Sunstone Hotel Investors Results

Sunstone Hotel Investors Reports Results For First Quarter 2017

27 Hotel Portfolio RevPAR increased 5.5% to $158.10.

Sunstone

Sunstone Hotel Investors, Inc.  (NYSE:  SHO) yesterday announced results for the first quarter ended March 31, 2017.

First Quarter 2017 Operational Results (as compared to First Quarter 2016):

  • Net income, which includes the gain recognized on the Company's February 2017 sale of the Fairmont Newport Beach, increased 5,148.9% to $63.8 million. 
  • Income attributable to common stockholders per diluted share increased 1,450.0% to $0.27. 
  • 27 Hotel Portfolio RevPAR increased 5.5% to $158.10. 
  • 27 Hotel Portfolio Adjusted EBITDA Margin, excluding prior year property tax adjustments, net increased 220 basis points to 27.6%. Excluding the Wailea Beach Resort, due to its extensive repositioning during the first quarter of 2016, the Hotel Portfolio Adjusted EBITDA Margin, excluding prior year property tax adjustments, net would have increased by 190 basis points. 
  • Adjusted EBITDA increased 12.5% to $69.6 million. 
  • Adjusted FFO attributable to common stockholders per diluted share increased 14.3% to $0.24.

John Arabia, President and Chief Executive Officer, stated, "In the first quarter, our portfolio generated strong revenue and profit growth that notably exceeded our expectations. Not only was demand and pricing stronger than anticipated in a large number of our hotels, but more importantly, our two recently repositioned hotels, the Boston Park Plaza and the Wailea Beach Resort, generated RevPAR and earnings gains that materially exceeded our forecasts. Furthermore, we have been pleasantly surprised that group attendance across our portfolio continues to materialize at the high-end of its historic norm, recent spend on group banquet and audio visual has been robust, and group production and pace for all future periods has accelerated. While increasing supply in a number of hotel markets and various geopolitical risks warrant conservatism and point to a wide range of potential outcomes for hotel revenue growth, first quarter trends have given us greater confidence in our near-term earnings prospects. As a result, we have increased our full-year 2017 earnings guidance."

 

UNAUDITED SELECTED STATISTICAL AND FINANCIAL DATA

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

Three Months Ended March 31,

2017

2016

Change

Net Income

$

63.8

$

1.2

5,148.9

%

Income (Loss) Attributable to Common Stockholders per Diluted Share

$

0.27

$

(0.02)

1,450.0

%

27 Hotel Portfolio RevPAR

$

158.10

$

149.80

5.5

%

27 Hotel Portfolio Occupancy

77.7

%

77.8

%

(10)

bps

27 Hotel Portfolio ADR

$

203.48

$

192.54

5.7

%

27 Hotel Portfolio Adjusted EBITDA Margin

27.6

%

25.4

%

220

bps

Adjusted EBITDA

$

69.6

$

61.8

12.5

%

Adjusted FFO Attributable to Common Stockholders

$

53.2

$

44.2

20.2

%

Adjusted FFO Attributable to Common Stockholders per Diluted Share

$

0.24

$

0.21

14.3

%

Disclosures regarding the non-GAAP financial measures in this release are included on pages 4 through 6. Reconciliations of non-GAAP financial measures to the most comparable GAAP measure for each of the periods presented are included on pages 9 through 13 of this release. 27 Hotel Portfolio Adjusted EBITDA Margin excludes prior year property tax adjustments, net. 

