Sunstone Hotel Investors, Inc. [SHO] Filings

10-Q 1 sho-20220331x10q.htm 10-Q

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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 March 31, 2022

☐

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 April 28, 2022, there were 215,210,303 shares of Sunstone Hotel Investors, Inc.’s common stock, $0.01 par value per share, outstanding.

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SUNSTONE HOTEL INVESTORS, INC.

QUARTERLY REPORT ON

FORM 10-Q

For the Quarterly Period Ended March 31, 2022

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		Page
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements	2

	Consolidated Balance Sheets as of March 31, 2022 (unaudited) and December 31, 2021	2

	Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021	3

	Unaudited Consolidated Statements of Equity for the Three Months Ended March 31, 2022 and 2021	4

	Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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	24

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40

Item 4.	Controls and Procedures	40

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41

Item 3.	Defaults Upon Senior Securities	41

Item 4.	Mine Safety Disclosures	41

Item 5.	Other Information	41

Item 6.	Exhibits	42

SIGNATURES		44

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PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

SUNSTONE HOTEL INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)



	March 31,		December 31,
	2022		2021
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	214,905	$	120,483
Restricted cash		39,484		42,234
Accounts receivable, net		35,346		28,733
Prepaid expenses and other current assets		18,137		14,338
Assets held for sale, net		—		76,308
Total current assets		307,872		282,096
Investment in hotel properties, net		2,613,428		2,720,016
Operating lease right-of-use assets, net		19,879		23,161
Deferred financing costs, net		2,080		2,580
Other assets, net		9,609		13,196
Total assets	$	2,952,868	$	3,041,049
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	55,902	$	47,701
Accrued payroll and employee benefits		14,800		19,753
Dividends payable		3,773		3,513
Other current liabilities		65,671		58,884
Current portion of notes payable, net		109,741		20,694
Liabilities of assets held for sale		—		25,213
Total current liabilities		249,887		175,758
Notes payable, less current portion, net		464,601		588,741
Operating lease obligations, less current portion		21,228		25,120
Other liabilities		9,143		11,656
Total liabilities		744,859		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 March 31, 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 March 31, 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 March 31, 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, 215,667,937 shares issued and outstanding at March 31, 2022 and 219,333,783 shares issued and outstanding at December 31, 2021		2,157		2,193
Additional paid in capital		2,588,405		2,631,484
Retained earnings		962,053		948,064
Cumulative dividends and distributions		(1,667,797)		(1,664,024)
Total stockholders’ equity		2,166,068		2,198,967
Noncontrolling interest in consolidated joint venture		41,941		40,807
Total equity		2,208,009		2,239,774
Total liabilities and equity	$	2,952,868	$	3,041,049

See accompanying notes to consolidated financial statements.

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SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)



	Three Months Ended March 31,
	2022		2021
REVENUES
Room	$	108,772	$	34,219
Food and beverage		39,583		4,971
Other operating		23,960		11,443
Total revenues		172,315		50,633
OPERATING EXPENSES
Room		30,461		11,640
Food and beverage		32,319		5,979
Other operating		5,436		1,805
Advertising and promotion		10,474		4,875
Repairs and maintenance		9,714		5,545
Utilities		5,705		4,151
Franchise costs		3,004		991
Property tax, ground lease and insurance		15,991		14,661
Other property-level expenses		23,910		10,477
Corporate overhead		10,714		7,177
Depreciation and amortization		31,360		30,770
Total operating expenses		179,088		98,071
Interest and other income (loss)		4,380		(379)
Interest expense		(5,081)		(7,649)
Gain on sale of assets		22,946		—
(Loss) gain on extinguishment of debt		(213)		222
Income (loss) before income taxes		15,259		(55,244)
Income tax provision		(136)		(43)
NET INCOME (LOSS)		15,123		(55,287)
(Income) loss from consolidated joint venture attributable to noncontrolling interest		(1,134)		1,975
Preferred stock dividends		(3,773)		(3,207)
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	10,216	$	(56,519)

Basic and diluted per share amounts:
Basic and diluted income (loss) attributable to common stockholders per common share	$	0.05	$	(0.26)
Basic and diluted weighted average common shares outstanding		217,271		214,438

See accompanying notes to consolidated financial statements.

