Sunstone Results

Sunstone Hotel Investors Reports Net Income Decline for Both Fourth Quarter And Full Year 2016

Q4 2016 Net income decreased 85.6% to $34.3 million - FY 2016 Net income decreased 60.4%

Sunstone

Sunstone Hotel Investors, Inc. (NYSE:  SHO) yesterday announced results for the fourth quarter and year ended December 31, 2016.

Fourth Quarter 2016 Operational Results (as compared to Fourth Quarter 2015):

  • Net income decreased 85.6% to $34.3 million. 
  • Income attributable to common stockholders per diluted share decreased 87.5% to $0.14. 
  • Comparable Portfolio Hotel RevPAR increased 0.4% to $153.33. 
  • Total Portfolio Hotel RevPAR increased 1.6% to $155.34. 
  • Comparable Hotel Adjusted EBITDA Margin, excluding prior year property tax adjustments, net decreased 80 basis points to 28.8%. Excluding the impact related to the end of the ground rent abatement at the Hilton San Diego Bayfront, Comparable Hotel Adjusted EBITDA Margin, excluding prior year property tax adjustments, net would have decreased by 30 basis points. 
  • Adjusted EBITDA decreased 2.4% to $79.1 million. 
  • Adjusted FFO attributable to common stockholders per diluted share decreased 3.3% to $0.29.

Full Year 2016 Operational Results (as compared to Full Year 2015):

  • Net income decreased 60.4% to $140.7 million. 
  • Income attributable to common stockholders per diluted share decreased 66.0% to $0.55. 
  • Comparable Portfolio Hotel RevPAR increased 1.3% to $163.75. 
  • Total Portfolio Hotel RevPAR increased 0.7% to $164.22. 
  • Comparable Hotel Adjusted EBITDA Margin, excluding prior year property tax adjustments, net decreased 30 basis points to 30.5%. Excluding the impact related to the end of the ground rent abatement at the Hilton San Diego Bayfront, Comparable Hotel Adjusted EBITDA Margin, excluding prior year property tax adjustments, net would have increased by 20 basis points. 
  • Adjusted EBITDA decreased 6.1% to $330.0 million. 
  • Adjusted FFO attributable to common stockholders per diluted share decreased 7.6% to $1.21.

John Arabia, President and Chief Executive Officer, stated, "During the quarter, transient demand and rates increased relative to the prior year, group attendance was healthy relative to its historic norms, and group spend on banquets and audio visual demonstrated strength. These better-than-anticipated top line results, coupled with energy, overhead and property tax savings, resulted in portfolio and company profits well ahead of our expectations." Mr. Arabia continued, "Following the recent sale of the Fairmont Newport Beach, as well as other recent capital transactions, we have significant liquidity and are pursuing the acquisition of quality hotels that satisfy our long-term return requirements. At the same time, we expect to continue to capital recycle various assets within our portfolio, including legacy assets that no longer meet our investment criteria or hotels  in which we believe we can harvest at a material premium to our internal valuation."

 

UNAUDITED SELECTED STATISTICAL AND FINANCIAL DATA

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

Three Months Ended December 31,

Year Ended December 31,

2016

2015

Change

 

2016

 

2015

Change

Net Income

$

34.3

$

237.6

(85.6)

%

$

140.7

$

355.5

(60.4)

%

Income Attributable to Common Stockholders per Diluted Share

$

0.14

$

1.12

(87.5)

%

$

0.55

$

1.62

(66.0)

%

Total Portfolio Hotel RevPAR

$

155.34

$

152.85

1.6

%

$

164.22

$

163.03

0.7

%

Total Portfolio Hotel RevPAR, excluding the Wailea Beach Resort

$

151.77

$

150.88

0.6

%

$

162.50

$

160.22

1.4

%

Comparable Portfolio Hotel RevPAR

$

153.33

$

152.69

0.4

%

$

163.75

$

161.59

1.3

%

Comparable Portfolio Hotel Occupancy

78.1

%

78.3

%

(20)

bps

82.4

%

82.3

%

10

bps

Comparable Portfolio Hotel ADR

$

196.32

$

195.01

0.7

%

$

198.73

$

196.34

1.2

%

Comparable Portfolio Hotel Adjusted EBITDA Margin

28.8

%

29.6

%

(80)

bps

30.5

%

30.8

%

(30)

bps

Adjusted EBITDA

$

79.1

$

81.1

(2.4)

%

$

330.0

$

351.3

(6.1)

%

Adjusted FFO Attributable to Common Stockholders

$

62.2

$

62.3

(0.2)

%

$

260.8

$

271.7

(4.0)

%

Adjusted FFO Attributable to Common Stockholders per Diluted Share

$

0.29

$

0.30

(3.3)

%

$

1.21

$

1.31

(7.6)

%

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. Comparable Hotel Adjusted EBITDA Margin excludes prior year property tax adjustments, net. 