The Company's actual results for the quarter ended March 31, 2017 compare to its guidance originally provided as follows: 

 

Metric

Quarter Ended

March 31, 2017

Guidance (1)

Quarter Ended

March 31, 2017

Actual Results

(unaudited)

Performance Relative

to Prior

Guidance Midpoint

Net Income ($ millions)

$54  to  $57

$64

+ $8

27 Hotel Portfolio RevPAR Growth

+ 2.5%   to  + 4.5%

5.5%

+ 2.0%

Adjusted EBITDA ($ millions)

$61  to  $64

$70

+ $7

Adjusted FFO Attributable to Common Stockholders ($ millions)

$43  to  $46

$53

+ $9

Adjusted FFO Attributable to Common Stockholders per Diluted Share

$0.19  to  $0.21

$0.24

+ $0.04

Diluted Weighted Average Shares Outstanding

219,600,000

219,400,000

- 200,000

 

(1)

Represents guidance presented on February 21, 2017.

Balance Sheet/Liquidity Update

As of March 31, 2017, the Company had $506.2 million of cash and cash equivalents, including restricted cash of $64.4 million. 

As of March 31, 2017, the Company had total assets of $3.7 billion, including $3.1 billion of net investments in hotel properties, total consolidated debt of $1.0 billion and stockholders' equity of $2.5 billion. 

Capital Improvements

The Company invested $29.9 million into capital improvements of its portfolio during the three months ended March 31, 2017. 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, or unannounced financings during 2017. 

For the second quarter of 2017, the Company expects: 

 

Metric

Quarter Ended

June 30, 2017

Guidance (1)

Net Income ($ millions)

$43 to  $47

27 Hotel Portfolio RevPAR Growth

+ 0.75% to + 2.75%

Adjusted EBITDA ($ millions)

$96  to  $99

Adjusted FFO Attributable to Common Stockholders ($ millions)

$78  to  $81

Adjusted FFO Attributable to Common Stockholders per Diluted Share

$0.35  to  $0.37

Diluted Weighted Average Shares Outstanding

219,500,000

For the full year of 2017, the Company expects: 

 

Metric

Prior Full Year

2017

Guidance (2)

Current Full Year

2017

Guidance (1)

Change in Full

Year 2017

Guidance Midpoint

Net Income ($ millions)

$150 to  $174

$156 to  $174

+ $2

27 Hotel Portfolio RevPAR Growth

+ 0.5% to + 3.5%

+ 1.5% to + 3.5%

+ 0.5%

Adjusted EBITDA ($ millions)

$306  to  $330

$316  to  $334

+ $7

Adjusted FFO Attributable to Common Stockholders ($ millions)

$239  to  $263

$250  to  $268

+ $8

Adjusted FFO Attributable to Common Stockholders per Diluted Share

$1.09  to  $1.19

$1.14  to  $1.22

+ $0.04

Diluted Weighted Average Shares Outstanding

219,800,000

219,800,000

 

(1)

See pages 11 and 12 for detailed reconciliations of Net Income to non-GAAP financial measures.

(2)

Represents guidance presented on February 21, 2017.

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

  • Full year 27 Hotel Portfolio RevPAR guidance is benefiting 150 to 200 basis points from the completed repositioning at the Wailea Beach Resort. 
  • Full year 27 Hotel Portfolio Adjusted EBITDA Margin change of approximately flat to + 75 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 $8.1 million. 
  • Full year interest expense of approximately $47.2 million to $47.4 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 April 28, 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 July 17, 2017 to stockholders of record as of June 30, 2017. 

The Company expects to continue to pay a regular quarterly 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.

Supplemental Disclosures

Contemporaneous with this release, the Company has furnished a Form 8-K with unaudited financial information. This additional information is being provided as a supplement to the information in this release and other filings with the SEC. The Company has no obligation to update any of the guidance or other information provided to conform to actual results or changes in the Company's portfolio, capital structure or future expectations.

About Sunstone Hotel Investors, Inc.

Sunstone Hotel Investors, Inc. is a lodging real estate investment trust ("REIT") that as of May 2, 2017 has interests in 27 hotels comprised of 13,226 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.

Sunstone Hotel Investors, Inc.