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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

See accompanying notes to consolidated financial statements.

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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

See accompanying notes to consolidated financial statements.

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SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



	Three Months Ended March 31,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	15,123	$	(55,287)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Bad debt expense		64		16
(Gain) loss on sale of assets		(22,946)		70
Loss (gain) on extinguishment of debt		213		(222)
Noncash interest on derivatives, net		(1,842)		(869)
Depreciation		31,288		30,760
Amortization of franchise fees and other intangibles		66		10
Amortization of deferred financing costs		680		735
Amortization of deferred stock compensation		3,578		2,752
Gain on hurricane-related damage		(4,369)		—
Changes in operating assets and liabilities:
Accounts receivable		(5,931)		(4,613)
Prepaid expenses and other assets		(136)		(776)
Accounts payable and other liabilities		3,319		(8,463)
Accrued payroll and employee benefits		(5,613)		(1,957)
Operating lease right-of-use assets and obligations		(346)		(331)
Net cash provided by (used in) operating activities		13,148		(38,175)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets		191,291		—
Proceeds from property insurance		3,910		—
Acquisition of hotel properties and other assets		(546)		—
Renovations and additions to hotel properties and other assets		(30,299)		(6,526)
Net cash provided by (used in) investing activities		164,356		(6,526)
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchases of outstanding common stock		(43,465)		—
Repurchases of common stock for employee tax obligations		(3,351)		(3,516)
Payments on notes payable		(35,503)		(832)
Dividends paid		(3,513)		(3,208)
Contribution from noncontrolling interest		—		1,375
Net cash used in financing activities		(85,832)		(6,181)
Net increase (decrease) in cash and cash equivalents and restricted cash		91,672		(50,882)
Cash and cash equivalents and restricted cash, beginning of period		162,717		416,139
Cash and cash equivalents and restricted cash, end of period	$	254,389	$	365,257

See accompanying notes to consolidated financial statements.

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SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Supplemental Disclosure of Cash Flow Information


	March 31,
	2022		2021
Cash and cash equivalents	$	214,905	$	320,275
Restricted cash		39,484		44,982
Total cash and cash equivalents and restricted cash shown on the consolidated statements of cash flows	$	254,389	$	365,257


	Three Months Ended March 31,
	2022		2021
Cash paid for interest	$	9,761	$	10,696
Cash paid (refunds) for income taxes, net	$	103	$	(28)
Operating cash flows used for operating leases	$	1,730	$	1,664

Changes in operating lease right-of-use assets	$	1,007	$	897
Changes in operating lease obligations		(1,353)		(1,228)
Changes in operating lease right-of-use assets and lease obligations, net	$	(346)	$	(331)

Supplemental Disclosure of Noncash Investing and Financing Activities


	Three Months Ended March 31,
	2022		2021
Accrued renovations and additions to hotel properties and other assets	$	19,049	$	5,402
Disposition deposit received in prior year in connection with sale of hotel	$	4,000	$	—
Assignment of finance lease right-of-use asset in connection with sale of hotel	$	44,712	$	—
Assignment of finance lease obligation in connection with sale of hotel	$	15,569	$	—
Assignment of operating lease right-of-use asset in connection with sale of hotel	$	2,275	$	—
Assignment of operating lease obligation in connection with sale of hotel	$	2,609	$	—
Amortization of deferred stock compensation — construction activities	$	123	$	117
Dividends payable	$	3,773	$	3,207

See accompanying notes to consolidated financial statements.

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SUNSTONE HOTEL INVESTORS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Description of Business

Sunstone Hotel Investors, Inc. (the “Company”) was incorporated in Maryland on June 28, 2004 in anticipation of an initial public offering of common stock, which was consummated on October 26, 2004. The Company elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes, commencing with its taxable year ended on December 31, 2004. The Company, through its 100% controlling interest in Sunstone Hotel Partnership, LLC (the “Operating Partnership”), of which the Company is the sole managing member, and the subsidiaries of the Operating Partnership, including Sunstone Hotel TRS Lessee, Inc. (the “TRS Lessee”) and its subsidiaries, is currently engaged in acquiring, owning, asset managing and renovating or repositioning hotel properties, and may also selectively sell hotels that no longer fit its stated strategy.