The Company's actual results for the quarter and year ended December 31, 2016 compare to its guidance originally provided as follows: 

 

Metric

Quarter Ended 

December 31, 2016 

Guidance (1)

Quarter Ended 

December 31, 2016 

Actual Results 

(unaudited)

Performance Relative 

to Prior 

Guidance Midpoint

Net Income ($ millions)

$16  to  $20

$34

+ $16

Total Portfolio Hotel RevPAR Growth

- 2.0%   to   0.0%

1.6%

+ 2.6%

Total Portfolio Hotel RevPAR Growth, excluding Wailea Beach Resort (2)

- 2.5%  to  - 0.5%

0.6%

+ 2.1%

Adjusted EBITDA ($ millions)

$69  to  $73

$79

+ $8

Adjusted FFO Attributable to Common Stockholders ($ millions)

$52  to  $56

$62

+ $8

Adjusted FFO Attributable to Common Stockholders per Diluted Share

$0.24  to  $0.26

$0.29

+ $0.04

Diluted Weighted Average Shares Outstanding

215,800,000

216,600,000

+ 800,000

Metric

Full Year 2016

Guidance (1)

Full Year 2016 Actual 

Results (unaudited 

except Net Income)

Performance Relative 

to Adjusted Prior 

Guidance Midpoint

Net Income ($ millions)

$123  to  $127

$141

+ $16

Total Portfolio Hotel RevPAR Growth

  - 0.5%  to  + 0.5%

0.7%

+ 0.7%

Total Portfolio Hotel RevPAR Growth, excluding Wailea Beach Resort (2)

+ 0.5%  to  + 1.5%

1.4%

+ 0.4%

Adjusted EBITDA ($ millions)

$320  to  $324

$330

+ $8

Adjusted FFO Attributable to Common Stockholders ($ millions)

$250  to  $254

$261

+ $9

Adjusted FFO Attributable to Common Stockholders per Diluted Share

$1.16  to  $1.18

$1.21

+ $0.04

Diluted Weighted Average Shares Outstanding

215,000,000

215,200,000

+ 200,000

 

(1)  Represents guidance presented on November 1, 2016.

(2) Excludes the Wailea Beach Resort due to the hotel's repositioning during 2016.

Recent Developments

On January 10, 2017, the Company received proceeds of $240.0 million from the private placement of senior unsecured notes. The private placement consisted of $120.0 million of notes bearing interest at a fixed rate of 4.69%, maturing in January 2026, and $120.0 million of notes bearing interest at a fixed rate of 4.79%, maturing in January 2028.

On January 11, 2017, the Company used proceeds received from its private placement of senior unsecured notes to repay the loan secured by the Marriott Boston Long Wharf, which had a balance of $176.0 million and a fixed rate of 5.58%. The Marriott Boston Long Wharf loan was scheduled to mature in April 2017, and was available to be repaid without penalty in January 2017. Following the repayment of the loan secured by the Marriott Boston Long Wharf in January 2017, the Company currently has 22 unencumbered hotels.

On February 10, 2017, the Company sold the 444-room Fairmont Newport Beach, California for a gross sales price of $125.0 million. The hotel was classified as held for sale as of December 31, 2016, but did not qualify as a discontinued operation as the sale did not represent a strategic shift that had a major impact on the Company's business plan or its primary markets.

On February 17, 2017, the Company's Board of Directors authorized an increase to the current share repurchase program to acquire up to $300.0 million of the Company's common and preferred stock. Future purchases will depend on various factors, including the Company's capital needs as well as the price of the Company's common and preferred stock.

Balance Sheet/Liquidity Update

As of December 31, 2016, the Company had $437.5 million of cash and cash equivalents, including restricted cash of $67.9 million. Adjusting for the significant cash transactions that occurred in January 2017, including the $119.8 million payment of the Company's common and preferred dividends, the funding of $240.0 million in unsecured senior notes and the $176.0 million repayment of the mortgage secured by the Marriott Boston Long Wharf, total pro forma cash including restricted cash as of December 31, 2016 would be $381.7 million. 

As of December 31, 2016, the Company had total assets of $3.7 billion, including $3.2 billion of net investments in hotel properties, total consolidated debt of $0.9 billion and stockholders' equity of $2.5 billion. 

In December 2016, the Company issued 3,564,047 shares of its common stock for gross proceeds of $55.1 million. The shares were issued in connection with an "At the Market" program pursuant to Equity Distribution Agreements ("ATM Agreements"), which the Company entered into during 2014 with Wells Fargo Securities, LLC and Merrill Lynch Pierce, Fenner & Smith Incorporated. Under the ATM Agreements, the Company is authorized to issue common stock having an aggregate offering amount of up to $150.0 million. As of December 31, 2016, the Company had $73.3 million available for sale under the ATM Agreements.

The Company intends to enter into new ATM Agreements during the first quarter of 2017, increasing its authorization to issue common stock to an aggregate offering amount of up to $300.0 million.  

Bryan Giglia, Chief Financial Officer, stated "Our Board recently increased the Company's share repurchase authorization and ATM authorization in order to provide the Company with the incremental tools to manage the business and to increase our optionality in a volatile environment.  Given our significant cash position and investment capacity, we are well positioned to take advantage of various opportunities."  

