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Sunstone Hotel Investors, Inc. 10-K Analysis & Summary – 2/21/2025

⚠️This is not investment advice.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️

Sunstone Hotel Investors, Inc.

Filing date:

02/21/2025

TLDR:

Sunstone Hotel Investors, Inc. experienced a decrease in revenue and net income in 2024 due to hotel dispositions and renovations, partially offset by a new acquisition. While occupancy rates improved, inflationary pressures and geographic concentration remain key risks.

ELI5:

Sunstone, a company that owns hotels, made less money this year because they sold some hotels and fixed up others. Even though more people stayed in their hotels, they still face challenges like rising costs and having many hotels in the same areas.

Accession #:

0001558370-25-001297

Published on

Analyst Summary

  • Total revenue decreased by 8.2% from $986.48 million in 2023 to $905.81 million in 2024.
  • Net income decreased significantly by 79.1% from $206.71 million in 2023 to $43.26 million in 2024.
  • Occupancy (Comparable Portfolio) increased from 70.2% in 2023 to 72.1% in 2024.
  • ADR (Comparable Portfolio) decreased from $333.37 in 2023 to $327.83 in 2024.
  • RevPAR (Comparable Portfolio) increased from $234.03 in 2023 to $236.37 in 2024.
  • Adjusted EBITDAre decreased by 12.8% from $263.45 million in 2023 to $229.69 million in 2024.
  • Gross Profit Margin decreased by 0.15% from 61.82% to 61.73%.
  • Operating Profit Margin decreased by 78.3% from 21.42% to 4.65%.
  • Net Profit Margin decreased by 77.2% from 20.95% to 4.78%.
  • Return on Assets (ROA) decreased by 78.8% from 6.56% to 1.39%.
  • Return on Equity (ROE) decreased by 85.0% from 8.89% to 1.33%.
  • Basic and Diluted Earnings Per Share (EPS) decreased by 84.9% from $0.93 to $0.14.
  • Current Ratio decreased by 57.4% from 7.04 to 3.00.
  • Quick Ratio decreased by 59.1% from 6.70 to 2.74.
  • Cash Ratio decreased by 62.9% from 6.30 to 2.34.
  • Debt-to-Equity Ratio increased by 5.3% from 0.38 to 0.40.
  • Debt-to-Assets Ratio increased by 3.8% from 0.26 to 0.27.
  • Interest Coverage Ratio decreased by 63.8% from 5.09 to 1.84.
  • Asset Turnover decreased by 6.5% from 0.31 to 0.29.
  • Price-to-Earnings Ratio (P/E) is 76.07.
  • Price-to-Book Ratio (P/B) is 1016.
  • Price-to-Sales Ratio (P/S) is 2.36.
  • Enterprise Value to EBITDA (EV/EBITDA) is 12.94.
  • Revenue Growth decreased by -8.2%.
  • Net Income Growth decreased by -79.1%.
  • EPS Growth decreased by -84.9%.

Opportunities and Risks

  • Geographic Concentration: A significant portion of the company’s hotels are concentrated in California, Florida, Hawaii, and Washington D.C., exposing the company to regional economic and environmental risks.
  • Inflationary Pressures: Inflation may increase operating costs, potentially impacting profitability.
  • Reliance on Third-Party Managers: The company’s performance is dependent on the effectiveness of its third-party hotel managers.
  • Debt Levels: The company has a significant amount of outstanding debt, which may restrict financial flexibility.
  • Cybersecurity: The company and its third-party managers face ongoing cybersecurity threats.
  • Improved Occupancy: Occupancy rates in the comparable portfolio have improved, indicating a recovery in demand.
  • Strategic Acquisitions: The acquisition of the Hyatt Regency San Antonio Riverwalk provides an opportunity for revenue growth.
  • Capital Recycling: The company’s strategy of recycling capital from slower-growth assets to higher-growth opportunities may enhance returns.
  • Flexible Capital Structure: The company’s capital structure provides financial flexibility to execute its strategy.

Potential Implications

Stock Price

  • A hold rating is suggested, pending further observation of the performance of renovated properties and the impact of macroeconomic factors on the lodging industry.
  • Investors should closely monitor the company’s ability to manage operating expenses, maintain occupancy rates, and execute its capital recycling strategy.

