Sunstone Hotel Investors: An Important Revision

Sunstone Hotel Investors: An Important Revision

10’000 Hours/DigitalVision via Getty Images In the REIT space, there are many different companies that focus on many different niches or markets. One market that was hit particularly hard as a result of the COVID-19 pandemic was the hotel space. But of the smaller players in this space that managed to survive, one company that stands out as an interesting turnaround prospect is Sunstone Hotel Investors (NYSE: SHO ). Although investors in the company have experienced pain by holding the stock in recent months, management has done well to turn some of the operations of the enterprise around. Admittedly, there’s still plenty of room for improvement. But as that improvement is realized, the company should still offer some nice prospects for investors who are patient. Recent developments are mixed

The last time I wrote an article about Sunstone Hotel Investors was in July of 2021. At that time, the company was just coming off of some of the greatest pain that it had experienced as a result of the COVID-19 pandemic. It truly was in an early state of recovery and, based on my assessment of the firm, I determined that a full turnaround would offer investors potentially meaningful upside. In that article, I rated the company a bullish prospect. That would be considered a ‘buy’ according to the current rating system for Seeking Alpha. Since the publication of that article, the company has, unfortunately, not lived up to my own expectations. While the S&P 500 has delivered a loss of 1.7%, investors buying into Sunstone Hotel Investors would have incurred a loss of 10.4%.

Based on this disparity relative to the market, some investors might think that the fundamental performance of Sunstone Hotel Investors has been awful in recent months. However, the exact opposite has been true. After seeing revenue plummet from $1.12 billion in 2019 to $267.91 million in 2020, some might have thought that the picture for the company, operationally, couldn’t get any worse. But in the first quarter of its 2021 fiscal year, the most recent quarter for which data was available when I last wrote about the firm, revenue totaled just $50.63 million. That was almost a quarter of the $191.21 million in revenue the company generated the same time one year earlier. For anybody looking at the picture then, it would be understandable why one would be bearish. But fast forward to today, and we now know how things turned out for 2021 as a whole . Revenue for that year totaled $509.20 million. That’s nearly double what the company achieved in the 2020 fiscal year. Author – SEC EDGAR Data Based on the data provided, the company benefited largely from a rise in the occupancy rate at its properties. For the full 2021 fiscal year, for instance, the occupancy rate for its hotels was 44.3%. That compares to the 21.7% achieved in 2020. But when you dig deeper into the data, you find that the picture is a bit more complex than that. Occupancy rates during this two-year window happened to be rather volatile. In April of 2020, for instance, the company bottomed out with an occupancy rate of just 1.1%. That eventually recovered, with the figure in the final three months of 2021 ranging from between 55.5% and 56.2%. A year earlier, this range was between 12.6% and 19%. Another contributor to the company’s improvement was an increase in RevPAR that management recorded. During the 2021 fiscal year, this came in at $103.68. That compares to the $46 reported one year earlier. Of course, this doesn’t mean that the picture for the company doesn’t call for further improvement. The occupancy rate for its properties in 2019, for instance, was 83.7%. And the RevPAR averaged $196.08.

There were other ways in which Sunstone Hotel Investors continue to show improvement. During 2021, operating cash flow for the company was $28.4 million. If we strip out preferred distributions, this would total $13.2 million. By comparison, these figures in the 2020 fiscal year were negative $116.71 million and negative $129.54 million, respectively. FFO, or funds from operations, went from a negative $175.85 million to a negative $13.1 million. And the adjusted equivalent expanded from negative $156.58 million to a positive $8.4 million. Over that same window of time, the EBITDA for the business grew from a negative $103.21 million to a positive $69.7 million.

Another thing that we should briefly discuss is that management has fundamentally changed the company’s portfolio over this time frame. Back in 2019, for […]

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