Capital Improvements

The Company invested $42.3 million and $182.2 million into capital improvements of its portfolio during the three months and year ended December 31, 2016, respectively. During the fourth quarter 2016, the Company incurred total revenue displacement of approximately $1.5 million at the Wailea Beach Resort. In 2017, the Company expects to invest approximately $125 million to $140 million into its portfolio, which includes the final payments for the Wailea Beach Resort repositioning completed at the end of 2016.

2017 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 or changes in its operating environment, nor does it take into account any unannounced hotel acquisitions, dispositions, re-brandings, management changes, transition costs, severance costs associated with restructuring hotel services, early lease termination costs, prior year property tax assessments or credits, debt repurchases/repayments, perpetual preferred redemptions or unannounced financings during 2017. 

For the first quarter of 2017, the Company expects: 

 

Metric

Quarter Ended  

March 31, 2017 

Guidance (1)

Net Income ($ millions)

$54  to  $57

Total Portfolio Hotel RevPAR Growth

+ 2.5% to + 4.5%

Adjusted EBITDA ($ millions)

$61  to  $64

Adjusted FFO Attributable to Common Stockholders ($ millions)

$43  to  $46

Adjusted FFO Attributable to Common Stockholders per Diluted Share

$0.19  to  $0.21

Diluted Weighted Average Shares Outstanding

219,600,000

For the full year of 2017, the Company expects: 

 

Metric

Full Year 2017 

Guidance (1)

Net Income ($ millions)

$150 to  $174

Total Portfolio Hotel RevPAR Growth

+ 0.5% to + 3.5%

Adjusted EBITDA ($ millions)

$306  to  $330

Adjusted FFO Attributable to Common Stockholders ($ millions)

$239  to  $263

Adjusted FFO Attributable to Common Stockholders per Diluted Share

$1.09  to  $1.19

Diluted Weighted Average Shares Outstanding

219,800,000

 

(1)

See pages 12 and 13 for detailed reconciliations of Net Income to non-GAAP financial measures.

First quarter and full year 2017 guidance are based in part on the following assumptions:

  • Full year Total Portfolio Hotel RevPAR guidance is benefiting 150 to 200 basis points from the completed repositioning at the Wailea Beach Resort. 
  • Full year Hotel Adjusted EBITDA Margin change of approximately - 25 to + 50 basis points. 
  • Full year corporate overhead expense (excluding deferred stock amortization and one-time expenses related to any acquisition closing costs) of approximately $19.5 million to $20.5 million. 
  • Full year amortization of deferred stock compensation expense of approximately $8.3 million. 
  • Full year interest expense of approximately $48.0 million to $48.3 million, including approximately $2.3 million in amortization of deferred financing fees and excluding approximately $1.4 million of capital lease obligation interest. 
  • Full year total preferred dividends of $12.8 million, which includes the Series E and Series F cumulative redeemable preferred stock.

Dividend Update 

On February 17, 2017, the 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 April 17, 2017 to stockholders of record as of March 31, 2017. 

The Company expects to continue to pay a regular cash dividend of $0.05 per share of common stock throughout 2017. To the extent that the expected regular quarterly dividends for 2017 do not satisfy the Company's annual distribution requirements, the Company expects to satisfy the annual distribution requirement by paying a "catch-up" dividend in January 2018. 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 February 21, 2017 has interests in 27 hotels comprised of 13,225 rooms. Sunstone's hotels are primarily in the urban and resort upper upscale segment and are operated under nationally recognized brands, such as Marriott, Hilton and Hyatt. For further information, please visit Sunstone's website at www.sunstonehotels.com. 

Sunstone's mission is to create meaningful value for our stockholders by producing superior long-term returns through the ownership of long-term relevant lodging real estate. Our values include transparency, trust, ethical conduct, honest communication and discipline. As demand for lodging generally fluctuates with the overall economy, we seek to own hotels that will maintain a high appeal with travelers over long periods of time and will generate economic earnings materially in excess of recurring capital requirements.

Non-GAAP Financial Measures

We present the following non-GAAP financial measures that we believe are useful to investors as key supplemental measures of our operating performance: earnings before interest expense, taxes, depreciation and amortization, or EBITDA; Adjusted EBITDA (as defined below); funds from operations attributable to common stockholders, or FFO attributable to common stockholders; Adjusted FFO attributable to common stockholders (as defined below); hotel Adjusted EBITDA; and hotel Adjusted EBITDA margin. These measures should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP. EBITDA, Adjusted EBITDA, FFO attributable to common stockholders, Adjusted FFO attributable to common stockholders, hotel Adjusted EBITDA and hotel Adjusted EBITDA margin as calculated by us, may not be comparable to other companies that do not define such terms exactly the same as the Company does. These non-GAAP measures are used in addition to and in conjunction with results presented in accordance with GAAP. They should not be considered as alternatives to operating profit, cash flow from operations, or any other operating performance measure prescribed by GAAP. These non-GAAP financial measures reflect additional ways of viewing our operations that we believe, when viewed with our GAAP results and the reconciliations to the corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business than could be obtained absent this disclosure. We strongly encourage investors to review our financial information in its entirety and not to rely on a single financial measure.

