Hotel REIT Will Face Share Dilution And Valuation Pressure

Key Takeaways

• Strategic acquisitions and property repositionings, including Andaz Miami Beach, are set to boost revenue and earnings growth in 2025.
  
• Increased group bookings and recovery in business travel markets are expected to enhance occupancy and profitability.
  
• Successful resolution of labor disruptions, strategic investments, and strong group bookings enhance Sunstone Hotel Investors' revenue potential, earnings growth, and financial resilience.

Catalysts

A lodging real estate investment trust ("REIT") that as of the date of this release owns 14 hotels comprised of 6,675 rooms, the majority of which are operated under nationally recognized brands.

• The 2025 growth expectations for Sunstone Hotel Investors are optimistic due to improvements like recent acquisitions and completed repositionings, which are anticipated to drive revenue and earnings growth.
  
• The transformation of the Andaz Miami Beach, albeit delayed and with higher costs, is projected to contribute meaningfully to 2025 earnings after completion, impacting overall company earnings positively.
  
• An increase in group bookings, particularly in highly promising markets such as San Francisco, Washington, D.C., New Orleans, and San Diego, is expected to enhance revenue and profitability in 2025.
  
• Recovery trends in business travel in major urban markets like Boston, San Francisco, and Portland are expected to continue, strengthening future occupancy rates and contributing to revenue growth.
  
• Strategic investments such as the repositioning of Marriott Long Beach and properties like the JW Marriott in New Orleans are projected to support strong group pace and create a positive impact on revenue and EBITDA.

Sunstone Hotel Investors Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sunstone Hotel Investors's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.9% today to 3.6% in 3 years time.
• Analysts expect earnings to reach $37.7 million (and earnings per share of $0.11) by about December 2027, down from $154.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $83.7 million in earnings, and the most bearish expecting $29.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 129.4x on those 2027 earnings, up from 16.1x today. This future PE is greater than the current PE for the US Hotel and Resort REITs industry at 19.0x.
• Analysts expect the number of shares outstanding to grow by 19.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.43%, as per the Simply Wall St company report.

Sunstone Hotel Investors Future Earnings Per Share Growth

Risks

• The successful resolution of labor disruptions at key properties such as the Hilton San Diego Bayfront has allowed normal operations to resume, which could improve future revenue and occupancy rates by enhancing the operational stability of important group hotels.
  
• Strong performance in group bookings, particularly in urban assets like the Westin Washington, D.C. and Marriott Boston Long Wharf, indicates a healthy demand in future group events, suggesting potential for substantial revenue growth in 2025.
  
• Continued investments in renovations and transformations, such as Andaz Miami Beach and Marriott Long Beach Downtown, are expected to create better positioning and value for these assets, which could enhance earnings and profit margins once completed.
  
• Optimistic trends in key leisure destinations, particularly Wine Country resorts, with strong RevPAR growth and margin expansion, indicate potential for continued revenue and earnings growth from these high-demand markets.
  
• Strategic share repurchase activities and solid balance sheet management, including access to significant liquidity, position the company to potentially enhance shareholder value and stabilize earnings, contributing to a more resilient financial outlook.

Valuation

• The analysts have a consensus price target of $11.38 for Sunstone Hotel Investors based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $13.0, and the most bearish reporting a price target of just $10.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.1 billion, earnings will come to $37.7 million, and it would be trading on a PE ratio of 129.4x, assuming you use a discount rate of 7.4%.
• Given the current share price of $12.38, the analyst's price target of $11.38 is 8.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.