Catching up with Sunstone Hotel

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When you take your first look at the full-service lodging REIT Sunstone Hotel Investors (NYSE:SHO), you realize that their dividend yields are among the lowest in the REIT sector. However, to meet the annual distribution requirements, the company distributes a substantial catch-up dividend, which more than tripled its total distributions for 2014. They paid regular quarterly dividends $0.05, plus an extra $0.36 in the fourth quarter, for a total of $0.51. Unfortunately, the total distribution for 2014 would still keep SHO’s yield below the median for its sector. Should we expect a better distribution for 2015?

In fact, SHO results for Q1 2015 have been better than for Q1 2014:

  • Occupancy went up 130 basis points (from 78.3 to 79.6 percent), one of the highest rates in the sector.
  • Comparable hotel RevPAR and ADR increased 7 and 5 percent respectively.
  • Adjusted FFO per share increased 47 percent to $0.22, resulting in a 23 percent dividend payout. In fact, SHO expects 2015 AFFO to be $1.29 — 10 percent higher than last year.
  • Adjusted comparable hotel EBITDA margins increased 220 basis points to 26.2 percent, which is on a level with its peers.

sho hotel ebitda marginSHO owns 30 hotels with 14,306 rooms, mainly on the upper-upscale segment, which are operated under nationally-recognized brands like Fairmont, Hilton, Hyatt, Marriott and Sheridan.

After a five-year hiatus, SHO resumed dividend payments in September 2013, since when they have been paying $0.05 per quarter (except for the catch-up dividend), a pattern they do not foresee changing in the short term.

Better distribution for 2015 can be deterred by capital improvements. The company has been investing in renovations for Boston Park Plaza, one of its largest properties, and Marriott Wailea, its only resort property on Maui. They retained $0.20 of the Q4 dividend, which they distributed as a stock dividend so they could fund these renovations.

sho occupancy rateNot surprisingly, the company’s price-to-FFO has been below the peer median. Good regular dividends are a better commitment to investors than low regular dividends plus a catch-up dividend, so we can understand there is certain skepticism in the market. We see reasons SHO should raise dividends in the future, but, for now, they might prefer being very cautious.

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Source: Sunstone Hotel Investors, Chatham Lodging Trust, Fast Graphs

Written by Heli Brecailo

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.​