EBITDA and Adjusted EBITDA are commonly used measures of performance in many industries. We believe EBITDA and Adjusted EBITDA are useful to investors in evaluating our operating performance because these measures help investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization) from our operating results. We also believe the use of EBITDA and Adjusted EBITDA facilitate comparisons between us and other lodging REITs, hotel owners who are not REITs and other capital-intensive companies. In addition, certain covenants included in our indebtedness use EBITDA as a measure of financial compliance. We also use EBITDA and Adjusted EBITDA as measures in determining the value of hotel acquisitions and dispositions. 

Historically, we have adjusted EBITDA when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful information to investors regarding our operating performance and that the presentation of Adjusted EBITDA, when combined with the primary GAAP presentation of net income, is beneficial to an investor's complete understanding of our operating performance. 

We believe that the presentation of FFO attributable to common stockholders provides useful information to investors regarding our operating performance because it is a measure of our operations without regard to specified noncash items such as real estate depreciation and amortization, amortization of lease intangibles, any real estate impairment loss and any gain or loss on sale of real estate assets, all of which are based on historical cost accounting and may be of lesser significance in evaluating our current performance. Our presentation of FFO attributable to common stockholders conforms to the National Association of Real Estate Investment Trusts' ("NAREIT") definition of "FFO applicable to common shares." This may not be comparable to FFO reported by other REITs that do not define the terms in accordance with the current NAREIT definition, or that interpret the current NAREIT definition differently than we do. 

We also present Adjusted FFO attributable to common stockholders when evaluating our operating performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance, and may facilitate comparisons of operating performance between periods and our peer companies.

We adjust EBITDA and FFO attributable to common stockholders for the following items, which may occur in any period, and refer to these measures as either Adjusted EBITDA or Adjusted FFO attributable to common stockholders:

  • Amortization of favorable and unfavorable contracts: we exclude the noncash amortization of the favorable management contract asset recorded in conjunction with our acquisition of the Hilton Garden Inn Chicago Downtown/Magnificent Mile, along with the favorable and unfavorable tenant lease contracts, as applicable, recorded in conjunction with our acquisitions of the Boston Park Plaza, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hilton New Orleans St. Charles, the Hyatt Regency San Francisco and the Wailea Beach Resort. We exclude the noncash amortization of favorable and unfavorable contracts because it is based on historical cost accounting and is of lesser significance in evaluating our actual performance for the current period. 
  • Ground rent adjustments: we exclude the noncash expense incurred from straight-lining our ground lease obligations as this expense does not reflect the actual rent amounts due to the respective lessors in the current period and is of lesser significance in evaluating our actual performance for the current period. 
  • Gains or losses from debt transactions: we exclude the effect of finance charges and premiums associated with the extinguishment of debt, including the acceleration of deferred financing costs from the original issuance of the debt being redeemed or retired because, like interest expense, their removal helps investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure. 
  • Acquisition costs: under GAAP, costs associated with completed acquisitions that meet the Financial Accounting Standard Board's ("FASB") definition of a business in accordance with the Business Combinations Topic of the Accounting Standards Codification are expensed in the year incurred. We exclude the effect of these costs because we believe they are not reflective of the ongoing performance of the Company or our hotels. 
  • Noncontrolling interests: we deduct the noncontrolling partner's pro rata share of any EBITDA or FFO adjustments related to our consolidated Hilton San Diego Bayfront partnership, as well as any preferred dividends earned by preferred investors in an entity that owned the Doubletree Guest Suites Times Square, including related administrative fees, prior to the hotel's sale in December 2015. 
  • Cumulative effect of a change in accounting principle: from time to time, the FASB promulgates new accounting standards that require the consolidated statement of operations to reflect the cumulative effect of a change in accounting principle. We exclude these one-time adjustments, which include the accounting impact from prior periods, because they do not reflect our actual performance for that period. 
  • Impairment losses: we exclude the effect of impairment losses because we believe that including them in Adjusted EBITDA and Adjusted FFO attributable to common stockholders is not consistent with reflecting the ongoing performance of our remaining assets. 
  • Other adjustments: we exclude other adjustments that we believe are outside the ordinary course of business because we do not believe these costs reflect our actual performance for the period and/or the ongoing operations of our hotels. Such items may include: executive severance costs; lawsuit settlement costs; prior year property tax assessments or credits; property-level restructuring, severance and management transition costs; lease terminations; and any gains or losses we have recognized on sales or redemptions of assets other than real estate investments.

In addition, to derive Adjusted EBITDA we exclude the noncash expense incurred with the amortization of deferred stock compensation as this expense is based on historical stock prices at the date of grant to our corporate employees and does not reflect the underlying performance of our hotels. We also include an adjustment for the cash ground lease expense recorded on the Hyatt Centric Chicago Magnificent Mile's building lease. Upon acquisition of this hotel, we determined that the building lease was a capital lease, and, therefore, we include a portion of the capital lease payment each month in interest expense. We include an adjustment for ground lease expense on capital leases in order to more accurately reflect the actual rent due to the hotel's lessor in the current period, as well as the operating performance of the Hyatt Centric Chicago Magnificent Mile. We also exclude the effect of gains and losses on the disposition of depreciable assets because we believe that including them in Adjusted EBITDA is not consistent with reflecting the ongoing performance of our assets. In addition, material gains or losses from the depreciated value of the disposed assets could be less important to investors given that the depreciated asset value often does not reflect its market value.

