Sunstone Hotel Investors Results

Sunstone Hotel Investors First Quarter Net Income Decreased 39.8%

Sunstone Hotel Investors Reports Results For First Quarter 2018

Sunstone

Sunstone Hotel Investors, Inc. (NYSE: SHO) yesterday announced results for the first quarter ended March 31, 2018.

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

  • Net income decreased 39.8% to $38.5 million. Excluding the effect of gains on hotels sold during both the first quarters of 2018 and 2017, net income would have increased 16.7%.
  • Income attributable to common stockholders per diluted common share decreased 44.4% to $0.15. Excluding the effect of gains on hotels sold during both the first quarters of 2018 and 2017, income attributable to common stockholders per diluted common share would have increased 14.3%.
  • 25 Hotel Comparable Portfolio RevPAR decreased 0.7% to $160.54.
  • 25 Hotel Comparable Portfolio Adjusted EBITDAre Margin, excluding prior year property tax adjustments, net decreased

    170 basis points to 26.0%. Excluding the Hyatt Regency San Francisco, the Marriott Boston Long Wharf and the Renaissance Los Angeles Airport, all of which were under rooms renovation during the first quarter of 2018, the 22 Hotel Comparable Portfolio Adjusted EBITDAre Margin, excluding prior year property tax adjustments, net would have decreased 40 basis points.

  • Adjusted EBITDAre, excluding noncontrolling interest decreased 10.3% to $62.4 million.
  • Adjusted FFO attributable to common stockholders per diluted share decreased 16.7% to $0.20.

John Arabia, President and Chief Executive Officer, stated, "Our portfolio performed well during the first quarter, resulting in better-than-anticipated revenue growth and profitability above our previously provided guidance range. Profitability benefited from robust group spend on banquets and audio visual and strength in corporate transient demand. Our recently acquired or repositioned hotels, Boston Park Plaza, Oceans Edge and Wailea Beach Resort, all continued to outperform the respective markets, driving impressive year-over-year revenue and earnings growth."

Mr. Arabia continued, "Year-to-date, we continue to find opportunities to invest in our portfolio to drive future growth. Several of our 2018 capital investment projects have been or will be completed during the second quarter, including the meeting space addition at Boston Park Plaza, and the guestroom renovations at the Marriott Boston Long Wharf, Renaissance Los Angeles Airport and Hyatt Regency San Francisco. While we experienced some short-term disruption year-to-date, we expect these investments to result in future growth. Additionally, the ongoing guestroom renovation at the JW Marriott New Orleans and the 47,000 additional square feet of state-of-the-art meeting space under construction at the Renaissance Orlando are expected to drive additional growth into 2019."

UNAUDITED SELECTED STATISTICAL AND FINANCIAL DATA

($ in millions, except RevPAR, ADR and per share amounts)

Three Months Ended March 31,

2018

2017

Change

Net Income

$

38.5

$

63.8

(39.8)

%

Income Attributable to Common Stockholders per Diluted Share

$

0.15

$

0.27

(44.4)

%

25 Hotel Comparable Portfolio RevPAR Growth (1)

$

160.54

$

161.67

(0.7)

%

25 Hotel Comparable Portfolio Occupancy (1)

78.6

%

78.7

%

(10)

bps

25 Hotel Comparable Portfolio ADR (1)

$

204.25

$

205.42

(0.6)

%

25 Hotel Comparable Portfolio Adjusted EBITDAre Margin (1) (2) (3)

26.0

%

27.7

%

(170)

bps

Adjusted EBITDAre, excluding noncontrolling interest (3)

$

62.4

$

69.6

(10.3)

%

Adjusted FFO Attributable to Common Stockholders

$

45.9

$

53.2

(13.7)

%

Adjusted FFO Attributable to Common Stockholders per Diluted Share

$

0.20

$

0.24

(16.7)

%

__________________

(1)

The 25 Hotel Comparable Portfolio is comprised of all 25 hotels owned by the Company as of March 31, 2018, and includes prior ownership results for the Oceans Edge Resort & Marina acquired in July 2017.

(2)

The 25 Hotel Comparable Portfolio Adjusted EBITDAre Margins exclude any prior year property tax adjustments, net.

