Sunstone Hotel Investors Reports Results For Fourth Quarter And Full Year 2020

IRVINE, Calif., Feb. 11, 2021 /PRNewswire/ -- Sunstone Hotel Investors, Inc. (the "Company" or "Sunstone") (NYSE: SHO), the owner of Long-Term Relevant Real Estate® in the hospitality sector, today announced results for the fourth quarter and year ended December 31, 2020.

Fourth Quarter 2020 Operational Results (as compared to Fourth Quarter 2019):

• Resumption of Hotel Operations: 15 of the Company's 17 hotels were in operation as of December 31, 2020 (see details below), and 13 of the Company's 17 hotels were in operation for the entirety of the fourth quarter 2020.
• Net (Loss) Income: Net loss was $39.4 million as compared to net income of $45.4 million in the fourth quarter of 2019.
• 17 Hotel Portfolio RevPAR: 17 Hotel Portfolio RevPAR decreased 86.9% to $25.36.
• Adjusted EBITDAre: Adjusted EBITDAre, excluding noncontrolling interest decreased 125.3% to $(19.1) million.
• Adjusted FFO: Adjusted FFO attributable to common stockholders per diluted share decreased 161.5% to $(0.16).

Full Year 2020 Operational Results (as compared to Full Year 2019):

• Net (Loss) Income: Net loss was $410.5 million as compared to net income of $142.8 million in 2019.
• 17 Hotel Portfolio RevPAR: 17 Hotel Portfolio RevPAR decreased 77.2% to $46.02.
• Adjusted EBITDAre: Adjusted EBITDAre, excluding noncontrolling interest decreased 127.5% to $(88.1) million.
• Adjusted FFO: Adjusted FFO attributable to common stockholders per diluted share decreased 165.2% to $(0.73).

Information regarding the non-GAAP financial measures disclosed in this release is provided below in "Non-GAAP Financial Measures." Reconciliations of non-GAAP financial measures to the most comparable GAAP measure for each of the periods presented are included later in this release.

John Arabia, President and Chief Executive Officer, stated, "Despite 2020 being the most difficult year the lodging industry has ever faced, we were able to navigate the challenges, reduce our debt levels, improve the quality of our portfolio and opportunistically invest capital to better position Sunstone as our industry recovers. Our low levered balance sheet has protected the Company during this downturn, and will provide us with capacity to expand the portfolio as we enter the next growth cycle."

Mr. Arabia continued, "We expect 2021 to be a transition year with industry demand in the first quarter resembling the fourth quarter of 2020. That said, as the vaccine rollout has gained steam and stay-at-home restrictions have eased across the country, our portfolio has recently witnessed a measurable and encouraging increase in near-term reservations and group booking activity. More specifically, our portfolio has seen a sizable acceleration in near-term leisure reservations, the early recovery of commercial transient reservations and confirmation from many of our groups already on the books that they intend to hold their scheduled events in the third and fourth quarters. Should these positive trends continue, we would expect sequential quarter-over-quarter growth as the year progresses, and a return to hotel profitability by the second half of 2021."

Recent Developments

COVID-19:  Due to the government mandated restrictions on travel and public gatherings since the outbreak of COVID-19, the Company temporarily suspended operations at 14 of the 17 Hotels during the first half of 2020. In response to this challenging environment, the Company, working with its operators, has developed and implemented protocols to safely and responsibly resume operations at its hotels, including frequent and enhanced cleaning and sanitation, contactless check in and increased physical distancing throughout the hotels. As of the date of this release, the Company has resumed operations at all but two of its previously suspended hotels (see table below).

The Company experienced slow but steady improvements in hotel demand during October and November 2020; however, these improving demand trends moderated in December 2020 when several states reimplemented travel restrictions and stay-at-home orders.  Of the group business that has cancelled to date, approximately 25% has rebooked into future periods. The Company believes that a significant portion of the group business booked through the first half of 2021 has cancelled or will eventually cancel. The Company recorded total group and transient cancellation and attrition revenue of $1.7 million and $7.7 million in the fourth quarter and full year 2020, respectively. The extent of the effects of the pandemic on the Company's business and the hotel industry at large, however, will ultimately depend on future developments, including, but not limited to, the duration and severity of the pandemic, how quickly and successfully effective vaccines and therapies are distributed and administered, as well as the length of time it takes for demand and pricing to return and normal economic and operating conditions to resume.

