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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to               

Commission file number 001-32319

Sunstone Hotel Investors, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Maryland

20-1296886

(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer
Identification Number)

200 Spectrum Center Drive, 21st Floor
Irvine, California

92618

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s telephone number, including area code: (949) 330-4000

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value

SHO

New York Stock Exchange

Series H Cumulative Redeemable Preferred Stock, $0.01 par value

SHO.PRH

New York Stock Exchange

Series I Cumulative Redeemable Preferred Stock, $0.01 par value

SHO.PRI

New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of November 1, 2022, there were 210,399,520 shares of Sunstone Hotel Investors, Inc.’s common stock, $0.01 par value per share, outstanding.

SUNSTONE HOTEL INVESTORS, INC.

QUARTERLY REPORT ON

FORM 10-Q

For the Quarterly Period Ended September 30, 2022

TABLE OF CONTENTS

Page

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

2

Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021

2

Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021

3

Unaudited Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2022 and 2021

4

Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021

6

Notes to Unaudited Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

45

Item 4.

Controls and Procedures

45

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

46

Item 1A.

Risk Factors

46

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

Item 3.

Defaults Upon Senior Securities

46

Item 4.

Mine Safety Disclosures

46

Item 5.

Other Information

46

Item 6.

Exhibits

47

SIGNATURES

48

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

SUNSTONE HOTEL INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

September 30,

December 31,

    

2022

    

2021

(unaudited)

ASSETS

Current assets:

Cash and cash equivalents

$

117,588

$

120,483

Restricted cash

50,253

42,234

Accounts receivable, net

45,750

28,733

Prepaid expenses and other current assets

14,374

14,338

Assets held for sale, net

76,308

Total current assets

227,965

282,096

Investment in hotel properties, net

2,850,225

2,720,016

Operating lease right-of-use assets, net

17,866

23,161

Deferred financing costs, net

5,382

2,580

Other assets, net

8,945

13,196

Total assets

$

3,110,383

$

3,041,049

LIABILITIES AND EQUITY

Current liabilities:

Accounts payable and accrued expenses

$

60,512

$

47,701

Accrued payroll and employee benefits

22,413

19,753

Dividends and distributions payable

13,961

3,513

Other current liabilities

68,920

58,884

Current portion of notes payable, net

2,088

20,694

Liabilities of assets held for sale

25,213

Total current liabilities

167,894

175,758

Notes payable, less current portion, net

810,909

588,741

Operating lease obligations, less current portion

18,349

25,120

Other liabilities

9,575

11,656

Total liabilities

1,006,727

801,275

Commitments and contingencies (Note 12)

Equity:

Stockholders’ equity:

Preferred stock, $0.01 par value, 100,000,000 shares authorized:

Series G Cumulative Redeemable Preferred Stock, 2,650,000 shares issued and outstanding at both September 30, 2022 and December 31, 2021, stated at liquidation preference of $25.00 per share

66,250

66,250

6.125% Series H Cumulative Redeemable Preferred Stock, 4,600,000 shares issued and outstanding at both September 30, 2022 and December 31, 2021, stated at liquidation preference of $25.00 per share

115,000

115,000

5.70% Series I Cumulative Redeemable Preferred Stock, 4,000,000 shares issued and outstanding at both September 30, 2022 and December 31, 2021, stated at liquidation preference of $25.00 per share

100,000

100,000

Common stock, $0.01 par value, 500,000,000 shares authorized, 211,570,211 shares issued and outstanding at September 30, 2022 and 219,333,783 shares issued and outstanding at December 31, 2021

2,116

2,193

Additional paid in capital

2,487,931

2,631,484

Retained earnings

1,017,890

948,064

Cumulative dividends and distributions

(1,685,531)

(1,664,024)

Total stockholders’ equity

2,103,656

2,198,967

Noncontrolling interest in consolidated joint venture

40,807

Total equity

2,103,656

2,239,774

Total liabilities and equity

$

3,110,383

$

3,041,049

See accompanying notes to consolidated financial statements.

2

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

Three Months Ended September 30,

Nine Months Ended September 30,

    

2022

    

2021

    

2022

    

2021

REVENUES

Room

$

158,400

$

118,061

$

428,893

$

236,877

Food and beverage

63,476

27,338

174,717

47,547

Other operating

22,438

22,022

64,299

50,840

Total revenues

244,314

167,421

667,909

335,264

OPERATING EXPENSES

Room

38,791

32,106

106,594

66,692

Food and beverage

47,181

27,440

125,959

49,088

Other operating

6,440

4,643

17,965

9,934

Advertising and promotion

12,325

8,883

34,420

20,800

Repairs and maintenance

9,382

10,001

27,369

22,678

Utilities

7,708

6,164

19,652

14,998

Franchise costs

4,145

4,181

11,429

7,468

Property tax, ground lease and insurance

19,714

17,528

53,160

47,821

Other property-level expenses

29,032

21,633

83,333

48,177

Corporate overhead

7,879

15,422

27,310

32,066

Depreciation and amortization

31,750

32,585

94,003

96,084

Impairment loss

1,014

1,014

Total operating expenses

214,347

181,600

601,194

416,820

Interest and other income (loss)

270

2

4,766

(356)

Interest expense

(9,269)

(7,983)

(20,288)

(23,697)

Gain on sale of assets

22,946

(Loss) gain on extinguishment of debt, net

(770)

61

(962)

371

Income (loss) before income taxes

20,198

(22,099)

73,177

(105,238)

Income tax benefit (provision), net

290

(25)

126

(91)

NET INCOME (LOSS)

20,488

(22,124)

73,303

(105,329)

(Income) loss from consolidated joint venture attributable to noncontrolling interest

(933)

(3,477)

1,638

Preferred stock dividends and redemption charges

(3,351)

(6,287)

(10,897)

(17,289)

INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS

$

17,137

$

(29,344)

$

58,929

$

(120,980)

Basic and diluted per share amounts:

Basic income (loss) attributable to common stockholders per common share

$

0.08

$

(0.13)

$

0.27

$

(0.56)

Diluted income (loss) attributable to common stockholders per common share

$

0.08

$

(0.13)

$

0.27

$

(0.56)

Basic weighted average common shares outstanding

211,010

217,709

213,799

215,765

Diluted weighted average common shares outstanding

211,289

217,709

213,869

215,765

See accompanying notes to consolidated financial statements.