To derive Adjusted FFO attributable to common stockholders, we also exclude the noncash gains or losses on our derivatives, as well as any federal and state taxes associated with the application of net operating loss carryforwards, uncertain tax positions or with the sale of assets other than real estate investments. We believe that these items are not reflective of our ongoing finance costs.

In presenting hotel Adjusted EBITDA and hotel Adjusted EBITDA margins, the revenue and expense items associated with BuyEfficient prior to its sale in September 2015 and other miscellaneous non-hotel items have been excluded. We believe the calculation of hotel Adjusted EBITDA results in a more accurate presentation of the hotel Adjusted EBITDA margins for our hotels, and that these non-GAAP financial measures are useful to investors in evaluating our property-level operating performance. 

Our 26 comparable hotel portfolio is comprised of our total portfolio with the exception of the Wailea Beach Resort due to its extensive repositioning disruption during the fourth quarter of 2015 as well as all of 2016, and the Fairmont Newport Beach which was classified as held for sale at December 31, 2016, and subsequently sold in February 2017. We believe that providing comparable hotel data is useful to us and to investors in evaluating our operating performance because this measure helps us and investors evaluate and compare the results of our operations from period to period by removing the fluctuations caused by any acquisitions or dispositions, as well as by those hotels that we classify as held for sale, those hotels that are undergoing a material renovation or repositioning and those hotels whose room counts have materially changed during either the current or prior year. We strongly encourage investors to review our financial information in its entirety and not to rely on a single financial measure.

Reconciliations of net income to EBITDA, Adjusted EBITDA, FFO attributable to common stockholders and Adjusted FFO attributable to common stockholders are set forth on pages 10 and 11. Reconciliations and the components of hotel Adjusted EBITDA and hotel Adjusted EBITDA margin are set forth on page 14. 

For Additional Information:

Bryan Giglia

Sunstone Hotel Investors, Inc.

(949) 382-3036

 

Sunstone Hotel Investors, Inc.

Consolidated Balance Sheets

(In thousands, except share data)

December 31,

December 31,

2016

2015

Assets

Current assets:

Cash and cash equivalents

$

369,537

$

499,067

Restricted cash

67,923

76,180

Accounts receivable, net

39,337

32,024

Inventories

1,225

1,395

Prepaid expenses

10,489

10,879

Assets held for sale, net

79,113

Total current assets

567,624

619,545

Investment in hotel properties, net

3,158,219

3,230,852

Deferred financing fees, net

4,002

4,310

Other assets, net

9,389

10,386

Total assets

$

3,739,234

$

3,865,093

Liabilities and Equity

Current liabilities:

Accounts payable and accrued expenses

$

36,110

$

30,193

Accrued payroll and employee benefits

24,896

28,023

Dividends and distributions payable

119,847

265,124

Other current liabilities

39,869

42,174

Current portion of notes payable, net

184,929

85,776

Liabilities of assets held for sale

3,153

Total current liabilities

408,804

451,290

Notes payable, less current portion, net

746,374

1,010,819

Capital lease obligations, less current portion

15,574

15,575

Other liabilities

36,650

36,289

Total liabilities

1,207,402

1,513,973

Commitments and contingencies

Equity:

Stockholders' equity:

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

   8.0% Series D Cumulative Redeemable Preferred Stock, zero shares issued and outstanding at December 31, 2016, and 4,600,000 shares issued and outstanding at December 31, 2015, stated at liquidation preference of $25.00 per share

115,000

   6.95% Series E Cumulative Redeemable Preferred Stock, 4,600,000 shares issued and outstanding at December 31, 2016 and zero shares issued and outstanding at December 31, 2015, stated at liquidation preference of $25.00 per share

115,000

   6.45% Series F Cumulative Redeemable Preferred Stock, 3,000,000 shares issued and outstanding at December 31, 2016 and zero shares issued and outstanding at December 31, 2015, stated at liquidation preference of $25.00 per share

75,000

Common stock, $0.01 par value, 500,000,000 shares authorized, 220,073,140 shares issued and outstanding at December 31, 2016 and 207,604,391 shares issued and outstanding at December 31, 2015

2,201

2,076

Additional paid in capital

2,596,620

2,458,889

Retained earnings

786,901

652,704

Cumulative dividends and distributions

(1,092,952)

(927,868)

Total stockholders' equity

2,482,770

2,300,801

Noncontrolling interest in consolidated joint venture

49,062

50,319

Total equity

2,531,832

2,351,120

Total liabilities and equity

$

3,739,234

$

3,865,093

 

Sunstone Hotel Investors, Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

Three Months Ended December 31,

Year Ended December 31,

2016

2015

2016

2015

(unaudited)