As a REIT, certain tax laws limit the amount of “non-qualifying” income the Company can earn, including income derived directly from the operation of hotels. The Company leases all of its hotels to its TRS Lessee, which in turn enters into long-term management agreements with third parties to manage the operations of the Company’s hotels, in transactions that are intended to generate qualifying income.

As of March 31, 2022, the Company had interests in 14 hotels (the “14 Hotels”) currently held for investment. The Company’s third-party managers included the following:



		Number of Hotels
Subsidiaries of Marriott International, Inc. or Marriott Hotel Services, Inc. (collectively, “Marriott”)		6
Interstate Hotels & Resorts, Inc.		2
Four Seasons Hotels Limited		1
Highgate Hotels L.P. and an affiliate		1
Hilton Worldwide		1
Hyatt Hotels Corporation		1
Montage North America, LLC		1
Singh Hospitality, LLC		1

Total hotels owned as of March 31, 2022		14

COVID-19 Operational Update

COVID-19 and its variants have had and continue to have a detrimental effect on the hotel industry and the Company’s business, including significant room and event cancellations, corporate and government travel restrictions and an unprecedented decline in hotel demand. While operations have gradually improved since the onset of the COVID-19 pandemic in 2020, the Omicron variant in December 2021 led to a slowdown in demand recovery at the Company’s hotels. However, demand began to recover again in February 2022 as Omicron-related case counts subsided and travel patterns re-accelerated.

During the first quarter of 2022, corporate transient and group demand accelerated and reduced the Company’s reliance on leisure demand, which was the dominant source of business at many of the Company’s hotels during 2021. The amount of corporate negotiated business at the Company’s hotels continues to grow and the Company expects business travel to become a more significant portion of its overall demand as the year progresses. In addition, demand at the Company’s group-oriented hotels is increasing as corporate and association groups return to the Company’s hotels. The Company anticipates that group demand will compose a much more meaningful component of its total room nights during the remainder of 2022. However, the negative effects of the COVID-19 pandemic on the hotel industry have been unprecedented, and the Company has limited visibility to predict future operations.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements as of March 31, 2022 and December 31, 2021, and for the three months ended March 31, 2022 and 2021, include the accounts of the Company, the Operating Partnership, the TRS Lessee and their controlled subsidiaries. All significant intercompany balances and transactions have been eliminated. If the Company determines that it has an

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interest in a variable interest entity, the Company will consolidate the entity when it is determined to be the primary beneficiary of the entity.

The accompanying interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and in conformity with the rules and regulations of the Securities and Exchange Commission. In the Company’s opinion, the interim financial statements presented herein reflect all adjustments, consisting solely of normal and recurring adjustments, which are necessary to fairly present the interim financial statements. These financial statements should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on February 23, 2022. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

The Company does not have any comprehensive income other than what is included in net income. If the Company has any comprehensive income in the future such that a statement of comprehensive income would be necessary, the Company will include such statement in one continuous consolidated statement of operations.

The Company has evaluated subsequent events through the date of issuance of these financial statements.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Earnings Per Share

The Company applies the two-class method when computing its earnings per share. Net income per share for each class of stock is calculated assuming all of the Company’s net income is distributed as dividends to each class of stock based on their contractual rights.

Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are considered participating securities and are included in the computation of earnings per share.

Basic earnings (loss) attributable to common stockholders per common share is computed based on the weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) attributable to common stockholders per common share is computed based on the weighted average number of shares of common stock outstanding during each period, plus potential common shares considered outstanding during the period, as long as the inclusion of such awards is not anti-dilutive. Potential common shares consist of unvested restricted stock awards and units, using the more dilutive of either the two-class method or the treasury stock method.

The following table sets forth the computation of basic and diluted earnings (loss) per common share (unaudited and in thousands, except per share data):


	Three Months Ended March 31,
	2022		2021
Numerator:
Net income (loss)	$	15,123	$	(55,287)
(Income) loss from consolidated joint venture attributable to noncontrolling interest		(1,134)		1,975
Preferred stock dividends		(3,773)		(3,207)
Undistributed income allocated to unvested restricted stock compensation		(67)		—
Numerator for basic and diluted income (loss) attributable to common stockholders	$	10,149	$	(56,519)
Denominator:
Weighted average basic and diluted common shares outstanding		217,271		214,438
Basic and diluted income (loss) attributable to common stockholders per common share	$	0.05	$	(0.26)