During the fourth quarter and year ended December 31, 2020, the Company incurred $0.2 million and $29.1 million, respectively, of additional expenses as a result of the COVID-19 pandemic related to wages and benefits for furloughed or laid off hotel employees, net of $5.1 million and $5.2 million, respectively, in employee retention tax credits and various industry grants received by the hotels. These additional COVID-19-related expenses included severance of $3.1 million and $11.0 million incurred in the fourth quarter and year ended December 31, 2020, respectively. Due to the temporary suspension of operations at certain hotels in the portfolio and the incurrence of various extraordinary and non-recurring items, comparisons between the financial results for the fourth quarter and year ended December 31, 2020 to the same periods in 2019 are not meaningful.

Capital Investments:  The Company invested $7.4 million and $51.4 million into its portfolio during the fourth quarter and year ended December 31, 2020, respectively. In 2021, the Company expects to invest approximately $70 million to $80 million of capital, including approximately $30 million to reposition and rebrand the Renaissance Washington DC to The Westin Washington DC. The total cost of repositioning is expected to be approximately $70 million and will be incurred in 2021 and 2022. Upon substantial completion of the repositioning, the hotel will be rebranded The Westin Washington DC. Additional capital projects in 2021 include approximately $9 million at the Hilton San Diego Bayfront to convert a previously leased restaurant space to meeting space and re-concept the ground floor hotel restaurant, approximately $3 million to add an adult pool at the Wailea Beach Resort and approximately $2 million to convert a vacant retail space to meeting space at the Boston Park Plaza.

Hotel Rebranding:  On February 3, 2021, the Company entered into an agreement with affiliates of Marriott International to rebrand the Renaissance Washington DC to The Westin Washington DC, upon substantial completion of a renovation of the hotel.

Mr. Arabia continued, "Building on our previous success repositioning hotels in our portfolio to maximize value, we are very excited about the pending conversion of the Renaissance Washington DC to The Westin Washington DC. Over the past several years, the hotel's immediate surroundings have improved significantly with the addition of the neighboring City Center, Anthem Row, Apple's flagship store in the beautifully renovated Carnegie Library and countless high-end restaurants and amenities. Our incremental repositioning investment of roughly $30 million above a cyclical renovation is expected to deliver attractive returns, and position the hotel as a flagship convention hotel in Washington DC." 

Debt:  In December 2020, the Company completed second amendments to the agreements governing its unsecured debt, consisting of its revolving credit facility, term loans and senior notes, extending financial covenant relief from June 30, 2021 to March 31, 2022, with quarterly testing resuming for the period ending March 31, 2022. Additionally, the amendments extend the modification of the required quarterly-tested financial covenants to ease compliance for four quarters following the end of the covenant relief period. At December 31, 2020, the Company had no amount outstanding on the revolving portion of its amended credit facility, with $500.0 million of capacity available for additional borrowing under the agreement.

As part of the second amendments to the agreements governing the Company's unsecured debt, the Company was granted the ability to apply the net proceeds received from the completed sale of the Renaissance Los Angeles Airport to repay the $107.9 million mortgage loan secured by the Renaissance Washington DC. The loan was scheduled to mature on May 1, 2021, and was repaid without penalty on December 29, 2020.

Additionally, in December 2020, the Company executed an assignment-in-lieu agreement with the holder of the $77.2 million mortgage secured by the Hilton Times Square. As stipulated in the agreement, the Company satisfied all outstanding debt obligations, including regular and default interest or late charges that were assessed, in exchange for a $20.0 million payment, the credit of $3.2 million of restricted cash held by the mortgage holder, the assignment of the Company's leasehold interest in the Hilton Times Square and the retention of $11.6 million in certain potential employee-related obligations, which is currently held in escrow until those obligations are resolved. In conjunction with this agreement, the Company wrote-off approximately $22.2 million of various accrued expenses related to the hotel's operating lease and sublease, including, but not limited to, accrued property taxes, recapture of deferred taxes due from a prior deferral period, accrued ground rent and accrued easement payments. The Company removed the net assets and liabilities related to the hotel from its December 31, 2020 balance sheet, and recorded a $6.4 million gain on extinguishment of debt as a result of this transaction.

