Sunstone Resort Buyers: 8% Most popular Dividend With A Secure Stability Sheet (NYSE:SHO)

Introduction

As I’ve been increase my positions in most well-liked shares over the summer season and up to now few months, I additionally now should preserve tabs on these positions to ensure I am nonetheless snug with the efficiency of the businesses that issued the popular shares. Whereas I am not essentially an enormous fan of resort REITs (however my comparatively bullish stance on Park Accommodations and Resorts), I do like sure most well-liked shares from resort REITs as the chance/reward ratio seems to be fairly favorable from a dividend protection and asset protection perspective. On this article I am going to compensate for Sunstone Resort Buyers (NYSE:SHO), a REIT with maybe the strongest steadiness sheet within the hospitality sector.

The resort sector is bouncing again

After two relatively troublesome COVID years, issues had been lastly wanting up for the hospitality sector and resort REITs however the excessive inflation fee and decrease shopper confidence ranges could now pose the following problem. Happily most resort REITs have been very reluctant to pay excessive distributions and the steadiness sheets ought to be in a significantly better place to get via the following disaster.

Through the third quarter of this 12 months, Sunstone nonetheless needed to cope with a comparatively weaker outcome on a comparable foundation. The occupancy fee was simply 72% (in comparison with 84.8%) whereas the income per accessible room decreased from $210.49 to $207.18 in comparison with the third quarter of 2019, the final pre-COVID 12 months.

Whereas the web earnings is not essential for a REIT, it does present a helpful look underneath the hood as the web earnings result’s the start line for the FFO and AFFO calculations.

And as you may see under, Sunstone’s third quarter wasn’t unhealthy in any respect. The whole income elevated by virtually 50% whereas the working bills elevated by lower than 20% as a number of the working bills are comparatively mounted. The room income as an example elevated by $40M whereas the working bills elevated by simply over $6M which signifies that in extra of 80% of the incremental income was transformed into working earnings. That is outcome.

As you may see above, the resort REIT was worthwhile because it reported a web earnings of $20.5M primarily based on its working outcomes and after deducting the $3.35M in most well-liked dividends, the web earnings attributable to the shareholders of Sunstone was C$17.1M or $0.08 per share.

However as talked about, what actually issues are the FFO and AFFO calculations. The FFO calculation was fairly easy because it solely required so as to add again the depreciation and amortization bills, leading to an FFO of $48.5M. Based mostly on the present share depend of 210.4M shares (which is decrease than the typical share depend all through the quarter), the FFO per share was roughly $0.23.

The AFFO got here in at $51.3M, primarily after including again the affect of share-based compensation. This resulted in an AFFO per share of simply over $0.24. The AFFO within the first 9 months of the 12 months got here in at $0.61 per diluted share, but when I might solely use the present share depend we’re $0.62 per share. Which after all handsomely covers the present $0.05 quarterly dividend.

The popular shares nonetheless provide a beautiful threat/reward ratio

Take into account each the FFO and AFFO embody the affect of the popular dividends. As you may see within the AFFO desk, the $3.35M in Q3 most well-liked dividends and $10.9M in 9M 2022 most well-liked dividends already are included within the calculation. Because of this within the first 9 months of this 12 months the AFFO excluding the popular dividends would have exceeded $141M which additionally means the popular dividends had been very effectively lined as Sunstone wanted lower than 8% of its AFFO to cowl the dividends. This implies the dividend protection ratio was roughly 1,300%, which is excellent.

Wanting on the asset protection ratio, we see Sunstone’s steadiness sheet remains to be fairly robust. Whereas the REIT acquired extra property which resulted in an expanded steadiness sheet, I do not assume there’s something to fret about. If I would come with the restricted money within the equation, the full money place as of the tip of September stood at $168M whereas the full debt was $813M leading to a web debt of simply $645M. Contemplating the full e-book worth of the property was $2.85B as of the tip of September, the LTV ratio was lower than 25% which is amazingly low.

It is also necessary to know that the $2.85B e-book worth of the property contains in extra of $1.1B in accrued depreciation: The whole acquisition price of the land and buildings exceeded $3.45B (excluding all intangible property, building in progress and furnishings).

This implies the LTV ratio primarily based on the acquisition price of the actual property property is lower than 20%. That makes the steadiness sheet exceptionally secure. This additionally means the 11.25 million most well-liked shares with a complete worth of $281.25M are very effectively lined by the asset base. Even when the already depreciated worth of the property would lower by 65%, Sunstone will nonetheless have the ability to make collectors and most well-liked shareholders complete. The steadiness sheet additionally clearly reveals there’s in extra of $1.8B in fairness rating junior to the popular shares (and that’s primarily based on the e-book worth of the property and doesn’t take the acquisition worth or the honest worth into consideration).

There are at the moment two collection of most well-liked shares listed. The H-series are buying and selling with (NYSE:SHO.PH) as ticker image and provide a 6.125% most well-liked dividend for a complete of $1.53125 per 12 months whereas the I-Collection are buying and selling with (NYSE:SHO.PI) as ticker image providing a 5.7% most well-liked dividend for a cost of $1.425 per 12 months. Based mostly on the closing costs as of Wednesday, the H-Collection and I-Collection are at the moment yielding 8% and seven.7% respectively. Each points are cumulative and will be referred to as by Sunstone from Could 2026 and July 2026 on.

Funding thesis

I feel the chance/reward ratio of the Sunstone most well-liked shares is great. Whereas I notice and acknowledge the resort REIT enterprise is not straightforward and there’ll at all times be ups and downs, seeing a steadiness sheet with an LTV ratio of lower than 25% primarily based on the e-book worth and fewer than 20% primarily based on the acquisition price positively attracts my consideration.

At this level, the H-Collection are probably the most enticing because the yield is greater however the unfold between bid and ask on each most well-liked shares is usually comparatively extensive and restrict orders are strongly really useful. I personal each collection (purchased at totally different moments relying on which one was most attractively priced and I intend so as to add to my positions.