(3)

Effective January 1, 2018, the Company presents EBITDAre, reported in accordance with NAREIT guidelines, and Adjusted EBITDAre, excluding noncontrolling interest, as supplemental measures of performance. See the disclosures regarding non-GAAP financial measures for more information on this change.

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 March 31, 2018 compare to its guidance originally provided as follows:

Metric

Quarter Ended

March 31, 2018

Guidance (1)

Adjustments (2)

Adjusted Prior

First Quarter 2018

Guidance

Quarter Ended

March 31, 2018

Actual Results

(unaudited)

Performance

Relative to Prior

Guidance Midpoint

Net Income ($ millions)

$11 to  $14

+ $16

$26 to  $30

$38

+ $11

25 Hotel Comparable Portfolio RevPAR Growth

- 2.5% to - 0.5%

- 2.5% to - 0.5%

-0.7%

+ 0.8%

Adjusted EBITDAre, excluding noncontrolling interest ($ millions)

$57  to  $60

$0

$57  to  $60

$62

+ $4

Adjusted FFO Attributable to Common Stockholders ($ millions)

$41  to  $44

$0

$41  to  $44

$46

+ $4

Adjusted FFO Attributable to Common Stockholders per Diluted Share

$0.18  to  $0.20

- 0.01

$0.18  to  $0.19

$0.20

+ $0.013

Diluted Weighted Average Shares Outstanding

224,700,000

224,700,000

224,600,000

- 100,000

_______________________

(1)

Represents guidance presented on February 12, 2018.

(2)

Adjustments reflect the cumulative impact of operating results for the Marriott Philadelphia and the Marriott Quincy before their sale in January 2018, including severance payments associated with the sale, the net gain on the sale of the hotels, and the effect on net income of business interruption proceeds at the Oceans Edge Resort & Marina recognized during the first quarter of 2018.

Balance Sheet/Liquidity Update

As of March 31, 2018, the Company had $546.4 million of cash and cash equivalents, including restricted cash of $79.3 million, total assets of $3.8 billion, including $3.1 billion of net investments in hotel properties, total consolidated debt of $988.5 million and stockholders' equity of $2.6 billion.

Capital Improvements

The Company invested $39.3 million into capital improvements of its portfolio during the three months ended March 31, 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 are expected to be 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 $4.9 million of total revenue displacement was incurred during the first quarter. 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 $31 million to $34 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 expected to be completed during the second quarter 2018. The Company expects $5 million to $6 million of total revenue displacement 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.
  • Renaissance Los Angeles Airport: The Company is investing approximately $9 million, with a portion spent in 2017, to renovate all 501 guestrooms and suites. In addition, the Company previously completed a renovation of its restaurant, lounge and meeting spaces in 2017. The renovation includes the complete redesign of all guestrooms. The renovation began during the fourth quarter 2017, and will be completed during the second quarter 2018. The Company expects to incur approximately $1 million of total revenue displacement during the first half of 2018.
  • Hyatt Regency San Francisco: The Company is investing approximately $10 million, with a portion spent in 2017, to renovate the hotel's 138 suites and Regency Club rooms. The renovation began during the fourth quarter 2017, and will be completed during the second quarter 2018. The Company expects to incur approximately $0.3 million of revenue displacement during the first half of 2018.
  • Boston Park Plaza: The Company has converted vacant retail space to 8,000 square feet of new meeting space. The new meeting space is expected to allow the hotel to increase the number of group rooms sold by approximately 10,000 room nights annually. Construction of the new meeting space began during the fourth quarter 2017, and was completed during the second quarter 2018. Total cost for the new meeting space was approximately $3 million. The Company did not incur any displacement related to the construction.