Revenues

Room

$

195,195

$

207,361

$

824,340

$

874,117

Food and beverage

72,984

74,072

294,415

293,892

Other operating

21,405

19,500

70,585

81,171

Total revenues

289,584

300,933

1,189,340

1,249,180

Operating expenses

Room

51,762

54,293

211,947

224,035

Food and beverage

50,060

51,520

204,102

204,932

Other operating

4,168

5,262

16,684

21,335

Advertising and promotion

14,801

15,640

60,086

61,892

Repairs and maintenance

11,168

11,759

44,307

46,557

Utilities

7,310

7,807

30,424

34,543

Franchise costs

9,245

10,087

36,647

40,096

Property tax, ground lease and insurance

21,038

22,554

82,979

94,967

Other property-level expenses

35,044

32,948

142,742

142,332

Corporate overhead

6,073

6,117

25,991

33,339

Depreciation and amortization

41,847

41,805

163,016

164,716

Total operating expenses

252,516

259,792

1,018,925

1,068,744

Operating income

37,068

41,141

170,415

180,436

Interest and other income

673

535

1,800

3,885

Interest expense

(3,265)

(15,496)

(50,283)

(66,516)

Loss on extinguishment of debt

(25)

(2,962)

(284)

(2,964)

Gain on sale of assets

190

214,535

18,413

226,217

Income before income taxes and discontinued operations

34,641

237,753

140,061

341,058

Income tax benefit (provision)

(343)

(178)

616

(1,434)

Income from continuing operations

34,298

237,575

140,677

339,624

Income from discontinued operations, net of tax

15,895

Net income

34,298

237,575

140,677

355,519

Income from consolidated joint ventures attributable to noncontrolling interests

(1,122)

(1,521)

(6,480)

(8,164)

Preferred stock dividends and redemption charge

(3,208)

(2,300)

(15,964)

(9,200)

Income attributable to common stockholders

$

29,968

$

233,754

$

118,233

$

338,155

Basic and diluted per share amounts:

Income from continuing operations attributable to common stockholders

$

0.14

$

1.12

$

0.55

$

1.54

Income from discontinued operations, net of tax

0.08

Basic and diluted income attributable to common stockholders per common share

$

0.14

$

1.12

$

0.55

$

1.62

Basic and diluted weighted average common shares outstanding

216,163

207,604

214,966

207,350

Distributions declared per common share

$

0.53

$

1.26

$

0.68

$

1.41

 

Sunstone Hotel Investors, Inc.

Reconciliation of Net Income to Non-GAAP Financial Measures

(Unaudited and in thousands)

Reconciliation of Net Income to EBITDA and Adjusted EBITDA

Three Months Ended December 31,

Year Ended December 31,

2016

2015

2016

2015

Net income

$

34,298

$

237,575

$

140,677

$

355,519

Operations held for investment:

Depreciation and amortization

41,847

41,805

163,016

164,716

Amortization of lease intangibles

63

707

252

3,791

Interest expense

3,265

15,496

50,283

66,516

Income tax (benefit) provision

343

178

(616)

1,434

Noncontrolling interests:

Income from consolidated joint ventures attributable to noncontrolling interests

(1,122)

(1,521)

(6,480)

(8,164)

Depreciation and amortization

(873)

(866)

(3,480)

(3,432)

Interest expense

(433)

(388)

(1,684)

(1,537)

Discontinued operations:

Income tax provision

105

EBITDA

77,388

292,986

341,968

578,948

Operations held for investment:

Amortization of deferred stock compensation

1,541

1,031

7,157

6,536

Amortization of favorable and unfavorable contracts, net

52

(1,487)

394

(1,623)

Noncash straight-line lease expense

465

496

1,878

1,987

Capital lease obligation interest - cash ground rent

(351)

(351)

(1,404)

(1,404)

Gain on sale of assets, net

(196)

(214,526)

(18,422)

(226,234)

Severance costs associated with sale of BuyEfficient

1,636

Loss on extinguishment of debt

25

2,962

284

2,964

Gain on redemption of note receivable

(939)

Prior year property tax adjustments, net

308

(3,971)

(865)

Property-level restructuring, severance and management transition costs

62

1,578

1,219

Lease termination costs

1,000

300

Costs associated with CEO severance

5,257

Noncontrolling interests:

Noncash straight-line lease expense

(112)

(112)

(450)

(450)

Discontinued operations:

Gain on sale of assets

(16,000)

1,732

(211,925)

(11,956)

(227,616)

Adjusted EBITDA

$

79,120

$

81,061

$

330,012

$

351,332

 

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 December 31,

Year Ended December 31,

2016

2015

2016

2015

Net income

$

34,298

$

237,575

$

140,677

$

355,519

Preferred stock dividends and redemption charge

(3,208)

(2,300)

(15,964)

(9,200)

Operations held for investment:

Real estate depreciation and amortization

41,716

41,653

162,431

163,361

Amortization of lease intangibles

63

707

252

3,791

Gain on sale of assets, net

(196)

(214,526)

(18,422)

(226,234)

Noncontrolling interests:

Income from consolidated joint ventures attributable to noncontrolling interests

(1,122)

(1,521)

(6,480)

(8,164)

Real estate depreciation and amortization

(873)

(866)

(3,480)

(3,432)

Discontinued operations:

Gain on sale of assets

(16,000)

FFO attributable to common stockholders

70,678

60,722

259,014

259,641

Operations held for investment:

Write-off of deferred financing fees

455

Amortization of favorable and unfavorable contracts, net

52

(1,487)

394

(1,623)