Consolidated Balance Sheets

(In thousands, except share data)

March 31,

December 31,

2017

2016

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$

441,830

$

369,537

Restricted cash

64,414

67,923

Accounts receivable, net

50,229

39,337

Inventories

1,252

1,225

Prepaid expenses

13,252

10,489

Assets held for sale, net

79,113

Total current assets

570,977

567,624

Investment in hotel properties, net

3,149,472

3,158,219

Deferred financing fees, net

2,087

4,002

Other assets, net

9,945

9,389

Total assets

$

3,732,481

$

3,739,234

Liabilities and Equity

Current liabilities:

Accounts payable and accrued expenses

$

36,327

$

36,110

Accrued payroll and employee benefits

17,078

24,896

Dividends and distributions payable

14,228

119,847

Other current liabilities

43,786

39,869

Current portion of notes payable, net

8,898

184,929

Liabilities of assets held for sale

3,153

Total current liabilities

120,317

408,804

Notes payable, less current portion, net

982,460

746,374

Capital lease obligations, less current portion

15,574

15,574

Other liabilities

36,917

36,650

Total liabilities

1,155,268

1,207,402

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, 2017 and December 31, 2016, 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, 2017 and December 31, 2016, stated at liquidation preference of $25.00 per share

75,000

75,000

Common stock, $0.01 par value, 500,000,000 shares authorized, 220,417,417 shares issued and outstanding at March 31, 2017 and 220,073,140 shares issued and outstanding at December 31, 2016

2,204

2,201

Additional paid in capital

2,594,724

2,596,620

Retained earnings

848,736

786,901

Cumulative dividends and distributions

(1,107,180)

(1,092,952)

Total stockholders' equity

2,528,484

2,482,770

Noncontrolling interest in consolidated joint venture

48,729

49,062

Total equity

2,577,213

2,531,832

Total liabilities and equity

$

3,732,481

$

3,739,234

 

Sunstone Hotel Investors, Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

Three Months Ended March 31,

2017

2016

(unaudited)

Revenues

Room

$

190,367

$

187,297

Food and beverage

75,501

71,234

Other operating

14,875

15,761

Total revenues

280,743

274,292

Operating expenses

Room

51,292

51,044

Food and beverage

50,537

51,929

Other operating

3,831

4,056

Advertising and promotion

14,946

14,993

Repairs and maintenance

10,967

11,264

Utilities

7,222

7,514

Franchise costs

8,055

8,096

Property tax, ground lease and insurance

21,287

22,840

Other property-level expenses

34,738

34,713

Corporate overhead

6,779

6,717

Depreciation and amortization

40,807

40,047

Total operating expenses

250,461

253,213

Operating income

30,282

21,079

Interest and other income

721

489

Interest expense

(11,249)

(20,010)

Loss on extinguishment of debt

(4)

(105)

Gain on sale of assets

44,285

Income before income taxes

64,035

1,453

Income tax provision

(208)

(237)

Net income

63,827

1,216

Income from consolidated joint venture attributable to noncontrolling interest

(1,992)

(1,650)

Preferred stock dividends

(3,207)

(2,766)

Income (loss) attributable to common stockholders

$

58,628

$

(3,200)

Basic and diluted per share amounts:

Basic and diluted income (loss) attributable to common stockholders per common share

$

0.27

$

(0.02)

Basic and diluted weighted average common shares outstanding

219,093

212,887

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 EBITDA and Adjusted EBITDA

Three Months Ended March 31,

2017

2016

Net income

$

63,827

$

1,216

Operations held for investment:

Depreciation and amortization

40,807

40,047

Amortization of lease intangibles

63

63

Interest expense

11,249

20,010

Income tax provision

208

237

Noncontrolling interest:

Income from consolidated joint venture attributable to noncontrolling interest

(1,992)

(1,650)

Depreciation and amortization

(875)

(865)

Interest expense

(457)

(413)

EBITDA

112,830

58,645

Operations held for investment:

Amortization of deferred stock compensation

1,749

1,614

Amortization of favorable and unfavorable contracts, net

99

(4)

Noncash ground rent

(275)

488

Capital lease obligation interest - cash ground rent

(351)

