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Bear of the Day: Sunstone (SHO)

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Sunstone Hotel Investors, Inc. (SHO - Free Report) is trying to make it out of the pandemic and to the other side in 2021. This Zacks Rank #5 (Strong Sell) is still expected to see negative earnings in 2021 even as its hotels reopen

Sunstone Hotel Investors is a lodging REIT that has interests in 18 hotels across the United States consisting of 9,495 rooms.

The hotels are operated under nationally recognized brands such as Marriott, Hilton and Hyatt.

Sale of the Renaissance Los Angeles Airport for $91.5 Million

On Dec 8, Sunstone announced the sale of the 502-room Renaissance Los Angeles Airport for a gross sale price of $91.5 million.

This was one of the company's 4 hotels which were never shut during the pandemic.

The sale of the hotel is in line with the company's strategy of concentrating its portfolio into Long-Term Relevant Real Estate.

It also provides further liquidity.

Big Miss in the Third Quarter

On Nov 5, Sunstone reported its third quarter earnings and missed on the Zacks Consensus Estimate by 36.8%.

Sunstone reported earnings of a loss of $0.26 versus the Zacks Consensus of a loss of $0.19.

It has missed 3 quarters in a row.

By the end of the quarter, 16 of the company's 19 hotels were open.

6 of the company's hotels were in operation for the entire quarter. 6 additional hotels opened during the third quarter, mostly in July and August.

4 other hotels resumed operations in the fourth quarter.

For the 6 hotels open for the entirety of the third quarter, RevPAR fell 80.5% to $37.37.

But there has been sequential monthly improvement since the summer, mostly in leisure travel.

A majority of the company's group business for 2020 has canceled. Of that group business which has canceled, approximately 23% has rebooked into future periods.

Liquidity Position

Combined with more hotels now being open, and continued aggressive cost containment, Sunstone has been able to reduce its cash burn rate.

"Assuming no change to current operating fundamentals, our cash burn rate has been reduced to between $16 million and $20 million per month before capital investment," said John Arabia, President and Chief Executive Officer.

"We expect this figure to decline further, and eventually return to profitability, as recently reopened hotels ramp up and as portfolio occupancy and profits gradually increase."

As of Sep 30, 2020, Sunstone had $503.6 million of cash and cash equivalents, including restricted cash of $42.3 million, total assets of $3.2 billion, including $2.6 billion of net investments in hotel properties, total consolidated debt of $934.7 million and stockholders’ equity of $2.1 billion.

Additionally, it will soon have the cash from the sale of the Renaissance.

Analysts Cut 2020 and 2021 Estimates

Over the last 30 days, analysts have gotten more bearish.

3 estimates were cut for 2020 during that time which pushed the Zacks Consensus down to a loss of $0.78 from a loss of $0.73.

3 estimates were also cut, and 1 raised, for 2021 in the last month which pushed down the Zacks Consensus to a loss of $0.13 from a loss of $0.10.

That's a big improvement on 2020, with an earnings rebound of 82.8%.

Shares Rally on Vaccine Hopes

Sunstone's shares are up 51% since Nov 1 as the news on viable vaccines started hitting the headlines.

The hotel companies are part of the 2021 reopen trade.

Many investors have been diving into hotels, restaurants, airlines and cruise stocks on the belief that the worst of the pandemic downturn is over and that days will be brighter in 2021.

Has the reopen trade already been priced into these shares?

It suspended its dividend earlier this year and has not resumed it.

Sunstone also didn't provide any forward guidance due to COVID uncertainties.

If you're an investor who buys companies based on rising earnings estimates, you might want to stay on the sidelines in this hotel REIT.

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