Sunstone Hotel Investors Reports Results For Fourth Quarter And Full Year 2015

ALISO VIEJO, Calif., Feb. 22, 2016 /PRNewswire/ -- Sunstone Hotel Investors, Inc. (the "Company" or "Sunstone") (NYSE: SHO) today announced results for the fourth quarter and full year ended December 31, 2015.

Fourth Quarter 2015 Operational Results (as compared to Fourth Quarter 2014):

• Comparable Hotel RevPAR, including adoption of the industry's Uniform System of Accounts for the Lodging Industry, Eleventh Revised Edition ("USALI Eleventh Revised Edition"), which became effective January 1, 2015, increased 4.1% to $152.40.
• Comparable Hotel Adjusted EBITDA Margin, including adoption of the USALI Eleventh Revised Edition and excluding prior year property taxes, net increased 120 basis points to 29.4%.
• Adjusted EBITDA increased 4.6% to $81.1 million.
• Adjusted FFO attributable to common stockholders per diluted share increased 11.1% to $0.30.
• Income attributable to common stockholders, which includes a gain of $214.5 million recognized on the Company's sale of its interests in the Doubletree Guest Suites Times Square, increased 2,034.2% to $233.8 million.
• Income attributable to common stockholders per diluted share increased 2,140.0% to $1.12.

Full Year 2015 Operational Results (as compared to Full Year 2014):

• Comparable Hotel RevPAR, including adoption of the USALI Eleventh Revised Edition, increased 5.9% to $162.42.
• Comparable Hotel Adjusted EBITDA Margin, including adoption of the USALI Eleventh Revised Edition and excluding prior year property taxes, net increased 120 basis points to 30.8%.
• Adjusted EBITDA increased 12.4% to $351.3 million.
• Adjusted FFO attributable to common stockholders per diluted share increased 12.0% to $1.31.
• Income attributable to common stockholders, which includes gains of $226.2 million recognized on the Company's sales of its interests in the Doubletree Guest Suites Times Square as well as BuyEfficient, increased 369.5% to $338.2 million.
• Income attributable to common stockholders per diluted share increased 337.8% to $1.62.

John Arabia, President and Chief Executive Officer, stated, "During the fourth quarter, our portfolio continued to meet or exceed our expectations, benefiting from robust group business and out-of-room group spend. Group food and beverage and ancillary revenue spend increased throughout the year, driving profitability. Additionally, we enhanced our already strong growth prospects, balance sheet and liquidity with the sale of the leasehold interest of the Doubletree Guest Suites Times Square, which we sold in December for nearly $1.2 million per key. Looking forward to 2016, there is considerable uncertainty and various headwinds in the broad economy that may negatively impact lodging demand. While our hotel-specific indicators, such as group booking pace and group night production remain robust, these headwinds warrant more conservative than normal forecasting, and increase the risk of falling short of our earnings guidance. The economy and general hotel demand are factors out of our control. However, the factors within our control, such as having one of the lowest levered balance sheets in the REIT industry and being positioned to deliver strong earnings growth through our various hotel repositionings, give us confidence that we are well positioned to take advantage of nearly any economic situation that comes our way."

Recent Developments

In December 2015, the Company entered into a term loan agreement, which provided the Company with a six month period within which it had the option to borrow up to $100.0 million. The Company drew the available $100.0 million on January 29, 2016, and used the proceeds on February 1, 2016, combined with cash on hand, to repay the $114.2 million loan secured by the Boston Park Plaza. The Boston Park Plaza loan was scheduled to mature in February 2018, and was available to be repaid without penalty in February 2016. The $100.0 million unsecured term loan matures in January 2023, and bears interest based on a pricing grid with a range of 180 to 255 basis points over LIBOR, depending on the Company's leverage ratios. Additionally, the Company entered into a forward swap agreement that fixed the LIBOR rate at 1.853% for the duration of the $100.0 million term loan. Based on the Company's current leverage, the loan reflects a fixed rate of 3.653%. Following the Company's repayment of the loan secured by the Boston Park Plaza, it has 21 unencumbered hotels, 14 of which are held by subsidiaries whose interests are pledged to the Company's credit facility.

Bryan Giglia, Chief Financial Officer, stated, "At the end of 2015, we achieved our long-term leverage goals, resulting in one of the lowest levered balance sheets in the REIT space. With a significant cash position, low leverage, well staggered maturities, strong banking relationships and an undrawn $400 million credit facility, we have significant financial strength and flexibility, have sizable optionality, and are well positioned to take advantage of various opportunities that may arise."