(351)

Gain on sale of assets, net

(44,570)

(7)

Loss on extinguishment of debt

4

105

Prior year property tax adjustments, net

(97)

Property-level restructuring, severance and management transition costs

1,560

Noncontrolling interest:

Noncash ground rent

72

(113)

(43,272)

3,195

Adjusted EBITDA

$

69,558

$

61,840

 

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,

2017

2016

Net income

$

63,827

$

1,216

Preferred stock dividends

(3,207)

(2,766)

Operations held for investment:

Real estate depreciation and amortization

40,678

39,893

Amortization of lease intangibles

63

63

Gain on sale of assets, net

(44,570)

(7)

Noncontrolling interest:

Income from consolidated joint venture attributable to noncontrolling interest

(1,992)

(1,650)

Real estate depreciation and amortization

(875)

(865)

FFO attributable to common stockholders

53,924

35,884

Operations held for investment:

Amortization of favorable and unfavorable contracts, net

99

(4)

Noncash ground rent

(275)

488

Noncash interest related to (gain) loss on derivatives, net

(657)

6,402

Loss on extinguishment of debt

4

105

Prior year property tax adjustments, net

(97)

Property-level restructuring, severance and management transition costs

1,560

Noncontrolling interest:

Noncash ground rent

72

(113)

Noncash interest related to loss on derivative

(4)

(761)

8,341

Adjusted FFO attributable to common stockholders

$

53,163

$

44,225

FFO attributable to common stockholders per diluted share

$

0.25

$

0.17

Adjusted FFO attributable to common stockholders per diluted share

$

0.24

$

0.21

Basic weighted average shares outstanding

219,093

212,887

Shares associated with unvested restricted stock awards

262

84

Diluted weighted average shares outstanding

219,355

212,971

 

Sunstone Hotel Investors, Inc.

Reconciliation of Net Income to Non-GAAP Financial Measures

Guidance for Second Quarter 2017

(Unaudited and in thousands, except per share amounts)

Reconciliation of Net Income to Adjusted EBITDA

Quarter Ended

June 30, 2017

Low

High

Net income

$

43,400

$

46,600

Depreciation and amortization

40,500

40,700

Amortization of lease intangibles

100

100

Interest expense

12,800

12,500

Income tax provision

200

200

Noncontrolling interest

(3,000)

(3,100)

Amortization of deferred stock compensation

2,600

2,600

Amortization of favorable and unfavorable contracts, net

100

100

Noncash ground rent

(300)

(300)

Capital lease obligation interest - cash ground rent

(400)

(400)

Adjusted EBITDA

$

96,000

$

99,000

Reconciliation of Net Income to Adjusted FFO Attributable to Common Stockholders

Net income

$

43,400

$

46,600

Preferred stock dividends

(3,200)

(3,200)

Real estate depreciation and amortization

40,400

40,600

Amortization of lease intangibles

100

100

Noncontrolling interest

(2,600)

(2,700)

Amortization of favorable and unfavorable contracts, net

100

100

Noncash ground rent

(300)

(300)

Adjusted FFO attributable to common stockholders

$

77,900

$

81,200

Adjusted FFO attributable to common stockholders per diluted share

$

0.35

$

0.37

Diluted weighted average shares outstanding

219,500

219,500

 

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

$

155,600

$

173,600

Depreciation and amortization

162,400

162,800

Amortization of lease intangibles

300

300

Interest expense

47,400

47,200

Income tax provision

800

800

Noncontrolling interest

(11,700)

(11,900)

Amortization of deferred stock compensation

8,100

8,100

Amortization of favorable and unfavorable contracts, net

200

200

Noncash ground rent

(1,100)

(1,100)

Capital lease obligation interest - cash ground rent

(1,400)

(1,400)

Gain on sale of assets, net

(44,600)

(44,600)