3

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY

(In thousands, except share and per share data)

Noncontrolling

Preferred Stock

Common Stock

Cumulative

Interest in

Number of

Number of

Additional

Retained

Dividends and

Consolidated

    

Shares

    

Amount

    

Shares

    

Amount

    

Paid in Capital

    

 Earnings

    

Distributions

    

    Joint Venture    

    

Total Equity

Balance at December 31, 2021 (audited)

11,250,000

$

281,250

219,333,783

$

2,193

$

2,631,484

$

948,064

$

(1,664,024)

$

40,807

$

2,239,774

Amortization of deferred stock compensation

3,701

3,701

Issuance of restricted common stock, net

213,179

2

(3,353)

(3,351)

Series G preferred stock dividends and dividends payable at $0.221475 per share

(587)

(587)

Series H preferred stock dividends and dividends payable at $0.382813 per share

(1,761)

(1,761)

Series I preferred stock dividends and dividends payable at $0.356250 per share

(1,425)

(1,425)

Repurchase of outstanding common stock

(3,879,025)

(38)

(43,427)

(43,465)

Net income

13,989

1,134

15,123

Balance at March 31, 2022

11,250,000

$

281,250

215,667,937

$

2,157

$

2,588,405

$

962,053

$

(1,667,797)

$

41,941

$

2,208,009

Amortization of deferred stock compensation

2,971

2,971

Issuance of restricted common stock

53,616

1

(92)

(91)

Forfeiture of restricted common stock

(34,807)

Series G preferred stock dividends and dividends payable at $0.221475 per share

(587)

(587)

Series H preferred stock dividends and dividends payable at $0.382813 per share

(1,761)

(1,761)

Series I preferred stock dividends and dividends payable at $0.356250 per share

(1,425)

(1,425)

Repurchase of outstanding common stock

(3,235,958)

(33)

(34,482)

(34,515)

Distribution to noncontrolling interest

(5,500)

(5,500)

Acquisition of noncontrolling interest, net

(62,564)

(38,784)

(101,348)

Net income

35,349

2,343

37,692

Balance at June 30, 2022

11,250,000

$

281,250

212,450,788

$

2,125

$

2,494,238

$

997,402

$

(1,671,570)

$

$

2,103,445

Amortization of deferred stock compensation

2,350

2,350

Common stock distributions and distributions payable at $0.05 per share

(10,610)

(10,610)

Series G preferred stock dividends and dividends payable at $0.062081 per share

(165)

(165)

Series H preferred stock dividends and dividends payable at $0.382813 per share

(1,761)

(1,761)

Series I preferred stock dividends and dividends payable at $0.356250 per share

(1,425)

(1,425)

Repurchase of outstanding common stock

(880,577)

(9)

(8,657)

(8,666)

Net income

20,488

20,488

Balance at September 30, 2022

11,250,000

$

281,250

211,570,211

$

2,116

$

2,487,931

$

1,017,890

$

(1,685,531)

$

$

2,103,656

See accompanying notes to consolidated financial statements.

4

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY

(In thousands, except share and per share data)

Noncontrolling

Preferred Stock

Common Stock

Cumulative

Interest in

Number of

Number of

Additional

Retained

Dividends and

Consolidated

Shares

    

Amount

 

Shares

 

Amount

 

Paid in Capital

 

 Earnings

 

Distributions

 

Joint Venture

 

Total Equity

Balance at December 31, 2020 (audited)

7,600,000

$

190,000

215,593,401

$

2,156

$

2,586,108

$

913,766

$

(1,643,386)

$

40,735

$

2,089,379

Amortization of deferred stock compensation

2,869

2,869

Issuance of restricted common stock, net

581,683

6

(3,522)

(3,516)

Series E preferred stock dividends and dividends payable at $0.434375 per share

(1,998)

(1,998)

Series F preferred stock dividends and dividends payable at $0.403125 per share

(1,209)

(1,209)

Contribution from noncontrolling interest

1,375

1,375

Net loss

(53,312)

(1,975)

(55,287)

Balance at March 31, 2021

7,600,000

$

190,000

216,175,084

$

2,162

$

2,585,455

$

860,454

$

(1,646,593)

$

40,135

$

2,031,613

Amortization of deferred stock compensation

4,784

4,784

Repurchase of common stock for employee tax obligations net of restricted common stock issued

(45,661)

(1)

(1,360)

(1,361)

Net proceeds from issuance of common stock

2,913,682

29

37,630

37,659

Net issuance of Series G preferred stock in connection with hotel acquisition

2,650,000

66,250

(142)

66,108

Net proceeds from issuance of Series H preferred stock

4,600,000

115,000

(3,801)

111,199

Redemption of Series E preferred stock

(4,600,000)

(115,000)

4,016

(4,016)

(115,000)

Series E preferred stock dividends at $0.337847 per share through redemption date

(1,554)

(