Balance Sheet/Liquidity Update

As of December 31, 2015, the Company had approximately $575.2 million of cash and cash equivalents, including restricted cash of $76.2 million. Adjusting for payment of the Company's common and preferred dividends in January 2016, total pro forma cash including restricted cash as of December 31, 2015 would be $388.9 million.

As of December 31, 2015, the Company had total assets of $3.9 billion, including $3.2 billion of net investments in hotel properties, total consolidated debt of $1.1 billion and stockholders' equity of $2.3 billion.

Capital Improvements

The Company invested $57.7 million into capital improvements of its portfolio during the three months ended December 31, 2015. During the fourth quarter 2015, the Company incurred revenue displacement of approximately $2.0 million. In 2016, the Company expects to invest approximately $160 million to $180 million into its portfolio, with the majority of that investment going to complete its two repositionings at the Boston Park Plaza and the Wailea Beach Marriott Resort & Spa. The Company expects $14.0 million to $16.0 million of revenue displacement, and $10.5 million to $12.5 million of EBITDA displacement resulting from the completion of the Wailea Beach Marriott Resort & Spa repositioning, which is in-line with previous estimates. In addition to displacement at the Wailea Beach Marriott Resort & Spa, the Company expects $2.5 million to $3.5 million of displacement resulting from the completion of the Boston Park Plaza repositioning, which is in-line with previous estimates.

Marc Hoffman, Chief Operating Officer, stated "We are very pleased with the progress of our repositionings in Boston and Wailea, which we expect to complete in the second and fourth quarters, respectively. While our operating results are likely to be disrupted in the near-term, we remain confident that these investments and our portfolio's positioning in healthy markets should result in strong growth in late 2016 and in 2017."

2016 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 and/or credits, debt repurchases/repayments, perpetual preferred redemptions or unannounced financings during 2016.

First quarter and full year 2016 guidance are based in part on the following assumptions:

• Full year revenue disruption of $14.0 million to $16.0 million, related to the repositioning at the Wailea Beach Marriott Resort & Spa, which is expected to negatively impact full year Comparable Hotel RevPAR by 100 to 125 basis points.
• Guarantee payment of $5.0 million related to the Wailea Beach Marriott Resort & Spa recorded in the fourth quarter.
• Full year Comparable Hotel Adjusted EBITDA Margin reduction of approximately 20 to 0 basis points, which excludes the Wailea Beach Marriott Resort & Spa and any guarantee payments, but does reflect the impact related to the end of the ground lease rent abatement at the Hilton San Diego Bayfront.
• Full year EBITDA includes approximately $6.0 million of expense related to the end of the ground lease rent abatement at the Hilton San Diego Bayfront.
• Full year corporate overhead expense (excluding stock amortization and one-time expenses related to acquisition closing costs) of approximately $22.5 million to $23.5 million.
• Full year interest expense of approximately $54.3 million to $55.1 million, including approximately $2.0 million in amortization of deferred financing fees, and excluding approximately $1.4 million of capital lease obligation interest.
• Full year expense of approximately $2.5 million to $3.0 million in one-time costs related to property-level restructuring, severance, management transition and lease termination costs, the majority of which is expected to occur during the first quarter. These expenses have been excluded from both Adjusted EBITDA and Adjusted FFO attributable to common stockholders.
• Full year preferred dividends of $9.2 million for the Series D cumulative redeemable preferred stock.

Dividend Update

On February 18, 2016, the board of directors declared a cash dividend of $0.05 per share of common stock, as well as a cash dividend of $0.50 per share payable to its Series D cumulative redeemable preferred stockholders. The dividends will be paid on April 15, 2016 to stockholders of record as of March 31, 2016.

The Company expects to continue to pay a regular quarterly cash dividend of $0.05 per share of common stock throughout 2016. To the extent that the expected regular quarterly dividends for 2016 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 2017. The level of any future quarterly dividends, however, 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 2015 financial results on February 23, 2016, 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 1-800-524-8850 (for domestic callers) or 1-416-204-9702 (for international callers). 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 22, 2016 has interests in 29 hotels comprised of 13,845 rooms. Sunstone's hotels are primarily in the urban, upper upscale segment and are operated under nationally recognized brands, such as Marriott, Hilton, Hyatt, Fairmont and Sheraton. 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. Our values include transparency, trust, ethical conduct, communication and discipline. As demand for lodging generally fluctuates with the overall economy, we seek to employ a balanced, cycle-appropriate corporate strategy.

