Despite multiple weather challenges, labor disruptions at one of its largest hotels and some leisure slowdowns, Sunstone Hotel Investors’ hotels were able to deliver strong performance in the third quarter, its chief executive said.
During the company's third-quarter 2024 earnings call, Sunstone President and CEO Bryan Giglia said one of the quarter's major disruptions came from the Hilton San Diego Bayfront, where union employees went on strike during the third and fourth quarters. The union reached an agreement on a new contract in October, so while the strike created some short-term disruption, normal operations have resumed at the hotel.
After adjusting for the labor impact in San Diego, the company’s third-quarter earnings results came generally in line with revised expectations due to solid business-transient demand at urban properties, better ancillary spend across the portfolio and solid cost controls at the property and corporate level, he said.
“Despite a more muted near-term outlook, we continue to be optimistic about our earnings potential as we move into 2025, which is expected to benefit from recent acquisitions, completed repositionings, stronger citywides, improved group pace and an easier comparison related to disruption, specifically from the labor activity in San Diego,” he said.
Business and group demand strength
During the third quarter, Sunstone saw sustained strength in group activity and further recovery in business travel, Giglia said. Leisure demand has continued to moderate.
The newly converted Westin Washington D.C. Downtown, formerly a Renaissance, again led the portfolio, growing revenue per available room by 33% and total RevPAR by 39%. The hotel's post-conversion performance continues to exceed expectations and is attracting higher-quality groups and appealing to a broader range of transient guests. The hotel has increased total transient room nights by 29% year over year with an average daily rate 31% higher than what it achieved as a Renaissance hotel in 2019, he said.
“The hotel led the comp set in ADR index, which speaks to the degree of transformation we have achieved at this property under the Westin flag,” he said.
With the exception of San Diego, Sunstone saw strength across its convention hotel portfolio, which achieved combined total revenue per available room growth of nearly 15% thanks to robust performances in San Francisco, Orlando and San Antonio along with Washington, D.C., Giglia said.
Group pace is improving further in 2025 across the portfolio, including in Wailea, Hawaii; San Francisco; Washington, D.C.; San Diego; and California's wine country, he said. Group revenue is now pacing up in the low double-digit range for next year.
Business travel trends improved further during the quarter with strength in Boston, San Francisco and Portland, Oregon, Giglia said.
The Marriott Boston Long Wharf exceeded expectations with TRevPAR growth of 8.6% as the hotel increased occupancy by more than 500 basis points due to strong corporate demand on top of solid group business. In San Francisco, midweek transient demand outperformed, driving occupancy higher by nearly 800 basis points despite a softer group backdrop. In Portland, occupancy jumped more than 16 percentage points due to stronger short-term demand and growing transient and group activity.
Sunstone’s newly converted Marriott Long Beach Downtown in California had strong early bookings, including group bookings, that were up more than 50% compared to 2019, he said. The transient rate index was up more than 30% compared to the previous month.
“We are seeing the benefit of our investment in this hotel in the fourth quarter, as the hotel ramps up and gains share against its peers, especially with the highest-rated corporate guests,” he said.
Excluding the Long Beach property as it’s still ramping up, Sunstone’s urban hotel portfolio grew RevPAR by 9%, he said.
Leisure continued to moderate during the quarter, resulting in normalizing of pricing, Giglia said.
“This has been particularly true in Key West, where rates grew to very robust levels following the pandemic, but where we have seen incremental price sensitivity in recent quarters,” he said.
The demand environment in Maui has been softer than expected, resulting in more subdued vacation travel to the island following last year’s wildfire, he said. Rates and occupancy for the Wailea Beach Resort came in below expectations from last quarter, and it has carried over into the start of the fourth quarter.
The situation is turning around, however, as there has been an increase in bookings and total room nights are pacing 20% higher than last year, he said. Pricing has moderated, but that still translates to 7% growth in room revenue. The market is showing signs of improvement for 2025 with more a more constructive group calendar driving strong group pace.
Work continues on the transformation of the Andaz Miami Beach, formerly the Confidante Miami Beach. The multiple hurricanes that hit Florida in recent months, along with additional time needed for permitting and inspections, have extended the project timeline by several weeks, Giglia said.
The renovation is in its final stages, and the Sunstone team is confident the resort is well-positioned to deliver on expectations, he said.
“Our full focus is on completing the renovation and positioning the resort to contribute meaningfully to our 2025 earnings,” he said.
By the numbers
For the third quarter, Sunstone reported $3.2 million in net income, down from $15.6 million in the third quarter of 2023, according to the company’s earnings release. Total revenue amounted to $226.4 million, down from $247.7 million a year ago.
The company reported comparable RevPAR of $207.56, down 1.3% year over year. Average daily rate was $301.69, down 0.9% year over year. Occupancy was 68.8%, down 30 basis points.
Adjusted earnings before interest, taxes, depreciation and amortization for real estate was $53.6 million, a 15.9% year-over-year decrease.
During the third quarter, Sunstone invested $41.6 million its hotel and resort portfolio. Most of the capital investment went to the renovation and conversion of the Andaz Miami Beach. For the full year, the company expects it will invest $140 million to $150 million into its portfolio, most of which related to the Andaz Miami Beach and the Marriott Long Beach Downtown and soft goods for the Wailea Beach Resort.
Since the start of the third quarter, Sunstone repurchased more than 2.3 million shares of its common stock at an average purchase price of $9.79 per share for a total repurchase amount before expenses of $22.8 million. Year to date through Nov. 11, it has repurchased more than 2.6 million of common shares at an average purchase price of $9.83 per share for a total repurchase amount before expenses of $26.4 million.
On Nov. 7, Sunstone entered into a new delayed draw $100 million term loan agreement. It expects to fully draw the term loan in early December, using most of the proceeds to repay the loan secured by the JW Marriott New Orleans, which will have a balance of $72.1 million at maturity.
The new term loan has an initial term of one year with two six-month extension options, resulting in an extended maturity of November 2026. It will bear interest pursuant to a leverage-based pricing grid ranging from 1.35% to 2.20% over the applicable adjusted term SOFR. It has the option to swap some or all of the loan balance to fixed rates. As a result of the new term loan, all of Sunstone’s hotels are unencumbered and, inclusive of extension options, Sunstone has no debt maturities prior to 2026.
As of the end of the third quarter, Sunstone had $192.6 million in cash and cash equivalents, including restricted cash of $77 million. It had total assets of $3.1 billion, with $2.8 billion of net investments in hotel properties and total debt of $817.4 million and stockholders’ equity of $2.1 billion.
As of press time, Sunstone’s stock was trading at $10.53, down 2% year to date. The NYSE Composite Index was up 17.9% for the same period.