Sunstone Hotel Investors, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Sunstone is a lodging REIT with interests in 28 primarily upscale, upper-upscale and luxury U.S. hotels. Unless otherwise noted, figures below are in millions of dollars.
Financial and operating performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $303.3 | $324.6 | $899.8 | $948.2 |
| Operating income | $48.8 | $52.3 | $133.3 | $139.3 |
| Net income | $39.4 | $63.1 | $106.4 | $117.9 |
| Income attributable to common stockholders | $34.2 | $58.8 | $88.3 | $104.4 |
| Basic and diluted EPS | $0.16 | $0.28 | $0.41 | $0.50 |
| Adjusted EBITDA | $87.9 | $94.2 | $250.9 | $270.3 |
| Adjusted FFO attributable to common stockholders | $71.1 | $74.8 | $198.6 | $209.4 |
- Operating margin was approximately 16.1% in Q3 2016 versus 16.1% a year earlier, and 14.8% for the first nine months versus 14.7% in 2015.
- Comparable Portfolio RevPAR increased 2.2% in Q3 and 1.6% year to date. Q3 comparable occupancy rose 100 basis points to 86.9%, and ADR rose 1.0% to $200.74. Year-to-date comparable occupancy increased 20 basis points to 83.7% and ADR rose 1.4% to $198.27.
- Net cash provided by operating activities was $228.5 for the first nine months, versus $229.0 in 2015. Investing cash outflow was $110.0, including $139.8 of hotel renovations and additions; financing cash outflow was $250.5. Cash and cash equivalents ended at $367.1.
Liquidity, debt and capital
- At September 30, total assets were $3.74 billion and total liabilities were $1.18 billion. Notes payable principal was approximately $1.005 billion; reported carrying value was approximately $1.000 billion. Cash plus restricted cash totaled $434.4, of which $367.1 was unrestricted.
- Approximately 77.8% of debt was fixed-rate, including swaps. The weighted average interest rate was 4.4%; management reported an approximately four-year weighted average debt maturity. A 100-basis-point rate change on variable-rate debt was estimated to affect future earnings and cash flows by about $2.1 annually before noncontrolling interests.
- Contractual debt principal due within one year was $252.4. The filing also reports $56.0 of outstanding renovation and construction commitments and $358.8 of operating lease obligations over all periods.
- Sunstone issued $115.0 of Series E preferred stock at 6.95% and $75.0 of Series F at 6.45%, and redeemed $115.0 of 8.0% Series D preferred stock. The redemption generated a $4.1 charge. The company repaid the $114.2 Boston Park Plaza mortgage and $72.6 of debt secured by Renaissance Orlando at SeaWorld, and drew a $100.0 unsecured term loan.
Changes, management commentary and outlook
- Revenue fell 6.6% in Q3 and 5.1% year to date, largely because of the sales of Sheraton Cerritos and Doubletree Guest Suites Times Square; BuyEfficient was also sold in 2015. Room revenue from the existing portfolio increased, while the Wailea Beach Marriott repositioning and softer Chicago and Houston markets weighed on results.
- Q3 net income and common-stockholder income were down against 2015, which included an $11.7 gain on the BuyEfficient sale and $15.9 of discontinued-operation income. Year-to-date 2016 included an $18.2 gain on the Sheraton Cerritos sale and a $1.6 tax benefit from reversal of an accrual after the statute of limitations expired. Derivative losses added $7.8 to interest expense year to date.
- Management described the lodging cycle as mature/late phase and emphasized asset management, disciplined capital recycling, selective acquisitions and dispositions, low leverage and balance-sheet flexibility. No numerical earnings or operating guidance is provided.
- Management cited risks including economic weakness, new hotel supply and alternative lodging, market-level competition, rising labor and other operating costs, renovation disruption, hotel-manager and brand relationships, debt and covenants, capital-market access, REIT requirements, leases and cyber/security risks. Renovations displaced an estimated $6.5 of room revenue year to date. No hotel-property or goodwill impairment indicators were identified.
- The filing reports $0.5 of outstanding letters of credit, environmental indemnities without stated term or damage limits, and routine litigation; management did not expect litigation liabilities beyond insurance to materially affect results. Disclosure controls were deemed effective, and no material change in internal control was reported.
Important facts for investors to verify
- How much of the reported revenue and earnings decline reflects sold assets versus performance of the continuing hotel portfolio, and whether comparable RevPAR trends persist.
- Renovation schedules, remaining commitments and expected operating disruption at Wailea Beach Marriott and other properties.
- Debt maturities and refinancing plans, particularly the $252.4 of principal contractually due within one year, as well as interest-rate exposure and covenant headroom.
- Cash requirements for capital spending, lease obligations and common and preferred dividends, and the company’s ability to maintain liquidity while pursuing acquisitions or dispositions.
- The sustainability of Adjusted EBITDA and Adjusted FFO, including the effect of dispositions, derivative valuation changes, preferred dividends and other adjustments; these are non-GAAP measures and may not be comparable across companies.