Sunstone Hotel Investors, Inc. – 2024 10-K Filing Report

Executive Summary

This report analyzes Sunstone Hotel Investors, Inc.’s 2024 10-K filing. The company, a REIT focused on upper upscale and luxury hotels, experienced a decrease in revenue compared to 2023, primarily due to hotel dispositions and renovations, partially offset by a new acquisition. While occupancy rates improved in the comparable portfolio, inflationary pressures and geographic concentration remain key risks. The company maintains a flexible capital structure and appropriate leverage. A hold rating is suggested, pending further observation of the performance of renovated properties and the impact of macroeconomic factors on the lodging industry.

Company Overview

Sunstone Hotel Investors, Inc. is a REIT that owns a portfolio of upper upscale and luxury hotels primarily located in major convention, resort destination, and urban markets. As of December 31, 2024, the company owned 15 hotels with 7,253 rooms. The company’s strategy focuses on active asset management, capital investment, and strategic capital recycling.

Detailed Analysis

Management’s Discussion and Analysis (MD&A)

Management attributes the decrease in revenue to hotel dispositions (Boston Park Plaza) and ongoing renovations (The Confidante Miami Beach and Renaissance Long Beach). The acquisition of the Hyatt Regency San Antonio Riverwalk partially offset these declines. Management highlights the company’s strong liquidity position and flexible capital structure as key strengths. Forward-looking statements regarding future performance are subject to risks including economic conditions, competition, and unforeseen events.

Financial Statement Analysis

Key Ratios and Trends

  • Revenue: Total revenue decreased by 8.2% from $986.48 million in 2023 to $905.81 million in 2024.
  • Net Income: Net income decreased significantly by 79.1% from $206.71 million in 2023 to $43.26 million in 2024.
  • Occupancy (Comparable Portfolio): Increased from 70.2% in 2023 to 72.1% in 2024.
  • ADR (Comparable Portfolio): Decreased from $333.37 in 2023 to $327.83 in 2024.
  • RevPAR (Comparable Portfolio): Increased from $234.03 in 2023 to $236.37 in 2024.
  • Adjusted EBITDAre: Decreased by 12.8% from $263.45 million in 2023 to $229.69 million in 2024.

Visual Aids

(Note: Due to the limitations of text-based output, actual charts and graphs cannot be included. However, the following descriptions indicate the types of visualizations that would be beneficial.)

  • Revenue Trend Chart: A line chart showing the trend of total revenue over the past 3 years, highlighting the impact of acquisitions and dispositions.
  • Occupancy and RevPAR Comparison: A bar chart comparing occupancy and RevPAR for the comparable portfolio in 2023 and 2024.
  • Debt Maturity Schedule: A table or chart illustrating the company’s debt maturity schedule, highlighting upcoming maturities.

Uncommon Metrics

  • FF&E Reserve Funding: The company is required to maintain FF&E reserve accounts, ranging between 2.0% and 5.5% of applicable annual revenue.
  • Percentage of Unionized Employees: Approximately 28.0% of workers employed by the company’s third-party managers are covered by collective bargaining agreements.

Risk and Opportunity Assessment

Risks

  • Geographic Concentration: A significant portion of the company’s hotels are concentrated in California, Florida, Hawaii, and Washington D.C., exposing the company to regional economic and environmental risks.
  • Inflationary Pressures: Inflation may increase operating costs, potentially impacting profitability.
  • Reliance on Third-Party Managers: The company’s performance is dependent on the effectiveness of its third-party hotel managers.
  • Debt Levels: The company has a significant amount of outstanding debt, which may restrict financial flexibility.
  • Cybersecurity: The company and its third-party managers face ongoing cybersecurity threats.

Opportunities

  • Improved Occupancy: Occupancy rates in the comparable portfolio have improved, indicating a recovery in demand.
  • Strategic Acquisitions: The acquisition of the Hyatt Regency San Antonio Riverwalk provides an opportunity for revenue growth.
  • Capital Recycling: The company’s strategy of recycling capital from slower-growth assets to higher-growth opportunities may enhance returns.
  • Flexible Capital Structure: The company’s capital structure provides financial flexibility to execute its strategy.

Conclusion and Actionable Insights

Sunstone Hotel Investors, Inc. faces challenges related to revenue declines and inflationary pressures. However, the company’s improved occupancy rates, strategic acquisitions, and flexible capital structure present opportunities for future growth. A hold rating is suggested, pending further observation of the performance of renovated properties and the impact of macroeconomic factors on the lodging industry. Investors should closely monitor the company’s ability to manage operating expenses, maintain occupancy rates, and execute its capital recycling strategy.