Adjusted EBITDA

$

316,000

$

334,000

Reconciliation of Net Income to Adjusted FFO Attributable to Common Stockholders

Net income

$

155,600

$

173,600

Preferred stock dividends

(12,800)

(12,800)

Real estate depreciation and amortization

162,100

162,500

Amortization of lease intangibles

300

300

Noncontrolling interest

(9,600)

(9,800)

Amortization of favorable and unfavorable contracts, net

200

200

Noncash ground rent

(1,100)

(1,100)

Noncash interest related to gain on derivatives, net

(600)

(600)

Gain on sale of assets, net

(44,600)

(44,600)

Adjusted FFO attributable to common stockholders

$

249,500

$

267,700

Adjusted FFO attributable to common stockholders per diluted share

$

1.14

$

1.22

Diluted weighted average shares outstanding

219,800

219,800

 

Sunstone Hotel Investors, Inc.

Non-GAAP Financial Measures

27 Hotel Portfolio Adjusted EBITDA and Margins

(Unaudited and in thousands)

Three Months Ended March 31,

2017

2016

27 Hotel Portfolio Adjusted EBITDA Margin (1)

27.6%

25.4%

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

27.6%

25.4%

Total revenues

$

280,743

$

274,292

Non-hotel revenues (3)

(18)

(121)

Total Actual Hotel Revenues

280,725

274,171

Sold hotel revenues (4)

(3,541)

(11,248)

Total 27 Hotel Portfolio Revenues

$

277,184

$

262,923

Net income

$

63,827

$

1,216

Non-hotel revenues (3)

(18)

(121)

Non-hotel operating expenses, net (5)

(435)

330

Property-level restructuring, severance and management transition costs (6)

1,560

Corporate overhead

6,779

6,717

Depreciation and amortization

40,807

40,047

Interest and other income

(721)

(489)

Interest expense

11,249

20,010

Loss on extinguishment of debt

4

105

Gain on sale of assets

(44,285)

Income tax provision

208

237

Actual Hotel Adjusted EBITDA

77,415

69,612

Sold hotel Adjusted EBITDA (4)

(1,019)

(2,775)

27 Hotel Portfolio Adjusted EBITDA

76,396

66,837

Prior year property tax adjustments, net (7)

(97)

27 Hotel Portfolio Adjusted EBITDA, excluding prior year property tax adjustments, net

$

76,396

$

66,740

 

* Footnotes on page 14

(1)

27 Hotel Portfolio Adjusted EBITDA Margin is calculated as 27 Hotel Portfolio Adjusted EBITDA divided by Total 27 Hotel Portfolio Revenues.

(2)

27 Hotel Portfolio Adjusted EBITDA Margin, excluding prior year property tax adjustments, net is calculated as 27 Hotel Portfolio Adjusted EBITDA, excluding prior year property tax adjustments, net divided by Total 27 Hotel Portfolio Revenues. Excluding the Wailea Beach Resort due to its extensive repositioning during the first quarter of 2016, the Hotel Portfolio Adjusted EBITDA Margin would have been 26.6% and 24.7% for the three months ended March 31, 2017 and 2016, respectively.

(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 Hilton New Orleans St. Charles, the Hyatt Regency San Francisco and the Wailea Beach Resort.

(4)

Sold hotel includes hotel revenues and Adjusted EBITDA generated during the Company's ownership period for the Fairmont Newport Beach, sold in February 2017, and the Sheraton Cerritos, sold in May 2016.

(5)

Non-hotel operating expenses, net include the following: the amortization of lease intangibles; the amortization of a favorable management agreement; noncash ground rent; and capital lease obligation interest - cash ground rent.

(6)

Property-level restructuring, severance and management transition costs for the three months ended March 31, 2016 include the following severance costs: Hilton Times Square $0.5 million; Hyatt Regency San Francisco $0.9 million; and Wailea Beach Resort $0.1 million.

(7)

Prior year property tax adjustments, net for the three months ended March 31, 2016 excludes the additional net benefit of $0.1 million.



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