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 second quarter of 2018, the Company expects:

Metric

Quarter Ended

June 30, 2018

Guidance (3)

Net Income ($ millions)

$48 to  $51

25 Hotel Comparable Portfolio RevPAR Growth

+ 0.5% to + 2.5%

Adjusted EBITDAre, excluding noncontrolling interest ($ millions)

$96  to  $99

Adjusted FFO Attributable to Common Stockholders ($ millions)

$77  to  $81

Adjusted FFO Attributable to Common Stockholders per Diluted Share

$0.34  to  $0.36

Diluted Weighted Average Shares Outstanding

224,800,000

For the full year of 2018, the Company expects:

Metric

Full Year 2018 

Guidance (1)

Adjustments (2)

Adjusted Prior

Full Year 2018

Guidance

Current

Full Year 2018

Guidance (3)

Change in

Full Year 2018

Guidance Midpoint

Net Income ($ millions)

$115 to  $140

+ $16

$130 to  $156

$145 to  $164

+ $11

25 Hotel Comparable Portfolio RevPAR Growth

- 0.5% to + 2.5%

- 0.5% to + 2.5%

0% to + 2.5%

+0.3%

Adjusted EBITDAre, excluding noncontrolling interest ($ millions)

$303  to  $327

$0

$303  to  $327

$310  to  $328

+ $4

Adjusted FFO Attributable to Common Stockholders ($ millions)

$235  to  $259

$0

$235  to  $259

$242  to  $261

+ $4

Adjusted FFO Attributable to Common Stockholders per Diluted Share

$1.05  to  $1.15

- $0.01

$1.04  to  $1.15

$1.07  to  $1.16

+ $0.02

Diluted Weighted Average Shares Outstanding

225,000,000

225,000,000

225,000,000

___________________

(1)

Reflects guidance presented on February 12, 2018.

(2)

Adjustments reflect the cumulative impact of operating results for the Marriott Philadelphia and the Marriott Quincy before their sale in January 2018, including severance payments associated with the sale, the net gain on the sale of the hotels, and the effect on net income of business interruption proceeds at the Oceans Edge Resort & Marina recognized during the first quarter of 2018.

(3)

See pages 13 and 14 for detailed reconciliations of Net Income to non-GAAP financial measures.

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

  • Full year 25 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 25 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 to $22 million.
  • Full year amortization of deferred stock compensation expense of approximately $9 million.
  • Full year interest expense of approximately $46 million, including approximately $3 million in amortization of deferred financing fees, approximately $2 million of capital lease obligation interest and approximately $3 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 May 3, 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 July 16, 2018 to stockholders of record as of June 29, 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.

About Sunstone Hotel Investors, Inc.

Sunstone Hotel Investors, Inc. is a lodging real estate investment trust ("REIT") that as of May 7, 2018 has interests in 25 hotels comprised of 12,450 rooms. Sunstone's hotels are primarily in the urban and resort upper upscale segment and are predominantly operated under nationally recognized brands, such as Marriott, Hilton and Hyatt.

 

Sunstone Hotel Investors, Inc.

Consolidated Balance Sheets

(In thousands, except share data)

March 31,

December 31,

2018

2017

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$

467,050

$

488,002

Restricted cash

79,336

71,309

Accounts receivable, net

48,589

34,219

Inventories

1,375

1,323

Prepaid expenses

12,532

10,464

Assets held for sale, net

122,807

Total current assets

608,882

728,124

Investment in hotel properties, net

3,110,887

3,106,066

Deferred financing fees, net

1,045

1,305

Other assets, net

31,971

22,317

Total assets

$

3,752,785

$

3,857,812

Liabilities and Equity

Current liabilities:

Accounts payable and accrued expenses

$

34,950

$

31,810

Accrued payroll and employee benefits

18,174

26,687

Dividends and distributions payable

14,488

133,894

Other current liabilities

43,073

44,502

Current portion of notes payable, net

5,569

5,477

Liabilities of assets held for sale

189

Total current liabilities

116,254

242,559

Notes payable, less current portion, net

975,779

977,282

Capital lease obligations, less current portion

26,854

26,804

Other liabilities

31,041

28,989

Total liabilities

1,149,928

1,275,634

Commitments and contingencies

Equity:

Stockholders' equity:

Preferred stock, $0.01 par value, 100,000,000 shares authorized:

6.95% Series E Cumulative Redeemable Preferred Stock, 4,600,000 shares issued and outstanding at March 31, 2018 and December 31, 2017, stated at liquidation preference of $25.00 per share