Financial Ratio and Metric Analysis

Profitability

  • Gross Profit Margin:

    • Ratio/Metric: ($905,809 – $146,369 – $182,840 – $23,323) / $905,809 = 61.73%
    • Trend: ($986,480 – $158,002 – $193,820 – $23,721) / $986,480 = 61.82%. Percentage Change: (61.73% – 61.82%) / 61.82% = -0.15%
    • Industry: The average gross profit margin for the REIT industry is around 60%. SHO’s gross profit margin is in line with the industry average.
  • Operating Profit Margin:

    • Ratio/Metric: $42,162 / $905,809 = 4.65%
    • Trend: $211,270 / $986,480 = 21.42%. Percentage Change: (4.65% – 21.42%) / 21.42% = -78.3%
    • Industry: The average operating profit margin for the REIT industry is around 15%. SHO’s operating profit margin is below the industry average.
  • Net Profit Margin:

    • Ratio/Metric: $43,262 / $905,809 = 4.78%
    • Trend: $206,708 / $986,480 = 20.95%. Percentage Change: (4.78% – 20.95%) / 20.95% = -77.2%
    • Industry: The average net profit margin for the REIT industry is around 10%. SHO’s net profit margin is below the industry average.
  • Return on Assets (ROA):

    • Ratio/Metric: $43,262 / $3,106,639 = 1.39%
    • Trend: $206,708 / $3,149,321 = 6.56%. Percentage Change: (1.39% – 6.56%) / 6.56% = -78.8%
    • Industry: The average ROA for the REIT industry is around 3%. SHO’s ROA is below the industry average.
  • Return on Equity (ROE):

    • Ratio/Metric: $28,034 / $2,104,020 = 1.33%
    • Trend: $192,720 / $2,166,638 = 8.89%. Percentage Change: (1.33% – 8.89%) / 8.89% = -85.0%
    • Industry: The average ROE for the REIT industry is around 8%. SHO’s ROE is below the industry average.
  • Earnings Per Share (EPS) – Basic and Diluted:

    • Ratio/Metric: Basic: $0.14, Diluted: $0.14
    • Trend: Basic: $0.93, Diluted: $0.93. Percentage Change: Basic: ($0.14 – $0.93) / $0.93 = -84.9%, Diluted: ($0.14 – $0.93) / $0.93 = -84.9%
    • Industry: The average EPS for the REIT industry varies widely, but SHO’s EPS is relatively low compared to some larger REITs.

Liquidity

  • Current Ratio:

    • Ratio/Metric: ($107,199 + $73,078 + $34,109 + $27,757) / ($52,722 + $24,137) = 3.00
    • Trend: ($426,403 + $67,295 + $31,206 + $26,383) / ($48,410 + $29,965) = 7.04. Percentage Change: (3.00 – 7.04) / 7.04 = -57.4%
    • Industry: A current ratio of 1.5 to 2 is generally considered healthy. SHO’s current ratio is above the healthy range.
  • Quick Ratio (Acid-Test Ratio):

    • Ratio/Metric: ($107,199 + $73,078 + $34,109) / ($52,722 + $24,137) = 2.74
    • Trend: ($426,403 + $67,295 + $31,206) / ($48,410 + $29,965) = 6.70. Percentage Change: (2.74 – 6.70) / 6.70 = -59.1%
    • Industry: A quick ratio of 1 or higher is generally considered healthy. SHO’s quick ratio is above the healthy range.
  • Cash Ratio:

    • Ratio/Metric: ($107,199 + $73,078) / ($52,722 + $24,137) = 2.34
    • Trend: ($426,403 + $67,295) / ($48,410 + $29,965) = 6.30. Percentage Change: (2.34 – 6.30) / 6.30 = -62.9%
    • Industry: A cash ratio of 0.5 or higher is generally considered healthy. SHO’s cash ratio is above the healthy range.

