Sunstone Hotel Investors Reports Results For Second Quarter 2018

ALISO VIEJO, Calif., July 30, 2018 /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 second quarter ended June 30, 2018.

Second Quarter 2018 Operational Results (as compared to Second Quarter 2017):

• Net income decreased 0.3% to $51.3 million. Excluding the effect of the gain on hotel sold during the second quarter of 2017, net income would have increased by 2.1%.
• Income attributable to common stockholders per diluted common share decreased 4.8% to $0.20. Excluding the effect of the gain on hotel sold during the second quarter of 2017, income attributable to common stockholders per diluted common share would have been flat.
• 24 Hotel Comparable Portfolio RevPAR increased 2.0% to $195.85.
• 24 Hotel Comparable Portfolio Adjusted EBITDAre Margin, excluding prior year property tax adjustments, net decreased 60 basis points to 34.1%. Excluding the Hyatt Regency San Francisco, the JW Marriott New Orleans, the Marriott Boston Long Wharf and the Renaissance Los Angeles Airport, all of which were under rooms renovation during the second quarter of 2018, the 20 Hotel Comparable Portfolio Adjusted EBITDAre Margin, excluding prior year property tax adjustments, net would have increased 10 basis points
• Adjusted EBITDAre, excluding noncontrolling interest decreased 1.0% to $101.2 million.
• Adjusted FFO attributable to common stockholders per diluted share decreased 2.6% to $0.37.

John Arabia, President and Chief Executive Officer, stated, "Our portfolio operating results exceeded our expectations due to stronger-than-anticipated room rate growth and significant increases in both food and beverage revenues and other income. As a result, our second quarter Adjusted EBITDAre and Adjusted FFO per diluted share exceeded the high end of our guidance, and we increased our full-year outlook for both operating fundamentals and earnings. In addition, we recently completed several transactions that enhance our portfolio quality. Following these transactions, we maintain significant financial capacity, which we expect to methodically and prudently invest into Long-Term Relevant Real Estate to further enhance our portfolio quality and earnings."

Disclosures regarding the non-GAAP financial measures in this release are included on pages 6 through 8. Reconciliations of non-GAAP financial measures to the most comparable GAAP measure for each of the periods presented are included on pages 11 through 16 of this release.

The Company's actual results for the quarter ended June 30, 2018 compare to its guidance originally provided as follows:

Recent Developments

On July 12, 2018, a subsidiary of the Company purchased the land underlying the 501-room JW Marriott New Orleans for $15.0 million. Prior to this purchase, the Company leased the approximately one acre of land from an unaffiliated third party for an annual rent payment of $625,000. The ground rent is reset every 10 years based on market factors, with the next rent reset scheduled for 2024.

On July 10, 2018, the Company sold the leasehold interest in the 408-room Hyatt Regency Newport Beach for a gross sale price of $95.0 million or approximately $233,000 per key. The hotel is subject to a short term ground lease that is scheduled to mature in 2048. The sale price represents a 9.7x multiple on trailing 12-month hotel Adjusted EBITDAre and an 8.6% capitalization rate on trailing 12-month net operating income.

On May 31, 2018, the Company acquired the exclusive perpetual rights to use portions of the Renaissance Washington DC building that the Company had previously leased from an unaffiliated third party for $18.4 million, including closing costs. The acquisition eliminates approximately $1.3 million of annual space rent.

During the second quarter of 2018, the Company issued 2,590,854 shares of its common stock for gross proceeds of $45.1 million. The shares were issued in connection with an "At the Market" ("ATM") program pursuant to Equity Distribution Agreements ("ATM Agreements"), which the Company entered into during the first quarter of 2017 with Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC and Wells Fargo Securities, LLC. Under the ATM Agreements, the Company is authorized to issue common stock having an aggregate offering amount of up to $300.0 million. As of June 30, 2018, the Company had $175.5 million available for sale under the ATM Agreements.

John Arabia added, "The combination of these transactions further advances our strategy of owning a portfolio of Long-Term Relevant Real Estate. Over the last three years we have sold approximately $1.0 billion of our lower quality or leasehold hotels, and redeployed a portion of those proceeds into Long-Term Relevant Real Estate. Additionally, following these transactions, our percentage of earnings generated from hotels subject to ground leases has declined over the past several years from approximately 50% to approximately 18%."

Balance Sheet/Liquidity Update

As of June 30, 2018, the Company had $619.9 million of cash and cash equivalents, including restricted cash of $75.0 million, total assets of $3.8 billion, including $3.1 billion of net investments in hotel properties, total consolidated debt of $986.6 million and stockholders' equity of $2.6 billion.