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During the three months ended March 31, 2022 and 2021, the Company excluded 1,323,953 and 1,589,336 anti-dilutive unvested time-based restricted stock awards that generally vest over periods ranging from three years to five years from its calculation of diluted earnings per share, respectively. In addition, during the three months ended March 31, 2022, the Company excluded the following anti-dilutive unvested performance-based restricted stock units from its calculation of diluted earnings per share: 169,832 shares that vest based on the achievement of the Company’s total relative shareholder return following a two year performance period; 254,748 shares that vest based on the achievement of the Company’s total relative shareholder return following a three year performance period; and 188,004 shares that vest based on the achievement of pre-determined stock price targets during a five year performance period.

Restricted Cash

Restricted cash primarily includes lender reserves required by our debt agreements and reserves for capital expenditures required by certain of our management and franchise agreements. At times, restricted cash also includes hotel acquisition or disposition-related earnest money held in escrow reserves pending completion of the associated transaction. In addition, restricted cash as of March 31, 2022 and December 31, 2021 included $10.3 million and $10.4 million, respectively, held in escrow related to certain current and potential employee-related obligations of one of the Company’s former hotels, $3.1 million held in escrow as of both March 31, 2022 and December 31, 2021 for the purpose of satisfying any severance or similar obligations that arise in connection with the termination of hotel personnel and any employment claim by hotel personnel at the Four Seasons Resort Napa Valley and $0.2 million held as collateral for certain letters of credit as of both March 31, 2022 and December 31, 2021 (see Note 12).

Investments in Hotel Properties

Investments in hotel properties, including land, buildings, furniture, fixtures and equipment (“FF&E”) and identifiable intangible assets are recorded at their respective relative fair values for an asset acquisition or at their estimated fair values for a business acquisition. Property and equipment purchased after the hotel acquisition date is recorded at cost. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset, the cost and related accumulated depreciation is removed from the Company’s accounts and any resulting gain or loss is included in the consolidated statements of operations.

Depreciation expense is based on the estimated life of the Company’s assets. The life of the assets is based on a number of assumptions, including the cost and timing of capital expenditures to maintain and refurbish the Company’s hotels, as well as specific market and economic conditions. Hotel properties are depreciated using the straight-line method over estimated useful lives primarily ranging from five to 40 years for buildings and improvements and three to 12 years for FF&E. Finance lease right-of-use assets other than land are depreciated using the straight-line method over the shorter of either their estimated useful life or the life of the related finance lease obligation. Intangible assets are amortized using the straight-line method over the shorter of their estimated useful life or over the length of the related agreement.

The Company’s investment in hotel properties, net also includes initial franchise fees which are recorded at cost and amortized using the straight-line method over the terms of the franchise agreements ranging from 15 to 20 years. All other franchise fees that are based on the Company’s results of operations are expensed as incurred.

While the Company believes its estimates are reasonable, a change in the estimated lives could affect depreciation expense and net income or the gain or loss on the sale of any of the Company’s hotels. The Company has not changed the useful lives of any of its assets during the periods discussed.

Impairment losses are recorded on long-lived assets to be held and used by the Company when indicators of impairment are present and the future undiscounted net cash flows, including potential sale proceeds, expected to be generated by those assets based on the Company’s anticipated investment horizon, are less than the assets’ carrying amount. The Company evaluates its long-lived assets to determine if there are indicators of impairment on a quarterly basis. No single indicator would necessarily result in the Company preparing an estimate to determine if a hotel’s future undiscounted cash flows are less than the book value of the hotel. The Company uses judgment to determine if the severity of any single indicator, or the fact there are a number of indicators of less severity that when combined, would result in an indication that a hotel requires an estimate of the undiscounted cash flows to determine if an impairment has occurred. If a hotel is considered to be impaired, the related assets are adjusted to their estimated fair value and an impairment loss is recognized. The impairment loss recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. The Company performs a fair value assessment, using one or more discounted cash flow analyses to estimate the fair value of the hotel, taking into account the hotel’s expected cash flow from operations, the Company’s estimate of how long it will own the hotel and the estimated proceeds from the disposition of the hotel. When multiple cash flow analyses are prepared, a probability is assigned to each cash flow analysis based upon the estimated likelihood of each scenario occurring. The factors addressed in determining estimated proceeds from disposition include anticipated operating cash flow in the year of disposition and terminal capitalization rate. The Company’s judgment is required in determining the discount rate applied to

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estimated cash flows, the estimated growth of revenues and expenses, net operating income and margins, the need for capital expenditures, as well as specific market and economic conditions. Based on the Company’s review, no hotels were impaired during either the three months ended March 31, 2022 or 2021.

Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than a forced or liquidation sale. The estimation process involved in determining if assets have been impaired and in the determination of fair value is inherently uncertain because it requires estimates of current market yields as well as future events and conditions. Such future events and conditions include economic and market conditions, as well as the availability of suitable financing. The realization of the Company’s investment in hotel properties is dependent upon future uncertain events and conditions and, accordingly, the actual timing and amounts realized by the Company may be materially different from their estimated fair values.

Leases

The Company determines if a contract is a lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Expense for these short-term leases is recognized on a straight-line basis over the lease term. For leases with an initial term greater than 12 months, the Company records a right-of-use (“ROU”) asset and a corresponding lease obligation. ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease obligations represent the Company’s obligation to make fixed lease payments as stipulated by the lease. The Company has elected to not separate lease components from nonlease components, resulting in the Company accounting for lease and nonlease components as one single lease component.

Leases are accounted for using a dual approach, classifying leases as either operating or financing based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the Company. This classification determines whether the lease expense is recognized on a straight-line basis over the term of the lease for operating leases or based on an effective interest method for finance leases.

Lease ROU assets are recognized at the lease commencement date and include the amount of the initial operating lease obligation, any lease payments made at or before the commencement date, excluding any lease incentives received, and any initial direct costs incurred. For leases that have extension options that the Company can exercise at its discretion, management uses judgment to determine if it is reasonably certain that the Company will in fact exercise such option. If the extension option is reasonably certain to occur, the Company includes the extended term’s lease payments in the calculation of the respective lease liability. None of the Company’s leases contain any material residual value guarantees or material restrictive covenants.

Lease obligations are recognized at the lease commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate (“IBR”) based on information available at the commencement date in determining the present value of lease payments over the lease term. The IBR is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. In order to estimate the Company’s IBR, the Company first looks to its own unsecured debt offerings, and adjusts the rate for both length of term and secured borrowing using available market data as well as consultations with leading national financial institutions that are active in the issuance of both secured and unsecured notes.

The Company reviews its right-of-use assets for indicators of impairment. If such assets are considered to be impaired, the related assets are adjusted to their estimated fair value and an impairment loss is recognized. The impairment loss recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Based on the Company’s review, no operating or finance lease ROU assets were impaired during either the three months ended March 31, 2022 or 2021.

Noncontrolling Interest

The Company’s consolidated financial statements include an entity in which the Company has a controlling financial interest. Noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. Such noncontrolling interest is reported on the consolidated balance sheets within equity, separately from the Company’s equity. On the consolidated statements of operations, revenues, expenses and net income or loss from the less-than-wholly owned subsidiary are reported at their consolidated amounts, including both the amounts attributable to the Company and the noncontrolling interest. Income or loss is allocated to the noncontrolling interest based on its weighted average ownership percentage for the applicable period. The consolidated statements of equity include beginning balances, activity for the period and ending balances for each component of stockholders’ equity, noncontrolling interest and total equity.

At both March 31, 2022 and December 31, 2021, the noncontrolling interest reported in the Company’s consolidated financial statements consisted of a third-party’s 25.0% ownership interest in the Hilton San Diego Bayfront.