Noncash straight-line lease expense

465

496

1,878

1,987

Noncash interest related to gain on derivatives, net

(9,236)

(321)

(1,426)

(309)

Loss on extinguishment of debt

25

2,962

284

2,964

Gain on redemption of note receivable

(939)

Prior year property tax adjustments, net

308

(3,971)

(865)

Property-level restructuring, severance and management transition costs

62

1,578

1,219

Lease termination costs

1,000

300

Income tax benefit related to prior years

(1,596)

Preferred stock redemption charge

4,052

Costs associated with CEO severance

5,257

Amortization of deferred stock compensation associated with CEO severance

1,623

Severance costs associated with sale of BuyEfficient

1,636

Income tax provision related to gain on sale of BuyEfficient

720

Noncontrolling interests:

Noncash straight-line lease expense

(112)

(112)

(450)

(450)

Noncash interest related to loss on derivative, net

(3)

Discontinued operations:

Income tax provision

105

(8,498)

1,600

1,743

12,077

Adjusted FFO attributable to common stockholders

$

62,180

$

62,322

$

260,757

$

271,718

FFO attributable to common stockholders per diluted share

$

0.33

$

0.29

$

1.20

$

1.25

Adjusted FFO attributable to common stockholders per diluted share

$

0.29

$

0.30

$

1.21

$

1.31

Basic weighted average shares outstanding

216,163

207,604

214,966

207,350

Shares associated with unvested restricted stock awards

445

263

242

262

Diluted weighted average shares outstanding

216,608

207,867

215,208

207,612

 

Sunstone Hotel Investors, Inc.

Reconciliation of Net Income to Non-GAAP Financial Measures

Guidance for First Quarter 2017

(Unaudited and in thousands, except per share amounts)

Reconciliation of Net Income to Adjusted EBITDA

Quarter Ended

March 31, 2017

Low

High

Net income

$

53,900

$

57,200

Depreciation and amortization

39,000

39,100

Amortization of lease intangibles

100

100

Interest expense

12,900

12,700

Income tax provision

400

400

Noncontrolling interest

(2,900)

(3,100)

Amortization of deferred stock compensation

2,200

2,200

Amortization of favorable and unfavorable contracts, net

100

100

Noncash straight-line lease expense

(300)

(300)

Capital lease obligation interest - cash ground rent

(400)

(400)

Gain on sale of assets

(44,000)

(44,000)

Adjusted EBITDA

$

61,000

$

64,000

Reconciliation of Net Income to Adjusted FFO Attributable to Common Stockholders

Net income

$

53,900

$

57,200

Preferred stock dividends

(3,200)

(3,200)

Real estate depreciation and amortization

38,700

38,800

Amortization of lease intangibles

100

100

Noncontrolling interest

(2,500)

(2,700)

Amortization of favorable and unfavorable contracts, net

100

100

Noncash straight-line lease expense

(300)

(300)

Gain on sale of assets

(44,000)

(44,000)

Adjusted FFO attributable to common stockholders

$

42,800

$

46,000

Adjusted FFO attributable to common stockholders per diluted share

$

0.19

$

0.21

Diluted weighted average shares outstanding

219,600

219,600

 

Sunstone Hotel Investors, Inc.

Reconciliation of Net Income to Non-GAAP Financial Measures

Guidance for Full Year 2017

(Unaudited and in thousands, except per share amounts)

Reconciliation of Net Income to Adjusted EBITDA

Year Ended

December 31, 2017

Low

High

Net income

$

150,100

$

174,400

Depreciation and amortization

156,000

156,400

Amortization of lease intangibles

300

300

Interest expense

48,300

48,000

Income tax provision

800

800

Noncontrolling interest

(11,500)

(11,900)

Amortization of deferred stock compensation

8,300

8,300

Amortization of favorable and unfavorable contracts, net

200

200

Noncash straight-line lease expense

(1,100)

(1,100)

Capital lease obligation interest - cash ground rent

(1,400)

(1,400)

Gain on sale of assets

(44,000)

(44,000)

Adjusted EBITDA

$

306,000

$

330,000

Reconciliation of Net Income to Adjusted FFO Attributable to Common Stockholders

Net income

$

150,100

$

174,400

Preferred stock dividends

(12,800)

(12,800)

Real estate depreciation and amortization

155,600

155,800

Amortization of lease intangibles

300

300

Noncontrolling interest

(9,800)

(10,200)

Amortization of favorable and unfavorable contracts, net

200

200

Noncash straight-line lease expense

(1,100)

(1,100)

Gain on sale of assets

(44,000)

(44,000)

Adjusted FFO attributable to common stockholders

$

238,500

$

262,600

Adjusted FFO attributable to common stockholders per diluted share

$

1.09

$

1.19

Diluted weighted average shares outstanding

219,800

219,800

 

Sunstone Hotel Investors, Inc.

