Sunstone Hotel Investors, Inc. (SHO-PI): Capitalizing on Strategic Investments for Robust Growth

Published on September 24, 2024 | Ticker: SHO-PI

Sunstone Hotel Investors, Inc. (SHO-PI) is a real estate investment trust (REIT) that owns and operates upper upscale and luxury hotels in urban and resort destinations across the United States. The company has a diverse portfolio of 14 hotels, with an average size of 477 rooms per property. Sunstone's strategic focus on acquiring and repositioning high-quality assets has enabled it to deliver consistent financial performance, with annual net income of $206,708,000, annual revenue of $985,980,000, annual operating cash flow of $198,131,000, and annual free cash flow of $88,000,000.

Financials

In the first quarter of 2024, Sunstone reported adjusted EBITDAre of $55 million and adjusted FFO of $0.18 per diluted share. The company's performance was generally in line with expectations, as better-than-expected operating margins and savings at the corporate level offset slightly lower RevPAR (revenue per available room) performance. Sunstone's geographic concentration in California, Florida, and Hawaii exposes the business to economic and weather conditions unique to these regions, which can impact the company's results.

Business Overview

Sunstone's strategic priorities are centered around three key pillars: recycling capital, investing in its portfolio, and returning capital to shareholders. The company's recent acquisition of the Hyatt Regency San Antonio Riverwalk for $230 million exemplifies its capital recycling strategy, as it redeployed proceeds from the sale of the Boston Park Plaza into a higher-yielding investment that is expected to contribute $12 million to $13 million in EBITDA during 2024.

The company's internal investment initiatives are also driving growth, with the newly converted Westin Washington, D.C. Downtown and the soon-to-be-rebranded Marriott Long Beach Downtown contributing to Sunstone's performance. The Westin Washington, D.C. Downtown saw a 52% increase in rooms RevPAR and a more than 77% increase in total RevPAR in the first quarter, highlighting the success of the conversion. Similarly, the Marriott Long Beach Downtown is expected to benefit from the brand change, allowing the hotel to better compete in the market.

Sunstone's most significant internal investment is the transformation of the Andaz Miami Beach, which is on schedule to be completed by the end of 2024. The company temporarily suspended operations at the resort in late March to facilitate the fastest construction schedule possible, resulting in short-term earnings disruption. However, Sunstone believes the Andaz Miami Beach will provide a significant layer of incremental growth once the disruption is behind them.

The company's third strategic pillar, returning capital to shareholders, is evidenced by the 29% increase in the quarterly common dividend to $0.09 per share. This increase reflects the incremental income generated by the Hyatt Regency San Antonio acquisition and the anticipated contribution from Sunstone's repositioned hotels.

Liquidity

Sunstone's balance sheet remains strong, with over $240 million in total cash and cash equivalents, including restricted cash, on a pro forma basis after the Hyatt Regency San Antonio acquisition. The company has significant liquidity, with full capacity on its credit facility, which, combined with cash on hand, equates to nearly $740 million in total liquidity. Sunstone's pro forma leverage is one of the lowest in the sector at 3.8x net debt and preferred equity to trailing EBITDA and 2.6x net debt to trailing EBITDA.

Outlook

Looking ahead, Sunstone is encouraged by the outlook for 2024, which benefits from its recent investments and sets the stage for the next layer of growth in the portfolio. The company's comparable portfolio group room revenue pace for the rest of the year is up approximately 9%, with broad-based strength across Boston, Washington, D.C., Orlando, Long Beach, and Wailea. Transient booking patterns remain short-term, but the recent week-over-week pickup from May and June is exceeding that of last year.

Sunstone's revised guidance for 2024 reflects the impact of the Hyatt Regency San Antonio Riverwalk acquisition. The company now expects full-year adjusted EBITDAre to range from $242 million to $263 million and adjusted FFO per diluted share to range from $0.84 to $0.94. This guidance includes an estimated $13 million to $15 million of earnings disruption related to the Marriott Long Beach Downtown conversion and the Andaz Miami Beach transformation.

Conclusion

The company's strategic execution, strong balance sheet, and diversified portfolio position Sunstone for continued success. By recycling capital, investing in its portfolio, and returning capital to shareholders, the company is creating multiple layers of embedded growth to drive incremental earnings and value over the next several years.

DiamondRock Hospitality Company (DRH): Navigating the Evolving Hospitality Landscape

DiamondRock Hospitality Company (DRH) is a real estate investment trust (REIT) that owns a diverse portfolio of premium hotels and resorts across the United States. With a history spanning over two decades, the company has established itself as a leading player in the hospitality industry, continuously adapting to the ever-changing market dynamics.

Sun Communities, Inc.: A Diversified REIT Leading in Manufactured Housing, RV, and Marina Properties

Sun Communities, Inc. (SUI) is a fully integrated real estate investment trust (REIT) that owns, operates, and develops manufactured housing (MH), recreational vehicle (RV), and marina communities across the United States, Canada, and the United Kingdom. With a rich history spanning over four decades, Sun Communities has evolved from a small MH REIT with 31 communities in 1993 to the leading owner and operator of MH, RV, and marina properties today.

Chatham Lodging Trust (CLDT): Navigating the Lodging Landscape with Strategic Asset Recycling

Chatham Lodging Trust (CLDT) is a real estate investment trust (REIT) that specializes in acquiring and managing upscale, extended-stay hotels and premium-branded, select-service hotels across the United States. The company’s strategic approach to asset management and its commitment to portfolio optimization have positioned it as a key player in the dynamic lodging industry.

DiamondRock Hospitality (DRH): Positioning for a Resilient Future

DiamondRock Hospitality Company (DRH) is a self-advised real estate investment trust (REIT) that owns a diverse portfolio of 36 premium hotels and resorts across the United States. With a focus on leisure destinations and top gateway markets, the company has steadily built a reputation for delivering solid returns to its shareholders.

Sunstone Hotel Investors (SHO): Positioning for Long-Term Growth Through Strategic Acquisitions and Operational Excellence

Business Overview and History Sunstone Hotel Investors, Inc. (SHO) is a real estate investment trust (REIT) that owns and operates a portfolio of high-quality hotels and resorts in major convention, resort, and urban markets across the United States. With a focus on upper-upscale and luxury properties, Sunstone has established itself as a leading player in the hospitality industry, delivering consistent financial performance and creating value for its shareholders.