Sunstone Hotel Investors Reports Results For First Quarter 2019

Sunstone Hotel Investors, Inc. (NYSE: SHO) today announced results for the first quarter ended March 31, 2019.

First Quarter 2019 Operational Results (as compared to First Quarter 2018):

  • Net income decreased 53.4% to $17.9 million. Excluding the effect of the gain on the two hotels sold during the first quarter of 2018, net income would have decreased 21.4%.
  • Income attributable to common stockholders per diluted common share decreased 60.0% to $0.06. Excluding the effect of the gain on the two hotels sold during the first quarter of 2018, income attributable to common stockholders per diluted common share would have decreased 25.0%.
  • 21 Hotel Comparable Portfolio RevPAR increased 4.3% to $177.23.
  • 21 Hotel Comparable Portfolio Adjusted EBITDAre Margin, excluding prior year property tax adjustments, net increased 40 basis points to 26.3%.
  • Adjusted EBITDAre, excluding noncontrolling interest increased 3.3% to $64.5 million.
  • Adjusted FFO attributable to common stockholders per diluted share increased 5.0% to $0.21.

John Arabia, President and Chief Executive Officer, stated, “Comparable property-level Adjusted EBITDA increased an impressive 6.0% in the first quarter due to strength in both group and transient business, healthy out-of-room revenues growth, the continued benefit from our completed renovation projects, and an ongoing focus on operating efficiencies. First quarter Comparable Portfolio RevPAR came in near the high end of our previously provided guidance range and our Comparable Portfolio Adjusted EBITDA margins increased by a healthy 40 basis points, which combined, resulted in quarterly earnings materially above the high end of our previously provided guidance range. Our outlook for operating fundamentals for the remainder of the year has not changed; therefore, we have increased our full-year earnings guidance for 2019.”

UNAUDITED SELECTED STATISTICAL AND FINANCIAL DATA

($ in millions, except RevPAR, ADR and per share amounts)

Three Months Ended March 31,

2019

2018

Change

Net Income

$

17.9

$

38.5

(53.4)

%

Income Attributable to Common Stockholders per Diluted Share

$

0.06

$

0.15

(60.0)

%

21 Hotel Comparable Portfolio RevPAR (1)

$

177.23

$

169.99

4.3

%

21 Hotel Comparable Portfolio Occupancy (1)

79.2

%

79.2

%

bps

21 Hotel Comparable Portfolio ADR (1)

$

223.78

$

214.63

4.3

%

21 Hotel Comparable Portfolio Adjusted EBITDAre Margin (1) (2)

26.3

%

25.9

%

40

bps

Adjusted EBITDAre, excluding noncontrolling interest

$

64.5

$

62.4

3.3

%

Adjusted FFO Attributable to Common Stockholders

$

47.5

$

45.9

3.5

%

Adjusted FFO Attributable to Common Stockholders per Diluted Share

$

0.21

$

0.20

5.0

%

(1)

The 21 Hotel Comparable Portfolio is comprised of all hotels owned by the Company as of March 31, 2019.

(2)

The 21 Hotel Comparable Portfolio Adjusted EBITDAre Margins exclude any prior year property tax adjustments, net.

Disclosures regarding the non-GAAP financial measures in this release are included on pages 5 through 7. Reconciliations of non-GAAP financial measures to the most comparable GAAP measure for each of the periods presented are included on pages 10 through 14 of this release.

The Company’s actual results for the quarter ended March 31, 2019 compare to its guidance originally provided as follows:

Metric

Quarter Ended

March 31, 2019

Guidance (1)

Quarter Ended

March 31, 2019

Actual Results
(unaudited)

Performance
Relative to Prior
Guidance Midpoint

Net Income ($ millions)

$10  to  $14

$18

+ $6

21 Hotel Comparable Portfolio RevPAR Growth

 + 2.5% to + 4.5%

4.3%

+ 0.8%

Adjusted EBITDAre, excluding noncontrolling interest ($ millions)

$59  to  $62

$65

+ $4

Adjusted FFO Attributable to Common Stockholders ($ millions)

$42  to  $45

$48

+ $4

Adjusted FFO Attributable to Common Stockholders per Diluted Share

$0.18  to  $0.20

$0.21

+ $0.02

Diluted Weighted Average Shares Outstanding

227,700,000

227,500,000

– 200,000

(1)

Reflects guidance presented on February 12, 2019.