Non-GAAP Financial Measures

Comparable Hotel Adjusted EBITDA and Margins

(Unaudited and in thousands)

Three Months Ended December 31,

Year Ended December 31,

2016

2015

2016

2015

Comparable Hotel Adjusted EBITDA Margin (1)

28.7%

29.6%

30.8%

30.9%

Comparable Hotel Adjusted EBITDA Margin, excluding prior year property tax adjustments, net  (2)

28.8%

29.6%

30.5%

30.8%

Total revenues

$

289,584

$

300,933

$

1,189,340

$

1,249,180

Non-hotel revenues (3)

(5,066)

(1,605)

(5,076)

(7,822)

Total Actual Hotel Revenues

284,518

299,328

1,184,264

1,241,358

Non-comparable hotel revenues (4)

(23,616)

(21,137)

(92,031)

(95,887)

Sold hotel revenues (5)

(19,152)

(4,846)

(78,384)

Total Comparable Hotel Revenues

$

260,902

$

259,039

$

1,087,387

$

1,067,087

Net income

$

34,298

$

237,575

$

140,677

$

355,519

Non-hotel revenues (3)

(66)

(1,605)

(76)

(7,822)

Performance guarantee (3)

(5,000)

(5,000)

Non-hotel operating expenses (6)

304

982

1,244

10,211

Property-level restructuring, severance and management transition costs (7)

62

1,578

1,219

Lease termination costs (7)

420

1,420

300

Corporate overhead

6,073

6,117

25,991

33,339

Depreciation and amortization

41,847

41,805

163,016

164,716

Interest and other income

(673)

(535)

(1,800)

(3,885)

Interest expense

3,265

15,496

50,283

66,516

Loss on extinguishment of debt

25

2,962

284

2,964

Gain on sale of assets

(190)

(214,535)

(18,413)

(226,217)

Income tax (benefit) provision

343

178

(616)

1,434

Income from discontinued operations, net of tax

(15,895)

Actual Hotel Adjusted EBITDA

80,646

88,502

358,588

382,399

Non-comparable hotel Adjusted EBITDA (4)

(5,847)

(5,601)

(21,949)

(29,591)

Sold hotel Adjusted EBITDA (5)

(6,108)

(1,404)

(23,020)

Comparable Hotel Adjusted EBITDA

74,799

76,793

335,235

329,788

Prior year property tax adjustments, net (8)

308

(3,971)

(865)

Comparable Hotel Adjusted EBITDA, excluding prior year property tax adjustments, net

$

75,107

$

76,793

$

331,264

$

328,923

 

* Footnotes on page 15

(1)

Comparable Hotel Adjusted EBITDA Margin is calculated as Comparable Hotel Adjusted EBITDA divided by Total Comparable Hotel Revenues.

(2)

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

(3)

Non-hotel revenues include a $5.0 million performance guarantee recorded by the Company in the fourth quarter of 2016, and paid by the brand manager of the Wailea Beach Resort in January 2017 to compensate the Company while the hotel was undergoing its extensive repositioning. Non-hotel revenues also include revenues generated by BuyEfficient prior to its sale in September 2015, as well as 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 Hilton New Orleans St. Charles, the Hyatt Regency San Francisco and the Wailea Beach Resort.

(4)

Includes hotel revenues and Adjusted EBITDA generated by the Wailea Beach Resort, which is classified as non-comparable due to its extensive repositioning during the fourth quarter of 2015, as well as all of 2016, and the Fairmont Newport Beach, which the Company classified as held for sale as of December 31, 2016, and subsequently sold in February 2017.

(5)

Includes hotel revenues and Adjusted EBITDA generated during the Company's ownership period for the Sheraton Cerritos, sold in May 2016, and the Doubletree Guest Suites Times Square, sold in December 2015. EBITDA for the Doubletree Guest Suites Times Square has been adjusted to exclude the amortization of lease intangibles as well as the noncash straight-line lease expense.

(6)

Non-hotel operating expenses represent expenses generated by BuyEfficient prior to its sale in September 2015, as well as the following: the amortization of lease intangibles; the amortization of a favorable management agreement; noncash straight-line lease expense; and capital lease obligation interest - cash ground rent.

(7)

Property-level restructuring, severance and management transition costs for the year ended December 31, 2016 includes the following severance costs: Hilton Times Square $0.5 million; Hyatt Regency San Francisco $0.9 million; Marriott Boston Long Wharf $45,000; Renaissance Washington DC $(10,000); and Wailea Beach Resort $0.1 million. Property-level restructuring, severance and management transition costs for the three months ended December 31, 2015 includes the following: Boston Park Plaza $0.1 million; and Hilton New Orleans St. Charles $(16,000). Property-level restructuring, severance and management transition costs for the year ended December 31, 2015 includes the following: Boston Park Plaza $0.7 million; Hilton New Orleans St. Charles $0.1 million; Marriott Philadelphia $20,000; and Renaissance Washington DC $0.4 million. Lease termination costs for the three months and year ended December 31, 2016 includes $0.4 million at the Boston Park Plaza. Lease termination costs for the year ended December 31, 2016 also includes $1.0 million at the Wailea Beach Resort. Lease termination costs for the year ended December 31, 2015 includes $0.3 million at the Boston Park Plaza.

(8)

Prior year property tax adjustments, net for the three months ended December 31, 2016 excludes the additional net expense of $0.3 million. For the years ended December 31, 2016 and 2015, prior year property tax adjustments, net excludes the additional net benefit of $4.0 million and $0.9 million, respectively.



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