Solvency/Leverage

  • Debt-to-Equity Ratio:

    • Ratio/Metric: $841,047 / $2,104,020 = 0.40
    • Trend: $814,559 / $2,166,638 = 0.38. Percentage Change: (0.40 – 0.38) / 0.38 = 5.3%
    • Industry: The average debt-to-equity ratio for the REIT industry is around 1.0. SHO’s debt-to-equity ratio is below the industry average.
  • Debt-to-Assets Ratio:

    • Ratio/Metric: $841,047 / $3,106,639 = 0.27
    • Trend: $814,559 / $3,149,321 = 0.26. Percentage Change: (0.27 – 0.26) / 0.26 = 3.8%
    • Industry: The average debt-to-assets ratio for the REIT industry is around 0.5. SHO’s debt-to-assets ratio is below the industry average.
  • Interest Coverage Ratio (Times Interest Earned):

    • Ratio/Metric: ($42,162 + $50,125) / $50,125 = 1.84
    • Trend: ($211,270 + $51,679) / $51,679 = 5.09. Percentage Change: (1.84 – 5.09) / 5.09 = -63.8%
    • Industry: An interest coverage ratio of 2 or higher is generally considered healthy. SHO’s interest coverage ratio is below the healthy range.

Activity/Efficiency

  • Asset Turnover:

    • Ratio/Metric: $905,809 / $3,106,639 = 0.29
    • Trend: $986,480 / $3,149,321 = 0.31. Percentage Change: (0.29 – 0.31) / 0.31 = -6.5%
    • Industry: The average asset turnover for the REIT industry is around 0.3. SHO’s asset turnover is in line with the industry average.

Valuation

  • Price-to-Earnings Ratio (P/E):

    • Ratio/Metric: $10.65 / $0.14 = 76.07
    • Industry: The average P/E ratio for the REIT industry is around 20. SHO’s P/E ratio is above the industry average.
  • Price-to-Book Ratio (P/B):

    • Ratio/Metric: Market Cap = 200,824,993 * $10.65 = $2,138,875,670. P/B = $2,138,875,670 / $2,104,020 = 1016
    • Industry: The average P/B ratio for the REIT industry is around 1. SHO’s P/B ratio is above the industry average.
  • Price-to-Sales Ratio (P/S):

    • Ratio/Metric: $2,138,875,670 / $905,809 = 2.36
    • Industry: The average P/S ratio for the REIT industry is around 2. SHO’s P/S ratio is in line with the industry average.
  • Enterprise Value to EBITDA (EV/EBITDA):

    • Ratio/Metric: EV = $2,138,875,670 + $841,047 – $180,277 = $2,799,645,670. EV/EBITDA = $2,799,645,670 / $216,337 = 12.94
    • Industry: The average EV/EBITDA ratio for the REIT industry is around 12. SHO’s EV/EBITDA ratio is in line with the industry average.

Growth Rates

  • Revenue Growth:

    • Ratio/Metric: ($905,809 – $986,480) / $986,480 = -8.2%
  • Net Income Growth:

    • Ratio/Metric: ($43,262 – $206,708) / $206,708 = -79.1%
  • EPS Growth:

    • Ratio/Metric: ($0.14 – $0.93) / $0.93 = -84.9%

Other Relevant Metrics

  • Hotel Adjusted EBITDAre:

    • Metric: Hotel Adjusted EBITDAre is a non-GAAP measure used by management to assess the operating performance of the hotels. It excludes items such as business interruption insurance proceeds, property-level hurricane-related expenses, pre-opening costs, and other non-recurring adjustments.
    • Calculation: Hotel Adjusted EBITDAre = Total Revenues – Room Expense – Food and Beverage Expense – Other Operating Expense – Advertising and Promotion – Repairs and Maintenance – Utilities – Franchise Costs – Property Tax, Ground Lease and Insurance – Other Property-Level Expenses + Business interruption insurance proceeds + Property-level hurricane-related restoration expenses and legal fees + Pre-opening costs associated with extensive renovation projects + Property-level legal settlements, restructuring, severance, and management transition costs + Taxes assessed on commercial rents + Amortization of right-of use assets and obligations
    • Trend: Hotel Adjusted EBITDAre decreased from $276,756 in 2023 to $233,861 in 2024.
    • Commentary: The exclusion of certain items provides a clearer picture of the core operating performance of the hotels. However, investors should be aware that these exclusions can significantly impact the overall financial picture.

Commentary

Sunstone Hotel Investors experienced a challenging year, with a significant decline in net income and EPS compared to the previous year. While revenue decreased, the company maintained a strong liquidity position and a manageable debt maturity profile. The decrease in profitability was primarily due to hotel dispositions, acquisitions, and renovations. The company’s financial ratios, such as debt-to-equity and debt-to-assets, remain healthy, indicating a conservative approach to leverage.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️