Balance Sheet/Liquidity Update

As of March 31, 2019, the Company had $734.7 million of cash and cash equivalents, including restricted cash of $50.7 million, total assets of $3.9 billion, including $2.9 billion of net investments in hotel properties, total consolidated debt of $981.0 million and stockholders’ equity of $2.7 billion.

Capital Improvements

The Company invested $24.5 million into capital improvements of its portfolio during the quarter ended March 31, 2019. In 2019, the Company expects to invest approximately $125 million to $145 million into its portfolio. Based on the expected timing and scope of the 2019 projects, the Company expects $4.5 million to $5.5 million of total revenue displacement related to its major capital improvement projects in 2019, of which approximately $2.3 million of total revenue displacement was incurred in the first quarter of 2019. A selection of the Company’s planned 2019 capital improvement projects include:

  • Hilton San Diego Bayfront: The Company expects to invest approximately $22 million to $24 million, with a portion spent in 2018, to renovate all 1,190 guestrooms and suites. The work will include the replacement of guestroom soft goods and renovation of corridors. The renovation began during the fourth quarter of 2018, and is expected to be completed during the third quarter of 2019. In addition, the Company expects to reposition the food and beverage offerings at the hotel, which will allow for the conversion of certain existing restaurant space into additional meeting space. The food and beverage repositioning work is currently anticipated to occur in 2020. As of the end of the first quarter, the Company incurred approximately $1.3 million of total revenue displacement, and continues to expect total revenue displacement for the guestroom and corridor project of $2.5 million to $3.0 million to be incurred during the first three quarters of 2019.
  • Renaissance Harborplace: The Company expects to invest approximately $21 million to $23 million, with a portion spent in 2018, to renovate all 622 guestrooms and suites. The renovation includes the complete redesign of all guestrooms and bathrooms, including the conversion of 445 bathtubs to showers. The renovation began during the fourth quarter of 2018, and is expected to be completed during the second quarter of 2019. As of the end of the first quarter, the Company incurred approximately $1.0 million of total revenue displacement, and expects total revenue displacement for the project of $1.5 million to $2.0 million to be incurred during the first half of 2019.
  • Hyatt Regency San Francisco: The Company expects to invest approximately $6 million to convert currently under-utilized corridor space into 17 new guestrooms. The conversion includes the addition of 15 rooms that will offer striking views of the San Francisco bay and surrounding area. Construction of the new guestrooms began during the second quarter of 2019, and is expected to be completed in the fourth quarter of 2019. The Company does not anticipate any material revenue displacement related to the construction.
  • Environmental and Sustainability Projects: The Company expects to invest approximately $4 million to $10 million into additional environmental and sustainability projects in 2019, including the installation of solar panels at certain hotels in the portfolio, additional LED lighting retrofits and the modernization of other mechanical equipment intended to reduce its overall energy consumption.

2019 Outlook

The Company’s achievement of the anticipated results is subject to risks and uncertainties, including those disclosed in the Company’s filings with the Securities and Exchange Commission. The Company’s guidance does not take into account the impact of any unanticipated developments in its business, changes in its operating environment, or any unannounced hotel acquisitions, dispositions, re-brandings, management changes, transition costs, noncash impairment expense, changes in deferred tax assets or valuation allowances, severance costs associated with restructuring hotel services, uninsured property losses, early lease termination costs, prior year property tax assessments or credits, debt repurchases/repayments, or unannounced financings during 2019.