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 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; potential 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 22, 2016, 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 an investor's complete understanding of our operating performance.

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 non-cash items such as real estate depreciation and amortization, amortization of lease intangibles, 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 the National Association of Real Estate Investment Trusts' ("NAREIT") definition of "FFO applicable to common shares." This 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 EBITDA and FFO attributable to common stockholders for the following items, which may occur in any period, and refer to these measures as either Adjusted EBITDA or Adjusted FFO attributable to common stockholders:

• Amortization of favorable and unfavorable contracts: we exclude the non-cash 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 Hilton New Orleans St. Charles, the Hyatt Regency San Francisco and the Wailea Beach Marriott Resort & Spa. The amortization of favorable and unfavorable contracts does not reflect the underlying performance of our hotels.
• Ground rent adjustments: we exclude the non-cash expense incurred from straightlining our ground lease obligations as this expense does not reflect the underlying performance of our hotels.
• 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 completed acquisitions classified as 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.
• Noncontrolling interests: we deduct the noncontrolling partner's pro rata share of any EBITDA or FFO adjustments related to our consolidated Hilton San Diego Bayfront partnership, as well as any preferred dividends earned by preferred investors in an entity that owns the Doubletree Guest Suites Times Square, including related administrative fees, prior to the hotel's sale in December 2015.
• 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 because they do not reflect our actual performance for that period.
• Impairment losses: we exclude the effect of impairment losses because we believe that including them in Adjusted EBITDA and Adjusted FFO attributable to common stockholders is not consistent with reflecting the ongoing performance of our remaining assets.
• Other adjustments: we exclude other adjustments such as executive severance costs, lawsuit settlement costs, prior year property tax adjustments, property-level restructuring, severance and management transition costs, lease buyouts and any gains or losses we have recognized on sales or redemptions of assets other than real estate investments because we do not believe these costs reflect our actual performance for that period and/or the ongoing operations of our hotels.

In addition, to derive Adjusted EBITDA we exclude the non-cash expense incurred with the amortization of deferred stock compensation as this expense does not reflect the underlying performance of our hotels. We also include an adjustment for the cash ground lease expense recorded on the Hyatt Chicago Magnificent Mile's building lease. Upon acquisition of this hotel, we determined that the building lease was a capital lease, and, therefore, we include a portion of the capital lease payment each month in interest expense. We include an adjustment for ground lease expense on capital leases in order to more accurately reflect the operating performance of the Hyatt Chicago Magnificent Mile. We also exclude the effect of gains and losses on the disposition of depreciable assets because we believe that including them in Adjusted EBITDA is not consistent with reflecting the ongoing performance of our assets. In addition, material gains or losses from the depreciated value of the disposed assets could be less important to investors given that the depreciated asset value often does not reflect its market value.

To derive Adjusted FFO attributable to common stockholders, we also exclude the non-cash gains or losses on our derivatives, as well as any federal and state taxes associated with the application of net operating loss carryforwards or with the sale of assets other than real estate investments. We believe that these items are not reflective of our ongoing finance costs.

In presenting hotel Adjusted EBITDA and hotel Adjusted EBITDA margins, the revenue and expense items associated with BuyEfficient prior to its sale in September 2015 and other miscellaneous non-hotel items have been excluded. We believe the calculation of hotel Adjusted EBITDA results in a more accurate presentation of the hotel Adjusted EBITDA margins for our hotels, and that these non-GAAP financial measures are useful to investors in evaluating our property-level operating performance.

Our 29 comparable hotels include all hotels held for investment as of December 31, 2015, and also include prior ownership results for the Wailea Beach Marriott Resort & Spa acquired in July 2014. We obtained prior ownership information from the Wailea Beach Marriott Resort & Spa's previous owner during the due diligence period before acquiring the hotel. We performed a limited review of the information as part of our analysis of the acquisition. We believe that providing comparable hotel data is useful to us and to investors in evaluating our operating performance because this measure helps us and investors evaluate and compare the results of our operations from period to period by removing the fluctuations caused by an acquisition or a disposition. We strongly encourage investors to review our financial information in its entirety and not to rely on a single financial measure.

Reconciliations of net income to EBITDA, Adjusted EBITDA, FFO attributable to common stockholders and Adjusted FFO attributable to common stockholders are set forth on pages 11 and 12. Reconciliations and the components of hotel Adjusted EBITDA and hotel Adjusted EBITDA margin are set forth on page 15.