The strength of group demand across Sunstone Hotel Investors' portfolio is spurring optimism among executives.
During the company's first-quarter earnings call, CEO Bryan Giglia said the company saw a sizable jump in profitability at a time when it is actively working to reshape and improve its portfolio.
"What is particularly encouraging is that demand growth continues to diversify away from just leisure travel and is composed of more business transient and group events," he said. "Two of our top three highest occupancy hotels were the Hilton San Diego Bayfront and the Renaissance Orlando [at Seaworld], both large convention hotels that were able to replace discounted transient demand with larger amounts of higher-rated corporate group business."
He said the Renaissance property set both revenue and profit records in March, a month that didn't benefit from weak year-over-year comparisons like January and February did.
These types of properties were the laggards in the earlier stages of the recovery, and Giglia said he's pleased they're now leading the way not just in demand growth but in pricing power, as well.
"Our urban and convention hotels continued to see the biggest gains and grew rates nearly 16% in the quarter compared to the prior year," he said, adding the Hyatt Regency San Francisco recorded year-over-year rate increases of 46% in the first quarter.
Resort properties, in comparison, increased rate by 2%, which he described as "a solid result given the record performance in the prior year."
Giglia said he was pleased by this strong performance at a time when the company is actively looking to refine its portfolio, both through internal renovations and asset recycling.
The company has several large-scale renovations in the works, including the Renaissance Washington DC, which will soon become the Westin Washington DC Downtown, and the conversion of The Confidante Miami Beach into the Andaz Miami Beach. Sunstone spent $22.5 million in capital investments in the first quarter with plans to spend as much as $150 million for the balance of 2023.
Year to date, the company has also spent $21.4 million on stock repurchases, and internal investments might be the path in the near future, as Giglia admitted the transactions market is currently challenging.
"Given where the debt market are, where debt is available but expensive relative to historic rates and not as plentiful as it once was, it does make transactions more challenging," he said. "It also makes larger transactions more challenging. You know, sub-$100 million hotels, if a buyer and seller can come to an agreement, you can get some form of financing for that. It obviously becomes more difficult as you get to larger deals where the debt might not be available, or at least not sufficient debt based on current rates and coverage levels."
First-Quarter Performance
Sunstone comparable revenue per available room increased 32% year over year in the first quarter to $218.82, with average daily rate of $313.94 and occupancy at 69.7%, according to the company's earnings release.
The company also recorded an increase in net income from $15.1 million in the first three months of 2022 to $21.1 million. Sunstone executives said the increase is more stark when adjusting for hotel transactions, because excluding the sale of three hotels in the first quarter of 2022 results in a net loss of $7.8 million.
Adjusted earnings before interest, taxes, depreciation and amortization for real estate jumped 121% to $60 million.
Sunstone executives said no further debt maturities loom for 2023 after a new $225 million refinancing of the Hilton San Diego Bayfront.
As of press time, Sunstone's stock was trading at $10.25 a share, up 8.58% year to date. The NYSE Composite was up 1.36% for the same period.