For the second quarter of 2019, the Company expects:

Metric

Quarter Ended

June 30, 2019

Guidance (1)

Net Income ($ millions)

$44  to  $48

21 Hotel Comparable Portfolio RevPAR Growth

 0.0% to + 2.0%

Adjusted EBITDAre, excluding noncontrolling interest ($ millions)

$93  to  $96

Adjusted FFO Attributable to Common Stockholders ($ millions)

$74  to  $77

Adjusted FFO Attributable to Common Stockholders per Diluted Share

$0.32  to  $0.34

Diluted Weighted Average Shares Outstanding

227,700,000

For the full year of 2019, the Company expects:

Metric

Full Year 2019
Guidance (2)

Current
Full Year 2019
Guidance (1)

Change in
Full Year 2019
Guidance Midpoint

Net Income ($ millions)

$109  to  $134

$118  to  $135

+ $5

21 Hotel Comparable Portfolio RevPAR Growth

 0.0% to + 3.0%

 0.5% to + 3.0%

+ 0.25%

Adjusted EBITDAre, excluding noncontrolling interest ($ millions)

$300  to  $324

$308  to  $324

+ $4

Adjusted FFO Attributable to Common Stockholders ($ millions)

$229  to  $254

$238  to  $254

+ $5

Adjusted FFO Attributable to Common Stockholders per Diluted Share

$1.01  to  $1.11

$1.04  to  $1.11

+ $0.02

Diluted Weighted Average Shares Outstanding

228,000,000

228,000,000

?

(1)

See page 12 for detailed reconciliations of Net Income to non-GAAP financial measures.

(2)

Reflects guidance presented on February 12, 2019.

Second quarter and full year 2019 guidance are based in part on the following assumptions:

  • Full year total revenue displacement of $4.5 million to $5.5 million, related to planned 2019 capital investment projects.
  • Full year Adjusted EBITDAre, excluding noncontrolling interest displacement of approximately $3.5 million to $4.5 million, related to planned 2019 capital investment projects.
  • Full year 21 Hotel Comparable Portfolio Adjusted EBITDAre Margin is expected to decline 25 basis points to 75 basis points.
  • Full year corporate overhead expense (excluding deferred stock amortization) of approximately $23 million.
  • Full year amortization of deferred stock compensation expense of approximately $9 million.
  • Full year interest expense of approximately $53 million, including approximately $3 million in amortization of deferred financing costs, approximately $3 million of finance lease obligation interest and approximately $2 million of noncash loss on derivatives.
  • Full year total preferred dividends of $13 million, which includes the Series E and Series F cumulative redeemable preferred stock.

Dividend Update

The Company’s board of directors declared a cash dividend of $0.05 per share of common stock, as well as cash dividends of $0.434375 per share payable to its Series E cumulative redeemable preferred stockholders and $0.403125 per share payable to its Series F cumulative redeemable preferred stockholders. The dividends will be paid on July 15, 2019 to stockholders of record as of June 28, 2019.

The Company expects to continue to pay a quarterly cash dividend of $0.05 per share of common stock throughout 2019. Consistent with the Company’s past practice and to the extent that the expected regular quarterly dividends for 2019 do not satisfy the annual distribution requirements, the Company expects to satisfy the annual distribution requirement by paying a “catch-up” dividend in January 2020. The level of any future quarterly dividends will be determined by the Company’s board of directors after considering long-term operating projections, expected capital requirements, and risks affecting the Company’s business.

About Sunstone Hotel Investors, Inc.

Sunstone Hotel Investors, Inc. is a lodging real estate investment trust (“REIT”) that as of May 6, 2019 has interests in 21 hotels comprised of 10,780 rooms. Sunstone’s business is to acquire, own, asset manage and renovate hotels considered to be Long-Term Relevant Real Estate®, the majority of which are operated under nationally recognized brands, such as Marriott, Hilton and Hyatt.

Sunstone Hotel Investors, Inc.

Consolidated Balance Sheets

(In thousands, except share data)

March 31,

December 31,

2019

2018

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$

683,995

$

809,316

Restricted cash

50,746

53,053

Accounts receivable, net

42,306

33,844

Prepaid expenses and other current assets

15,342

12,261

Total current assets

792,389

908,474

Investment in hotel properties, net

2,946,796

3,030,998

Finance lease right-of-use assets, net

55,359

Operating lease right-of-use assets, net

63,235

Deferred financing costs, net

3,338

3,544

Other assets, net

29,540

29,817

Total assets

$

3,890,657

$

3,972,833

Liabilities and Equity

Current liabilities:

Accounts payable and accrued expenses

$

34,668

$

30,425

Accrued payroll and employee benefits

17,102

25,039

Dividends and distributions payable

14,636

126,461

Other current liabilities

39,912

44,962

Current portion of notes payable, net

6,064

5,838

Total current liabilities

112,382

232,725

Notes payable, less current portion, net

969,657

971,225

Finance lease obligations, less current portion

27,064

27,009

Operating lease obligations, less current portion

53,276

Other liabilities

17,991

30,703

Total liabilities

1,180,370

1,261,662

Commitments and contingencies

Equity:

Stockholders’ equity:

Preferred stock, $0.01 par value, 100,000,000 shares authorized:

6.95% Series E Cumulative Redeemable Preferred Stock, 4,600,000 shares issued and outstanding at March 31, 2019 and December 31, 2018, stated at liquidation preference of $25.00 per share

115,000

115,000

6.45% Series F Cumulative Redeemable Preferred Stock, 3,000,000 shares issued and outstanding at March 31, 2019 and December 31, 2018, stated at liquidation preference of $25.00 per share

75,000

75,000

Common stock, $0.01 par value, 500,000,000 shares authorized, 228,587,447 shares issued and outstanding at March 31, 2019 and 228,246,247 shares issued and outstanding at December 31, 2018

2,286

2,282

Additional paid in capital

2,726,466

2,728,684

Retained earnings

1,199,039

1,182,722

Cumulative dividends and distributions

(1,454,838)

(1,440,202)

Total stockholders’ equity

2,662,953

2,663,486

Noncontrolling interest in consolidated joint venture

47,334

47,685

Total equity

2,710,287

2,711,171

Total liabilities and equity

$

3,890,657

$

3,972,833

Sunstone Hotel Investors, Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

Three Months Ended March 31,

2019

2018

(unaudited)

Revenues

Room

$

171,858

$

180,276

Food and beverage

69,113

74,266

Other operating

16,709

16,904

Total revenues

257,680

271,446

Operating expenses

Room

48,246

51,095

Food and beverage

46,822

50,154

Other operating

3,965

3,941

Advertising and promotion

13,564

13,906

Repairs and maintenance

10,282

11,103

Utilities

6,665

7,475

Franchise costs

6,839

7,853

Property tax, ground lease and insurance

20,348

21,781

Other property-level expenses

32,840

33,907

Corporate overhead

7,516

7,102

Depreciation and amortization

36,387

36,688

Total operating expenses

233,474

245,005

Interest and other income

4,924

1,491

Interest expense

(14,326)

(8,876)

Gain on sale of assets

15,659

Income before income taxes

14,804

34,715

Income tax benefit, net

3,112

3,740

Net income

17,916

38,455

Income from consolidated joint venture attributable to noncontrolling interest

(1,599)

(2,439)

Preferred stock dividends

(3,207)

(3,207)

Income attributable to common stockholders

$

13,110

$

32,809

Basic and diluted per share amounts:

Basic and diluted income attributable to common stockholders per common share

$

0.06

$

0.15

Basic and diluted weighted average common shares outstanding

227,219

224,282

Distributions declared per common share

$

0.05

$

0.05

Sunstone Hotel Investors, Inc.

Reconciliation of Net Income to Non-GAAP Financial Measures

(Unaudited and in thousands)

Reconciliation of Net Income to EBITDAre and Adjusted EBITDAre, Excluding Noncontrolling Interest

Three Months Ended March 31,

2019

2018

Net income

$

17,916

$

38,455

Operations held for investment:

Depreciation and amortization

36,387

36,688

Interest expense

14,326

8,876

Income tax benefit, net

(3,112)

(3,740)

Gain on sale of assets

(15,669)

EBITDAre

65,517

64,610

Operations held for investment:

Amortization of deferred stock compensation

2,122

2,000

Amortization of favorable and unfavorable contracts, net

3

Amortization of right-of-use assets (1)

(19)

(218)

Finance lease obligation interest – cash ground rent

(589)

(589)

Hurricane-related uninsured losses

69

Prior year property tax adjustments, net

189

(19)

Noncontrolling interest:

Income from consolidated joint venture attributable to noncontrolling interest

(1,599)

(2,439)

Depreciation and amortization

(639)

(638)

Interest expense

(560)

(435)

Amortization of right-of-use asset (1)

72

72

(1,023)

(2,194)

Adjusted EBITDAre, excluding noncontrolling interest

$

64,494

$

62,416

(1)

Amounts originally reported for the three months ended March 31, 2018 for amortization of lease intangibles and noncash ground rent have been reclassified to amortization of right-of-use assets to conform to the current year’s reporting.

