel-owning REIT; it owned 15 hotels at quarter-end.
Key financial metrics
Amounts are in millions except per-share data and percentages.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $251.3 | $117.2 | $423.6 | $167.8 |
| Net income (loss) | $37.7 | ($27.9) | $52.8 | ($83.2) |
| Income (loss) attributable to common stockholders | $31.6 | ($35.1) | $41.8 | ($91.6) |
| Basic and diluted EPS | $0.15 | ($0.16) | $0.19 | ($0.43) |
| Adjusted EBITDAre, excluding noncontrolling interest | $74.0 | $15.3 | $101.2 | $0.7 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $90.7 | ($13.9) |
- Q2 operating expenses were $207.8 million, including $30.9 million of depreciation and amortization; interest expense was $5.9 million.
- At June 30, cash and cash equivalents were $107.3 million and restricted cash was $45.6 million. Debt principal was $805.4 million; total liabilities were $983.2 million.
- Six-month investing cash outflow was $99.5 million, including $232.5 million for acquisitions and $62.6 million for renovations and additions. Financing cash outflow was $1.0 million.
Material changes versus prior comparable periods
- Q2 revenue increased 114.4% year over year, reflecting recovery in hotel demand. For the existing portfolio, Q2 occupancy rose 28 percentage points and ADR rose 27.8%; RevPAR increased 104.4%.
- Q2 food-and-beverage revenue grew to $71.7 million from $15.2 million. Operating costs also increased as business recovered; management cited higher payroll, management fees, supplies, and other operating expenses.
- Six-month results included $22.9 million of gains on hotel sales and $4.4 million of Hurricane Ida property-insurance proceeds. The company sold three Chicago-area hotels and acquired The Confidante Miami Beach for $232.0 million, and bought the remaining 25% interest in Hilton San Diego Bayfront for a preliminary $101.3 million.
- Sunstone repurchased 7.1 million common shares for $78.0 million in the first half. It invested $62.6 million in renovations and additions and had $76.9 million of remaining construction commitments.
Outlook, risks and unusual items
- Management reported recovering leisure, corporate transient and group demand, with group business expected to form a more meaningful share of room nights during the rest of 2022. It gave no numerical full-year guidance and said visibility remained limited.
- In July 2022, Sunstone amended its credit agreement: term loans increased from $108.3 million to $350.0 million, and proceeds repaid the $230.0 million revolver balance. The revised $500.0 million revolver has extension options potentially extending maturity to July 2027; the two term loans mature in July 2027 and January 2028.
- At quarter-end, 44.1% of debt was fixed-rate or effectively fixed. Management estimated a 100-basis-point rate move would change annual interest expense and cash flows by about $4.1 million, based on then-current variable rates. The Hilton San Diego Bayfront mortgage had a 6.0% rate cap through December 2022.
- COVID-19 and variants, inflation and rising labor, utility and insurance costs, reduced business travel, severe weather, hotel renovations, market competition, and debt covenant compliance remain key risks. A cash trap remained in place for the JW Marriott New Orleans; the Hilton San Diego Bayfront exited its cash trap in April 2022.
- Hurricane Ida restoration costs and insurance claims remained subject to potential further costs and final settlement. The company reported no hotel impairment for the periods presented, no legal proceedings in the filing’s legal-proceedings item, and no material change in disclosure controls.
Important facts for investors to verify
- Whether demand recovery, particularly corporate and group travel, continues and translates into sustained hotel-level margins amid rising costs.
- The final working-capital adjustment for the Hilton San Diego Bayfront interest purchase and the integration and performance of The Confidante Miami Beach.
- Updated debt balances, borrowing capacity, covenant compliance and interest-rate exposure after the July credit agreement amendment.
- Cash needs for the $76.9 million of construction commitments, planned renovations, dividends and continued share repurchases.
- Final insurance recoveries and any additional Hurricane Ida expenses, as well as the status of the JW Marriott New Orleans cash-trap provision.