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Revenue Recognition

Revenues are recognized when control of the promised goods or services is transferred to hotel guests, which is generally defined as the date upon which a guest occupies a room and/or utilizes the hotel’s services. Room revenue and other occupancy based fees are recognized over a guest’s stay at the previously agreed upon daily rate. Some of the Company’s hotel rooms are booked through independent internet travel intermediaries. If the guest pays the independent internet travel intermediary directly, revenue for the room is recognized by the Company at the price the Company sold the room to the independent internet travel intermediary, less any discount or commission paid. If the guest pays the Company directly, revenue for the room is recognized by the Company on a gross basis, with the related discount or commission recognized in room expense. A majority of the Company’s hotels participate in frequent guest programs sponsored by the hotel brand owners whereby the hotel allows guests to earn loyalty points during their hotel stay. The Company expenses charges associated with these programs as incurred, and recognizes revenue at the amount it will receive from the brand when a guest redeems their loyalty points by staying at one of the Company’s hotels. In addition, some contracts for rooms or food and beverage services require an advance deposit, which the Company records as deferred revenue (or a contract liability) and recognizes once the performance obligations are satisfied. Cancellation fees and attrition fees, which are charged to groups when they do not fulfill their contracted minimum number of room nights or minimum food and beverage spending requirements, are typically recognized as revenue in the period the Company determines it is probable that a significant reversal in the amount of revenue recognized will not occur, which is generally the period in which these fees are collected.

Food and beverage revenue and other ancillary services revenue are generated when a customer chooses to purchase goods or services separately from a hotel room. The revenue is recognized when the goods or services are provided to the customer at the amount the Company expects to be entitled to in exchange for those goods or services. For ancillary services provided by third parties, the Company assesses whether it is the principal or the agent. If the Company is the principal, revenue is recognized based upon the gross sales price. If the Company is the agent, revenue is recognized based upon the commission earned from the third party.

Additionally, the Company collects sales, use, occupancy and other similar taxes from customers at its hotels at the time of purchase, which are not included in revenue. The Company records a liability upon collection of such taxes from the customer, and relieves the liability when payments are remitted to the applicable governmental agency.

Trade receivables and contract liabilities consisted of the following (in thousands):


	March 31,		December 31,
	2022		2021
	(unaudited)
Trade receivables, net (1)	$	19,290	$	16,055
Contract liabilities (2)	$	55,762	$	40,226

(1)

Trade receivables are included in accounts receivable, net on the accompanying consolidated balance sheets.

(2)

Contract liabilities consist of advance deposits and are included in either other current liabilities or other liabilities on the accompanying consolidated balance sheets.

During the three months ended March 31, 2022 and 2021, the Company recognized approximately $13.8 million and $0.8 million, respectively, in revenue related to its outstanding contract liabilities.

Segment Reporting

The Company considers each of its hotels to be an operating segment, and allocates resources and assesses the operating performance for each hotel. Because all of the Company’s hotels have similar economic characteristics, facilities and services, the hotels have been aggregated into one single reportable segment, hotel ownership.

New Accounting Standards and Accounting Changes

In March 2020, the FASB issued Accounting Standards Update No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU No. 2020-04”), which provides temporary optional expedients and exceptions to the guidance in GAAP on contract modifications and hedge accounting to ease reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). Contracts that meet the following criteria are eligible for relief from the modification accounting requirements in GAAP: the contract references LIBOR or another rate that is expected to be discontinued due to reference rate reform; the modified terms directly replace or have the potential to replace the reference rate that is expected to be discontinued due to reference rate reform; and any contemporaneous changes to other terms that change or have the potential to change the amount and timing of contractual cash flows must be related to the replacement of the reference rate. For a

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contract that meets the criteria, the guidance generally allows an entity to account for and present modifications as an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. That is, the modified contract is accounted for as a continuation of the existing contract. ASU No. 2020-04 is effective upon issuance, and is applied prospectively from any date beginning March 12, 2020. The relief is temporary and generally cannot be applied to contract modifications that occur after December 31, 2022. The Company intends to take advantage of the expedients offered by ASU No. 2020-04 when it modifies its variable rate debt and interest rate cap and swap derivatives, which will affect the Company’s $220.0 million loan secured by the Hilton San Diego Bayfront, its credit facility and its unsecured term loans. The adoption of ASU No. 2020-04 is not expected to have a material impact on the Company’s consolidated financial statements.