Capital Improvements

The Company invested $41.3 million into capital improvements of its portfolio during the three months ended June 30, 2018. In 2018, the Company expects to invest approximately $150 million to $175 million into its portfolio. Several of the 2018 projects began in the fourth quarter 2017 and have been completed during the first half of 2018. Based on the expected timing and scope of its 2018 projects, the Company expects $9 million to $11 million of total revenue displacement related to all capital projects in 2018, of which approximately $9 million of total revenue displacement was incurred during the first half of 2018. The anticipated revenue displacement is expected to reduce the Company's 2018 total Comparable Portfolio RevPAR growth by approximately 100 basis points. A selection of the Company's planned 2018 capital investment projects include:

• Renaissance Orlando at SeaWorld®: The Company is currently constructing 46,500 square feet of new meeting space, including a 16,400 square foot ballroom, on vacant land adjacent to the hotel's existing 150,000 square feet of total event and meeting space. Total cost for the new meeting space is expected to be $22 million to $24 million, with a portion spent in 2017. The new, state-of-the-art meeting space is expected to allow the hotel to increase the number of group rooms sold by approximately 20,000 room nights annually. Construction of the new meeting space began during the fourth quarter 2017, and is expected to be completed during the first quarter 2019. The Company expects zero to $1 million of total revenue displacement during the second half of 2018 related to the construction.
• Marriott Boston Long Wharf: The Company expects to invest approximately $31 million, with a portion spent in 2017, to renovate all 412 guestrooms and suites. The renovation, which will better position the hotel with high-end group and business travelers, includes the complete redesign of all guestrooms and bathrooms, including enlarging many of the existing bathrooms and converting 346 bathtubs to showers, as well as expanding and upgrading the concierge lounge. The renovation began during the fourth quarter 2017, and is substantially complete. Approximately $6 million of total revenue was displaced during the first half of 2018.
• JW Marriott New Orleans: The Company expects to invest $26 million to $28 million, with a portion spent in 2017, to renovate all 501 guestrooms and suites. The renovation includes the complete redesign of all guestrooms and bathrooms, including enlarging many of the existing bathrooms and converting 381 bathtubs to showers. The renovation began during the second quarter 2018, and is expected to be completed during the fourth quarter 2018. The Company expects $2 million to $3 million of total revenue displacement during 2018.

2018 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, changes in its operating environment, or any unannounced hotel acquisitions, dispositions, re-brandings, management changes, transition costs, noncash impairment expense, changes in deferred tax assets or valuation allowances, severance costs associated with restructuring hotel services, uninsured property losses, early lease termination costs, prior year property tax assessments or credits, debt repurchases/repayments, or unannounced financings during 2018. The Company's 2018 guidance does include anticipated displacement from the scheduled 2018 capital investment projects. The Company expects the negative impact of its 2018 capital investment projects to result in approximately 100 basis points less annual RevPAR growth and approximately $6 million to $8 million less Adjusted EBITDAre, excluding noncontrolling interest. The Company's 2018 guidance does not anticipate any acceleration in business travel resulting from the recent federal tax cuts or other stimulus programs.

For the third quarter of 2018, the Company expects:

For the full year of 2018, the Company expects:

Third quarter and full year 2018 guidance are based in part on the following assumptions:

• Full year 24 Hotel Comparable Portfolio RevPAR guidance is negatively impacted by approximately 100 basis points, resulting from planned 2018 capital investment projects, a selection of which are discussed above.
• Full year revenue displacement of $9 million to $11 million, related to planned 2018 capital investment projects.
• Full year Adjusted EBITDAre, excluding noncontrolling interest displacement of approximately $6 million to $8 million, related to planned 2018 capital investment projects.
• Full year 24 Hotel Comparable Portfolio Adjusted EBITDAre Margin is expected to decline 50 basis points to 100 basis points, which is negatively impacted by approximately 40 basis points resulting from planned 2018 capital investment projects.
• Full year corporate overhead expense (excluding deferred stock amortization) of approximately $21 million.
• Full year amortization of deferred stock compensation expense of approximately $9 million.
• Full year interest expense of approximately $45 million, including approximately $3 million in amortization of deferred financing fees, approximately $2 million of capital lease obligation interest and approximately $4 million noncash gain on derivatives.
• Full year total preferred dividends of $13 million, which includes the Series E and Series F cumulative redeemable preferred stock.

Dividend Update

On July 27, 2018, the Company's 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 October 15, 2018 to stockholders of record as of September 28, 2018.

The Company expects to continue to pay a quarterly cash dividend of $0.05 per share of common stock throughout 2018. Consistent with the Company's past practice and to the extent that the expected regular quarterly dividends for 2018 do not satisfy the annual distribution requirements, the Company expects to satisfy the annual distribution requirement by paying a "catch-up" dividend in January 2019. 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.

Earnings Call

The Company will host a conference call to discuss second quarter 2018 financial results on July 31, 2018, 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 1-334-323-0522 and reference confirmation code 6313754 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 July 30, 2018 has interests in 24 hotels comprised of 12,046 rooms. Sunstone's primary business is to acquire, own, asset manage and renovate 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.

Sunstone's mission is to create meaningful value for our stockholders by producing superior long-term returns through the ownership of Long-Term Relevant Real Estate in the hospitality sector. 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; severe weather events or other natural disasters; 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 July 30, 2018, 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 margin. 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 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.

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