Sunstone Hotel Investors, Inc.

Reconciliation of Net Income to Non-GAAP Financial Measures

(Unaudited and in thousands, except per share amounts)

Reconciliation of Net Income to FFO Attributable to Common Stockholders and

Adjusted FFO Attributable to Common Stockholders

Three Months Ended March 31,

2019

2018

Net income

$

17,916

$

38,455

Preferred stock dividends

(3,207)

(3,207)

Operations held for investment:

Real estate depreciation and amortization (1)

35,770

36,228

Gain on sale of assets

(15,669)

Noncontrolling interest:

Income from consolidated joint venture attributable to noncontrolling interest

(1,599)

(2,439)

Real estate depreciation and amortization

(639)

(638)

FFO attributable to common stockholders

48,241

52,730

Operations held for investment:

Amortization of favorable and unfavorable contracts, net

3

Real estate amortization of right-of-use assets (1)

151

148

Noncash interest on derivatives and finance lease obligations, net

2,119

(3,137)

Hurricane-related uninsured losses

69

Prior year property tax adjustments, net

189

(19)

Noncash income tax benefit, net

(3,284)

(3,966)

Noncontrolling interest:

Real estate amortization of right-of-use asset (1)

72

72

Noncash interest on derivative, net

3

(753)

(6,827)

Adjusted FFO attributable to common stockholders

$

47,488

$

45,903

FFO attributable to common stockholders per diluted share

$

0.21

$

0.23

Adjusted FFO attributable to common stockholders per diluted share

$

0.21

$

0.20

Basic weighted average shares outstanding

227,219

224,282

Shares associated with unvested restricted stock awards

260

343

Diluted weighted average shares outstanding

227,479

224,625

(1)

Amounts originally reported for the three months ended March 31, 2018 for real estate depreciation and amortization related to finance leases, amortization of lease intangibles and noncash ground rent have been reclassified to real estate amortization of right-of-use assets to conform to the current year’s reporting.

Sunstone Hotel Investors, Inc.

Reconciliation of Net Income to Non-GAAP Financial Measures

Guidance for Second Quarter and Full Year 2019

(Unaudited and in thousands, except per share amounts)

Reconciliation of Net Income to Adjusted EBITDAre, Excluding Noncontrolling Interest

Quarter Ended

Year Ended

June 30, 2019

December 31, 2019

Low

High

Low

High

Net income

$

43,900

$

47,500

$

117,700

$

134,900

Depreciation and amortization

36,500

36,300

145,400

144,800

Interest expense

13,200

13,000

52,900

52,500

Income tax provision (benefit), net

300

300

(2,100)

(2,100)

Amortization of deferred stock compensation

3,000

3,000

9,300

9,300

Amortization of right-of-use assets

(300)

(300)

(800)

(800)

Finance lease obligation interest – cash ground rent

(600)

(600)

(2,400)

(2,400)

Prior year property tax adjustments, net

200

200

Noncontrolling interest

(3,000)

(3,200)

(12,200)

(12,400)

Adjusted EBITDAre, excluding noncontrolling interest

$

93,000

$

96,000

$

308,000

$

324,000

Reconciliation of Net Income to Adjusted FFO Attributable to Common Stockholders

Net income

$

43,900

$

47,500

$

117,700

$

134,900

Preferred stock dividends

(3,200)

(3,200)

(12,800)

(12,800)

Real estate depreciation and amortization

35,600

35,400

143,000

142,400

Real estate amortization of right-of-use assets

200

200

600

600

Noncash interest on derivatives and finance lease obligations, net

100

100

2,300

2,300

Prior year property tax adjustments, net

200

200

Noncash income tax benefit, net

(3,300)

(3,300)

Noncontrolling interest

(2,600)

(2,800)

(9,900)

(10,100)

Adjusted FFO attributable to common stockholders

$

74,000

$

77,200

$

237,800

$

254,200

Adjusted FFO attributable to common stockholders per diluted share

$

0.32

$

0.34

$

1.04

$

1.11

Diluted weighted average shares outstanding

227,700

227,700

228,000

228,000

Sunstone Hotel Investors, Inc.