3. Investment in Hotel Properties

Investment in hotel properties, net consisted of the following (in thousands):



	March 31,		December 31,
	2022		2021
	(unaudited)
Land	$	584,740	$	604,692
Buildings and improvements		2,579,854		2,729,461
Furniture, fixtures and equipment		401,559		431,780
Intangible assets		41,884		43,117
Construction in progress		76,707		41,260
Investment in hotel properties, gross		3,684,744		3,850,310
Accumulated depreciation and amortization		(1,071,316)		(1,130,294)
Investment in hotel properties, net	$	2,613,428	$	2,720,016

4. Disposals

In February 2022, the Company sold the Hyatt Centric Chicago Magnificent Mile for net proceeds of $67.2 million, including a $4.0 million deposit received from the buyer of the hotel in December 2021, and recorded a gain of $11.3 million. In March 2022, the Company sold the Embassy Suites Chicago and the Hilton Garden Inn Chicago Downtown/Magnificent Mile for combined net proceeds of $128.1 million and recorded a combined gain of $11.6 million. None of these sales represented a strategic shift that had a major impact on the Company’s business plan or its primary markets; therefore none of the hotels qualified as a discontinued operation.

5. Fair Value Measurements and Interest Rate Derivatives

Fair Value Measurements

As of March 31, 2022 and December 31, 2021, the carrying amount of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable and accounts payable and accrued expenses were representative of their fair values due to the short-term maturity of these instruments.

A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability in an orderly transaction. The hierarchy for inputs used in measuring fair value is as follows:


Level 1	Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2	Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3	Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

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As of both March 31, 2022 and December 31, 2021, the Company measured its interest rate derivatives at fair value on a recurring basis. The Company estimated the fair value of its interest rate derivatives using Level 2 measurements based on quotes obtained from the counterparties, which are based upon the consideration that would be required to terminate the agreements.

The following table presents the Company’s assets measured at fair value on a recurring and nonrecurring basis at March 31, 2022 and December 31, 2021 (in thousands):


			Fair Value Measurements at Reporting Date
	Total		Level 1		Level 2		Level 3
March 31, 2022 (unaudited):
Interest rate cap derivative	$	11	$	—	$	11	$	—
Total assets measured at fair value at March 31, 2022	$	11	$	—	$	11	$	—

December 31, 2021:
Interest rate cap derivative	$	3	$	—	$	3	$	—
Total assets measured at fair value at December 31, 2021	$	3	$	—	$	3	$	—

The following table presents the Company’s liabilities measured at fair value on a recurring and nonrecurring basis at March 31, 2022 and December 31, 2021 (in thousands):


			Fair Value Measurements at Reporting Date
	Total		Level 1		Level 2		Level 3
March 31, 2022 (unaudited):
Interest rate swap derivatives	$	394	$	—	$	394	$	—
Total liabilities measured at fair value at March 31, 2022	$	394	$	—

Sunstone Hotel Investors, Inc. [SHO] Filings
Sunstone Hotel Investors, Inc. [SHO-PH] Filings
Sunstone Hotel Investors, Inc. [SHO-PI] Filings
10-Q	[2022-05-04]
10-K	[2022-02-23]
10-Q	[2021-11-04]
10-Q	[2021-08-04]
10-Q	[2021-05-05]
10-K	[2021-02-12]
10-Q	[2020-11-06]
10-Q	[2020-08-05]
10-Q	[2020-05-11]
10-K	[2020-02-19]
10-Q	[2019-11-05]
10-Q	[2019-08-05]
10-Q	[2019-05-08]
10-K	[2019-02-14]
10-Q	[2018-11-06]
10-Q	[2018-08-01]
10-Q	[2018-05-08]
10-K	[2018-02-14]
10-Q	[2017-11-01]
10-Q	[2017-08-03]
10-Q	[2017-05-04]
10-K	[2017-02-23]
10-Q	[2016-11-02]
10-Q	[2016-08-08]
10-Q	[2016-05-03]
10-K	[2016-02-23]
10-Q	[2015-11-03]
10-Q	[2015-08-07]
10-Q	[2015-05-08]
10-K	[2015-02-19]
10-Q	[2014-11-04]
10-Q	[2014-08-08]
10-Q	[2014-05-07]
10-K	[2014-02-25]
10-Q	[2013-11-12]
10-Q	[2013-08-07]
10-Q	[2013-05-08]
10-K	[2013-02-25]
10-Q	[2012-11-06]
10-Q	[2012-08-07]
10-Q	[2012-05-03]
10-K	[2012-02-28]

Sunstone Hotel Investors, Inc. [SHO] Filings

Sunstone Hotel Investors, Inc. [SHO-PH] Filings

Sunstone Hotel Investors, Inc. [SHO-PI] Filings