115,000

115,000

6.45% Series F Cumulative Redeemable Preferred Stock, 3,000,000 shares issued and outstanding at March 31, 2018 and December 31, 2017, stated at liquidation preference of $25.00 per share

75,000

75,000

Common stock, $0.01 par value, 500,000,000 shares authorized, 225,614,712 issued and outstanding at March 31, 2018 and 225,321,660 shares issued and outstanding at December 31, 2017

2,256

2,253

Additional paid in capital

2,677,099

2,679,221

Retained earnings

968,293

932,277

Cumulative dividends and distributions

(1,284,501)

(1,270,013)

Total stockholders' equity

2,553,147

2,533,738

Noncontrolling interest in consolidated joint venture

49,710

48,440

Total equity

2,602,857

2,582,178

Total liabilities and equity

$

3,752,785

$

3,857,812

Sunstone Hotel Investors, Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

Three Months Ended March 31,

2018

2017

(unaudited)

Revenues

Room

$

180,276

$

190,367

Food and beverage

74,266

75,501

Other operating

16,904

14,875

Total revenues

271,446

280,743

Operating expenses

Room

51,095

51,292

Food and beverage

50,154

50,537

Other operating

3,941

3,831

Advertising and promotion

13,906

14,946

Repairs and maintenance

11,103

10,967

Utilities

7,475

7,222

Franchise costs

7,853

8,055

Property tax, ground lease and insurance

21,781

21,287

Other property-level expenses

33,907

34,738

Corporate overhead

7,102

6,779

Depreciation and amortization

36,688

40,807

Total operating expenses

245,005

250,461

Operating income

26,441

30,282

Interest and other income

1,491

721

Interest expense

(8,876)

(11,249)

Loss on extinguishment of debt

(4)

Gain on sale of assets

15,659

44,285

Income before income taxes

34,715

64,035

Income tax benefit (provision), net

3,740

(208)

Net income

38,455

63,827

Income from consolidated joint venture attributable to noncontrolling interest

(2,439)

(1,992)

Preferred stock dividends

(3,207)

(3,207)

Income attributable to common stockholders

$

32,809

$

58,628

Basic and diluted per share amounts:

Basic and diluted income attributable to common stockholders per common share

$

0.15

$

0.27

Basic and diluted weighted average common shares outstanding

224,282

219,093

Distributions declared per common share

$

0.05

$

0.05

Sunstone Hotel Investors, Inc.

Reconciliation of Net Income to Non-GAAP Financial Measures

(Unaudited and in thousands)

Reconciliation of Net Income to EBITDAre and Adjusted EBITDAre, Excluding Noncontrolling Interest

Three Months Ended March 31,

2018

2017

Net income

$

38,455

$

63,827

Operations held for investment:

Depreciation and amortization

36,688

40,807

Amortization of lease intangibles

63

63

Interest expense

8,876

11,249

Income tax (benefit) provision, net

(3,740)

208

Gain on sale of assets, net

(15,669)

(44,570)

EBITDAre

64,673

71,584

Operations held for investment:

Amortization of deferred stock compensation

2,000

1,749

Amortization of favorable and unfavorable contracts, net

3

99

Noncash ground rent

(281)

(275)

Capital lease obligation interest - cash ground rent

(589)

(351)

Loss on extinguishment of debt

4

Hurricane-related uninsured losses

69

Prior year property tax adjustments, net

(19)

Noncontrolling interest:

Income from consolidated joint venture attributable to noncontrolling interest

(2,439)

(1,992)

Depreciation and amortization

(638)

(875)

Interest expense

(435)

(457)

Noncash ground rent

72

72

(2,257)

(2,026)

Adjusted EBITDAre, excluding noncontrolling interest

$

62,416

$

69,558

Sunstone Hotel Investors, Inc.

