Sunstone Hotel Investors Reports Results For Fourth Quarter And Full Year 2016

ALISO VIEJO, Calif., Feb. 21, 2017 /PRNewswire/ -- Sunstone Hotel Investors, Inc. (the "Company" or "Sunstone") (NYSE: SHO) today 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."

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:

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:

For the full year of 2017, the Company expects:

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.

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 information prepared in accordance with generally accepted accounting principles. 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 2016 financial results on February 22, 2017, at 12:00 p.m. Eastern Time (9:00 a.m. Pacific Time). A live web cast of the call will be available via the Investor Relations section of the Company's website.  Alternatively, investors may dial 1-785-830-7990 and reference conference ID 5261810 to listen to the call live. A replay of the web cast 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 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.

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: volatility in the debt or equity markets affecting our ability to acquire or sell hotel assets; international, national and local economic and business conditions, including the likelihood of a U.S. recession, changes in the European Union or global economic slowdown, as well as any type of flu or disease-related pandemic, affecting the lodging and travel industry; the ability to maintain sufficient liquidity and our access to capital markets; terrorist attacks or civil unrest, which would affect occupancy rates at our hotels and the demand for hotel products and services; operating risks associated with the hotel business; risks associated with the level of our indebtedness and our ability to meet covenants in our debt and equity agreements; relationships with property managers and franchisors; our ability to maintain our properties in a first-class manner, including meeting capital expenditure requirements; our ability to compete effectively in areas such as access, location, quality of accommodations and room rate structures; changes in travel patterns, taxes and government regulations, which influence or determine wages, prices, construction procedures and costs; our ability to identify, successfully compete for and complete acquisitions; the performance of hotels after they are acquired; necessary capital expenditures and our ability to fund them and complete them with minimum disruption; our ability to continue to satisfy complex rules in order for us to qualify as a REIT for federal income tax purposes; 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 in this release is as of February 21, 2017, 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 in conjunction 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, 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