Finally, in December 2020, the Company exercised its first one-year option to extend the maturity date of the mortgage loan secured by the Hilton San Diego Bayfront from December 2020 to December 2021. The Company expects to exercise its two remaining one-year options to further extend the loan's maturity to December 2023.

After the repayment of the mortgage loan secured by the Renaissance Washington DC and the resolution of the mortgage loan secured by the Hilton Times Square, only three of the 17 Hotels are secured by mortgage loans. Assuming the Company is successful in extending the maturity of the mortgage secured by the Hilton San Diego Bayfront from December 2021 to December 2023, the Company's first debt maturity will be for the $85.0 million unsecured term loan due in September 2022.

Stock Repurchase and At the Market Stock Offering Programs:  On February 10, 2021, the Company's Board of Directors reauthorized the existing stock repurchase program, allowing the Company to acquire up to $500.0 million of the Company's common and preferred stock. The authorization has no stated expiration date. Future repurchases will depend on various factors, including the Company's capital needs, restrictions under its various financing agreements, as well as the price of the Company's common and preferred stock.

Additionally, the Company's Board of Directors reviewed and maintained the existing "At the Market" stock offering program, allowing the Company to issue common stock up to an aggregate offering amount of $300.0 million. The existing authorization has no stated expiration date.

Balance Sheet/Liquidity Update

As of December 31, 2020, the Company had $416.1 million of cash and cash equivalents, including restricted cash of $47.7 million, total assets of $3.0 billion, including $2.5 billion of net investments in hotel properties, total consolidated debt of $747.9 million and stockholders' equity of $2.0 billion. 

Operations Update

As of December 31, 2020 and through the date of this release, the status of the Company's 17 Hotels is as follows:

Operating statistics for the hotels that were open all or part of the fourth quarter of 2020 are as follows:

Preliminary January 2021 results for the 15 hotels open during the entire month include the following ($ in millions, except RevPAR and ADR):

Due to continued uncertainty regarding the duration and extent of the COVID-19 pandemic, the Company cannot provide further assurances regarding the pandemic's effect on the Company's results, and the Company does not intend to provide further updates unless deemed appropriate.

Dividend Update

On February 10, 2021, the Company's Board of Directors declared 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 15, 2021 to stockholders of record as of March 31, 2021.

The Company has suspended its quarterly common stock cash dividends. The resumption in quarterly common dividends will be determined by the Company's Board of Directors after considering the Company's obligations under its various financing agreements, projected taxable income, compliance with its debt covenants, 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 information provided to conform to actual results or changes in the Company's portfolio, capital structure or future expectations.

Earnings Call

The Company will host a conference call to discuss fourth quarter and full year 2020 financial results on February 12, 2021, at 12:00 p.m. Eastern Time (9:00 a.m. Pacific Time). A live webcast of the call will be available via the Investor Relations section of the Company's website at www.sunstonehotels.com. Alternatively, interested parties may dial 1-323-289-6576 and reference confirmation code 1183215 to listen to the live call. A replay of the webcast will also be archived on the website.

About Sunstone Hotel Investors, Inc.