Non-GAAP Financial Measures

21 Hotel Comparable Portfolio Adjusted EBITDAre and Margins

(Unaudited and in thousands)

Three Months Ended March 31,

2019

2018

21 Hotel Comparable Portfolio Adjusted EBITDAre Margin (1)

26.3%

25.9%

21 Hotel Comparable Portfolio Adjusted EBITDAre Margin, excluding prior year property tax adjustments, net (2)

26.3%

25.9%

Total revenues

$

257,680

$

271,446

Non-hotel revenues (3)

(23)

(20)

Hurricane-related business interruption insurance proceeds (4)

(812)

Total Actual Hotel Revenues

257,657

270,614

Sold hotel revenues (5)

(23,610)

Total 21 Hotel Comparable Portfolio Revenues

$

257,657

$

247,004

Net income

$

17,916

$

38,455

Non-hotel revenues (3)

(23)

(20)

Non-hotel operating expenses, net (6)

(767)

(773)

Hurricane-related business interruption insurance proceeds (4)

(812)

Hurricane-related uninsured losses (7)

69

Taxes assessed on commercial rents (8)

360

Corporate overhead

7,516

7,102

Depreciation and amortization

36,387

36,688

Interest and other income

(4,924)

(1,491)

Interest expense

14,326

8,876

Gain on sale of assets

(15,659)

Income tax benefit, net

(3,112)

(3,740)

Actual Hotel Adjusted EBITDAre

67,679

68,695

Sold hotel Adjusted EBITDAre (5)

(4,669)

21 Hotel Comparable Portfolio Adjusted EBITDAre

67,679

64,026

Prior year property tax adjustments, net (9)

189

(14)

21 Hotel Comparable Portfolio Adjusted EBITDAre, excluding prior year property tax adjustments, net

$

67,868

$

64,012

* Footnotes on page 14

(1)

21 Hotel Comparable Portfolio Adjusted EBITDAre Margin is calculated as 21 Hotel Comparable Portfolio Adjusted EBITDAre divided by Total 21 Hotel Comparable Portfolio Revenues.

(2)

21 Hotel Comparable Portfolio Adjusted EBITDAre Margin, excluding prior year property tax adjustments, net is calculated as 21 Hotel Comparable Portfolio Adjusted EBITDAre, excluding prior year property tax adjustments, net divided by Total 21 Hotel Comparable Portfolio Revenues.

(3)

Non-hotel revenues include the amortization of favorable and unfavorable tenant lease contracts recorded in conjunction with the Company’s acquisitions of the Boston Park Plaza, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hyatt Regency San Francisco and the Wailea Beach Resort.

(4)

Hurricane-related business interruption insurance proceeds include $0.8 million received in the first quarter of 2018 at the Oceans Edge Resort & Marina related to Hurricane Irma disruption in 2017 and 2018.

(5)

Sold hotel includes hotel revenues and Adjusted EBITDAre generated during the Company’s ownership periods for the Marriott Philadelphia and the Marriott Quincy, both of which were sold in January 2018, the Hyatt Regency Newport Beach sold in July 2018, two Houston hotels sold in October 2018, and the Marriott Tysons Corner sold in December 2018.

(6)

Non-hotel operating expenses, net include the following: the amortization of real estate-related right-of-use assets; the amortization of a favorable management agreement; and finance lease obligation interest – cash ground rent.

(7)

Hurricane-related uninsured losses for the first quarter of 2018 include $0.1 million at the Oceans Edge Resort & Marina and a total of $5,000 at two Houston hotels, which the Company sold in October 2018.

(8)

Taxes assessed on commercial rents for the first quarter of 2019 include $0.4 million at the Hyatt Regency San Francisco.

(9)

Prior year property tax adjustments, net for the first quarters of 2019 and 2018 exclude the additional net expense of $0.2 million and the additional net benefit of $14,000, respectively.

SOURCE Sunstone Hotel Investors, Inc.