Reconciliation of Net Income to Non-GAAP Financial Measures

(Unaudited and in thousands, except per share amounts)

Reconciliation of Net Income to FFO Attributable to Common Stockholders and

Adjusted FFO Attributable to Common Stockholders

Three Months Ended March 31,

2018

2017

Net income

$

38,455

$

63,827

Preferred stock dividends

(3,207)

(3,207)

Operations held for investment:

Real estate depreciation and amortization

36,594

40,678

Amortization of lease intangibles

63

63

Gain on sale of assets, net

(15,669)

(44,570)

Noncontrolling interest:

Income from consolidated joint venture attributable to noncontrolling interest

(2,439)

(1,992)

Real estate depreciation and amortization

(638)

(875)

FFO attributable to common stockholders

53,159

53,924

Operations held for investment:

Amortization of favorable and unfavorable contracts, net

3

99

Noncash ground rent

(281)

(275)

Noncash interest on derivatives and capital lease obligations, net

(3,137)

(657)

Loss on extinguishment of debt

4

Hurricane-related uninsured losses

69

Prior year property tax adjustments, net

(19)

Noncash income tax benefit

(3,966)

Noncontrolling interest:

Noncash ground rent

72

72

Noncash interest on derivative, net

3

(4)

(7,256)

(761)

Adjusted FFO attributable to common stockholders

$

45,903

$

53,163

FFO attributable to common stockholders per diluted share

$

0.24

$

0.25

Adjusted FFO attributable to common stockholders per diluted share

$

0.20

$

0.24

Basic weighted average shares outstanding

224,282

219,093

Shares associated with unvested restricted stock awards

343

262

Diluted weighted average shares outstanding

224,625

219,355

Sunstone Hotel Investors, Inc.

Reconciliation of Net Income to Non-GAAP Financial Measures

Guidance for Second Quarter 2018

(Unaudited and in thousands, except per share amounts)

Reconciliation of Net Income to Adjusted EBITDAre, Excluding Noncontrolling Interest

Quarter Ended

June 30, 2018

Low

High

Net income

$

47,900

$

51,400

Depreciation and amortization

36,200

36,100

Amortization of lease intangibles

100

100

Interest expense

12,700

12,400

Income tax provision

200

200

Noncontrolling interest

(3,100)

(3,200)

Amortization of deferred stock compensation

2,900

2,900

Noncash ground rent

(300)

(300)

Capital lease obligation interest - cash ground rent

(600)

(600)

Adjusted EBITDAre, excluding noncontrolling interest

$

96,000

$

99,000

Reconciliation of Net Income to Adjusted FFO Attributable to Common Stockholders

Net income

$

47,900

$

51,400

Preferred stock dividends

(3,200)

(3,200)

Real estate depreciation and amortization

35,700

35,600

Amortization of lease intangibles

100

100

Noncontrolling interest

(2,900)

(3,000)

Noncash ground rent

(300)

(300)

Noncash interest on derivatives and capital lease obligations, net

100

100

Adjusted FFO attributable to common stockholders

$

77,400

$

80,700

Adjusted FFO attributable to common stockholders per diluted share

$

0.34

$

0.36

Diluted weighted average shares outstanding

224,800

224,800

Sunstone Hotel Investors, Inc.

Reconciliation of Net Income to Non-GAAP Financial Measures

Guidance for Full Year 2018

(Unaudited and in thousands, except per share amounts)

Reconciliation of Net Income to Adjusted EBITDAre, Excluding Noncontrolling Interest

Year Ended

December 31, 2018

Low

High

Net income

$

144,800

$

163,900

Depreciation and amortization

145,100

144,700

Amortization of lease intangibles

300

300

Interest expense

45,900

45,500

Income tax benefit, net

(3,100)

(3,100)

Gain on sale of assets, net

(15,700)

(15,700)

Noncontrolling interest

(12,900)

(13,200)

Amortization of deferred stock compensation

9,000

9,000

Noncash ground rent

(1,100)

(1,100)

Capital lease obligation interest - cash ground rent

(2,400)

(2,400)

Hurricane-related uninsured losses

100

100

Adjusted EBITDAre, excluding noncontrolling interest

$

310,000

$

328,000

Reconciliation of Net Income to Adjusted FFO Attributable to Common Stockholders

Net income

$

144,800

$

163,900

Preferred stock dividends

(12,800)

(12,800)

Real estate depreciation and amortization

144,400

144,200

Amortization of lease intangibles

300

300

Gain on sale of assets, net

(15,700)