Sunstone Hotel Investors, Inc. is a lodging real estate investment trust ("REIT") that as of the date of this release has interests in 17 hotels comprised of 9,017 rooms. Sunstone's business is to acquire, own, asset manage and renovate or reposition 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. For further information, please visit Sunstone's website at www.sunstonehotels.com.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of federal securities laws and regulations. These forward-looking statements are identified by their use of terms and phrases such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "should," "will" and other similar terms and phrases, including opinions, references to assumptions and forecasts of future results. Forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from those anticipated at the time the forward-looking statements are made. These risks include, but are not limited to: the impact on the Company's business of the COVID-19 pandemic and the response of governments and the Company to the outbreak; increased risks related to employee matters, including increased employment litigation and claims for severance or other benefits tied to termination or furloughs as a result of temporary hotel suspensions or reduced hotel operations due to COVID-19; the impact on our business of potential defaults by us on our debt agreements or leases; general economic and business conditions, including a U.S. recession; trade conflicts and tariffs between the U.S. and its trading partners; changes impacting global travel; regional or global economic slowdowns, which may diminish the desire for leisure travel or the need for business travel; any type of flu or disease-related pandemic that impacts travel or the ability to travel, including COVID-19; the adverse effects of climate change affecting the lodging and travel industry, internationally, nationally and locally; the Company's need to operate as a REIT and comply with other applicable laws and regulations, including new laws, interpretations or court decisions that may change the federal or state tax laws or the federal or state income tax consequences of the Company's qualification as a REIT; rising hotel operating costs due to labor costs, workers' compensation and health-care related costs, utility costs, insurance and unanticipated costs such as acts of nature and their consequences and other factors that may not be offset by increased room rates; relationships with, and the requirements and reputation of, the Company's franchisors and hotel brands; relationships with, and the requirements, performance and reputation of, the managers of the Company's hotels; the ground, building or airspace leases for three of the 17 Hotels the Company has interests in as of the date of this release; competition for the acquisition of hotels, and the Company's ability to complete acquisitions and dispositions; performance of hotels after they are acquired; new hotel supply, or alternative lodging options such as timeshare, vacation rentals or sharing services such as Airbnb, in the Company's markets, which could harm its occupancy levels and revenue at its hotels; competition from hotels not owned by the Company; the need for renovations, repositionings and other capital expenditures for the Company's hotels; the impact, including any delays, of renovations and repositionings on hotel operations; changes in the Company's business strategy or acquisition or disposition plans; the Company's level of debt, including secured, unsecured, fixed and variable rate debt; financial and other covenants in the Company's debt and preferred stock; the Company's hotels may become impaired, or its hotels which have previously become impaired may become further impaired in the future, which may adversely affect its financial condition and results of operations; volatility in the capital markets and the effect on lodging demand or the Company's ability to obtain capital on favorable terms or at all; potential adverse tax consequences in the event that the Company's operating leases with its taxable REIT subsidiaries are not held to have been made on an arm's-length basis; system security risks, data protection breaches, cyber-attacks, including those impacting the Company's hotel managers or other third parties, and systems integration issues; other events beyond the Company's control, including natural disasters, terrorist attacks or civil unrest; and other risks and uncertainties associated with our business described in the Company's filings with the Securities and Exchange Commission. Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that the expectations will be attained or that any deviation will not be material. All forward-looking information provided herein is as of the date of this release, and the Company undertakes no obligation to update any forward-looking statement to conform the statement to actual results or changes in the Company's expectations.

This release should be read together with the consolidated financial statements and notes thereto included in our most recent reports on Form 10-K and Form 10-Q. Copies of these reports are available on our website at www.sunstonehotels.com and through the SEC's Electronic Data Gathering Analysis and Retrieval System ("EDGAR") at www.sec.gov.

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 for real estate, or EBITDAre; Adjusted EBITDAre, excluding noncontrolling interest (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 EBITDAre; and hotel Adjusted EBITDAre margins. These measures should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP. In addition, our calculation of these measures may not be comparable to other companies that do not define such terms exactly the same as the Company. 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 net income (loss), 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.

We present EBITDAre in accordance with guidelines established by the National Association of Real Estate Investment Trusts ("NAREIT"), as defined in its September 2017 white paper "Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate." We believe EBITDAre is a useful performance measure to help investors evaluate and compare the results of our operations from period to period in comparison to our peers. NAREIT defines EBITDAre as net income (calculated in accordance with GAAP) plus interest expense, income tax expense, depreciation and amortization, gains or losses on the disposition of depreciated property (including gains or losses on change in control), impairment write-downs of depreciated property and of investments in unconsolidated affiliates caused by a decrease in the value of depreciated property in the affiliate, and adjustments to reflect the entity's share of EBITDAre of unconsolidated affiliates.

