Sunstone Hotel Investors, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet figures are as of March 31, 2018. Sunstone is a U.S. lodging REIT with interests in 25 hotels, generally operated by third-party managers.
Financial and operating performance
Unless otherwise noted, amounts are in millions. Comparisons are with Q1 2017.
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $271.4 | $280.7 | Down 3.3% |
| Operating income | $26.4 | $30.3 | Down 12.7% |
| Net income | $38.5 | $63.8 | Down 39.8% |
| Income attributable to common stockholders | $32.8; $0.15 per share | $58.6; $0.27 per share | Down 44.0% |
| Operating cash flow | $30.6 | $40.1 | Down $9.5 |
| Adjusted EBITDAre, excluding noncontrolling interest | $62.4 | $69.6 | Down $7.1 |
| Adjusted FFO attributable to common stockholders | $45.9 | $53.2 | Down $7.3 |
Margins: GAAP operating margin was approximately 9.7%, compared with 10.8% in Q1 2017. Net income included gains on hotel sales, so the reported net margin is not a clean measure of recurring hotel performance.
Comparable hotel metrics: Occupancy was 78.6% (down 10 basis points), ADR was $204.25 (down 0.6%), and RevPAR was $160.54 (down 0.7%). Comparable Portfolio RevPAR index fell 100 basis points. Renovations at three hotels displaced an estimated $3.9 million of room revenue.
Liquidity, debt and capital
- Cash and cash equivalents were $467.1 million; restricted cash was $79.3 million, for total cash and restricted cash of $546.4 million. Unrestricted cash declined from $488.0 million at year-end 2017.
- Notes payable principal was $988.5 million, down from $990.4 million at December 31, 2017. Debt fair value was $994.8 million. Approximately 77.7% of debt was fixed-rate or swapped to fixed rates; weighted-average debt interest rate was 4.1%, or 4.5% on fixed-rate debt.
- Cash used in financing was $141.2 million, including $133.9 million of dividends and distributions. Cash provided by investing was $97.7 million, including hotel-sale proceeds, partly offset by $39.3 million of renovations and additions.
- Construction commitments totaled $78.5 million. The company reported a $400 million senior unsecured credit facility and $220.6 million of remaining capacity under its $300 million at-the-market equity program; the filing text does not provide a clear current unused amount under the credit facility.
Material changes and unusual items
- Sunstone sold the Marriott Philadelphia and Marriott Quincy in January for net proceeds of $137.0 million and recorded a $15.7 million gain. Their results remained in continuing operations. The prior-year comparison included a $44.3 million gain on the Fairmont Newport Beach sale.
- Lower revenue reflected hotel dispositions and weaker comparable room performance. The three renovation projects, fewer group room nights, market competition, and fewer exceptional events than in the prior-year quarter also weighed on results. The acquired Oceans Edge Resort & Marina contributed Q1 revenue.
- Interest expense declined to $8.9 million from $11.2 million, substantially reflecting a larger noncash derivative benefit. A $3.7 million net income-tax benefit was recorded, primarily from increased deferred tax assets related to seasonal net operating losses.
- Oceans Edge recognized $0.8 million of business-interruption proceeds related to Hurricane Irma. The company also reported $0.1 million of uninsured hurricane-related restoration expense.
- Revenue from contracts with customers was adopted in January 2018 with no material effect on the amount or timing of revenue recognition. The company was evaluating the effect of the new lease standard, scheduled to become effective in Q1 2019.
Outlook, risks and contingencies
No specific quantified earnings or operating guidance is provided. Management expects cash needs to include hotel operations, capital investment, debt service, and common and preferred distributions. It expects funding sources to include operations, cash on hand, asset sales, debt and equity offerings, and its credit facility. Management emphasizes maintaining low leverage, liquidity, and balance-sheet flexibility, and describes future acquisitions as selective.
Risks discussed include economic and lodging-demand weakness; new hotel and alternative-lodging supply; wage, utility, insurance and property-tax inflation; hotel renovations and related disruption; reliance on third-party managers and hotel brands; geographic concentration and severe weather; debt and interest-rate exposure; lease obligations; REIT qualification; and capital-market access. A 100-basis-point change in variable rates was estimated to affect future earnings and cash flow by approximately $2.2 million before the Hilton San Diego Bayfront noncontrolling-interest adjustment, or $1.7 million after it. The filing reports routine legal claims but says any uninsured liabilities are not expected to materially adversely affect financial condition or results; outcomes remain uncertain. It reports no separate legal proceedings or risk-factor changes in Part II.
Important facts for investors to verify
- How much of the year-over-year earnings decline reflects hotel sales and renovation disruption versus underlying comparable-property trends.
- Whether renovation schedules, the $78.5 million of construction commitments, and the associated room-revenue disruption remain consistent with management’s expectations.
- The sustainability of operating cash flow and distributions, given Q1 operating cash flow of $30.6 million and financing outflows of $141.2 million.
- Debt maturities, covenants, variable-rate exposure, and actual availability under the $400 million credit facility.
- The assumptions supporting the deferred tax asset and the timing and effect of adopting the lease-accounting standard.