(15,700)

Noncontrolling interest

(11,200)

(11,400)

Noncash ground rent

(1,100)

(1,100)

Noncash interest on derivatives and capital lease obligations, net

(3,000)

(3,000)

Hurricane-related uninsured losses

100

100

Noncash income tax benefit

(4,000)

(4,000)

Adjusted FFO attributable to common stockholders

$

241,800

$

260,500

Adjusted FFO attributable to common stockholders per diluted share

$

1.07

$

1.16

Diluted weighted average shares outstanding

225,000

225,000

Sunstone Hotel Investors, Inc.

Non-GAAP Financial Measures

25 Hotel Comparable Portfolio Adjusted EBITDAre and Margins

(Unaudited and in thousands)

Three Months Ended March 31,

2018

2017

25 Hotel Comparable Portfolio Adjusted EBITDAre Margin (1)

26.0%

27.7%

25 Hotel Comparable Portfolio Adjusted EBITDAre Margin, excluding prior year property tax adjustments, net (2)

26.0%

27.7%

Total revenues

$

271,446

$

280,743

Non-hotel revenues (3)

(20)

(18)

Total Actual Hotel Revenues

271,426

280,725

Recently acquired hotel prior ownership revenues (4)

3,980

Sold hotel revenues (5)

(603)

(18,344)

Total 25 Hotel Comparable Portfolio Revenues

$

270,823

$

266,361

Net income

$

38,455

$

63,827

Non-hotel revenues (3)

(20)

(18)

Non-hotel operating expenses, net (6)

(773)

(435)

Hurricane-related uninsured losses (7)

69

Corporate overhead

7,102

6,779

Depreciation and amortization

36,688

40,807

Interest and other income

(1,491)

(721)

Interest expense

8,876

11,249

Loss on extinguishment of debt

4

Gain on sale of assets

(15,659)

(44,285)

Income tax (benefit) provision, net

(3,740)

208

Actual Hotel Adjusted EBITDAre

69,507

77,415

Recently acquired hotel prior ownership Adjusted EBITDAre (4)

1,178

Sold hotel Adjusted EBITDAre (5)

943

(4,899)

25 Hotel Comparable Portfolio Adjusted EBITDAre

70,450

73,694

Prior year property tax adjustments, net (8)

(19)

25 Hotel Comparable Portfolio Adjusted EBITDAre, excluding prior year property tax adjustments, net

$

70,431

$

73,694

* Footnotes on page 16

(1)

25 Hotel Comparable Portfolio Adjusted EBITDAre Margin is calculated as 25 Hotel Comparable Portfolio Adjusted EBITDAre divided by Total 25 Hotel Comparable Portfolio Revenues.

(2)

25 Hotel Comparable Portfolio Adjusted EBITDAre Margin, excluding prior year property tax adjustments, net is calculated as 25 Hotel Comparable Portfolio Adjusted EBITDAre, excluding prior year property tax adjustments, net divided by Total 25 Hotel Comparable Portfolio Revenues.

(3)

Non-hotel revenues include the amortization of favorable and unfavorable tenant lease contracts recorded in conjunction with the Company's 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 Resort.

(4)

Recently acquired hotel includes hotel revenues and Adjusted EBITDAre generated during the prior ownership period for the Oceans Edge Resort & Marina, acquired in July 2017.

(5)

Sold hotel includes hotel revenues and Adjusted EBITDAre generated during the Company's ownership period for the Marriott Philadelphia and the Marriott Quincy, both of which were sold in January 2018, along with the Marriott Park City and the Fairmont Newport Beach, sold in June 2017 and February 2017, respectively.

(6)

Non-hotel operating expenses, net include the following: the amortization of lease intangibles; the amortization of a favorable management agreement; noncash ground rent; and capital lease obligation interest - cash ground rent.

(7)

Hurricane-related uninsured losses include $64,000 at the Oceans Edge Resort & Marina and a total of $5,000 at the two Houston hotels.

(8)

Prior year property tax adjustments, net for the three months ended March 31, 2018 excludes the additional net benefit of $19,000.



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