We make additional adjustments to EBITDAre 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 EBITDAre, excluding noncontrolling interest, when combined with the primary GAAP presentation of net income, is beneficial to an investor's complete understanding of our operating performance. In addition, we use both EBITDAre and Adjusted EBITDAre, excluding noncontrolling interest as measures in determining the value of hotel acquisitions and dispositions.

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, 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 NAREIT's definition of "FFO applicable to common shares." Our presentation 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 EBITDAre and FFO attributable to common stockholders for the following items, which may occur in any period, and refer to these measures as either Adjusted EBITDAre, excluding noncontrolling interest 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 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.

• 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 acquisitions that meet the definition of a business 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.

• 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.

• 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: lawsuit settlement costs; prior year property tax assessments or credits; the write-off of development costs associated with abandoned projects; property-level restructuring, severance and management transition costs; debt resolution costs; lease terminations; and property insurance proceeds or uninsured losses.

In addition, to derive Adjusted EBITDAre, excluding noncontrolling interest we exclude the noncontrolling partner's pro rata share of the net (income) loss allocated to the Hilton San Diego Bayfront partnership, as well as the noncontrolling partner's pro rata share of any EBITDAre and Adjusted EBITDAre components. We also 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. In addition, we exclude the amortization of our right-of-use assets and liabilities as these expenses are based on historical cost accounting and do not reflect the actual rent amounts due to the respective lessors or the underlying performance of our hotels. Additionally, we include an adjustment for the cash finance lease expenses recorded on the ground lease at the Courtyard by Marriott Los Angeles (prior to the hotel's sale in October 2019) and the building lease at the Hyatt Centric Chicago Magnificent Mile. We determined that both of these leases are finance leases, and, therefore, we include a portion of the lease payments each month in interest expense. We adjust EBITDAre for these two finance leases in order to more accurately reflect the actual rent due to both hotels' lessors in the current period, as well as the operating performance of both hotels. We also exclude the effect of gains and losses on the disposition of undepreciated assets because we believe that including them in Adjusted EBITDAre, excluding noncontrolling interest is not consistent with reflecting the ongoing performance of our assets.

To derive Adjusted FFO attributable to common stockholders, we also exclude the noncash interest on our derivatives and finance lease obligations, as we believe that these items are not reflective of our ongoing finance costs. Additionally, we exclude the noncontrolling partner's pro rata share of any FFO adjustments related to our consolidated Hilton San Diego Bayfront partnership. We also exclude the real estate amortization of our right-of-use assets and liabilities, which includes the amortization of both our finance and operating lease intangibles (with the exception of our corporate operating lease), as these expenses are based on historical cost accounting and do not reflect the actual rent amounts due to the respective lessors or the underlying performance of our hotels. In addition, we exclude changes to deferred tax assets, liabilities or valuation allowances, and income tax benefits or provisions associated with the application of net operating loss carryforwards, uncertain tax positions or with the sale of assets other than real estate investments.

In presenting hotel Adjusted EBITDAre and hotel Adjusted EBITDAre margins, miscellaneous non-hotel items have been excluded. We believe the calculation of hotel Adjusted EBITDAre results in a more accurate presentation of the hotel Adjusted EBITDAre margins for our hotels, and that these non-GAAP financial measures are useful to investors in evaluating our property-level operating performance.

Reconciliations of net (loss) income to EBITDAre, Adjusted EBITDAre, excluding noncontrolling interest, FFO attributable to common stockholders, Adjusted FFO attributable to common stockholders, hotel Adjusted EBITDAre and hotel Adjusted EBITDAre margins are set forth in the following pages of this release.

For Additional Information:
Bryan Giglia
Sunstone Hotel Investors, Inc.
(949) 382-3036

Aaron Reyes
Sunstone Hotel Investors, Inc.
(949) 382-3018