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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 June 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 August 1, 2022, there were 212,316,344 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 June 30, 2022

TABLE OF CONTENTS

Page

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

2

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

2

Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021

3

Unaudited Consolidated Statements of Equity for the Three and Six Months Ended June 30, 2022 and 2021

4

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 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

44

Item 4.

Controls and Procedures

44

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

44

Item 1A.

Risk Factors

44

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

Item 3.

Defaults Upon Senior Securities

45

Item 4.

Mine Safety Disclosures

45

Item 5.

Other Information

45

Item 6.

Exhibits

46

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)

June 30,

December 31,

    

2022

    

2021

(unaudited)

ASSETS

Current assets:

Cash and cash equivalents

$

107,329

$

120,483

Restricted cash

45,611

42,234

Accounts receivable, net

42,151

28,733

Prepaid expenses and other current assets

14,137

14,338

Assets held for sale, net

76,308

Total current assets

209,228

282,096

Investment in hotel properties, net

2,847,800

2,720,016

Operating lease right-of-use assets, net

18,881

23,161

Deferred financing costs, net

1,406

2,580

Other assets, net

9,308

13,196

Total assets

$

3,086,623

$

3,041,049

LIABILITIES AND EQUITY

Current liabilities:

Accounts payable and accrued expenses

$

63,451

$

47,701

Accrued payroll and employee benefits

18,716

19,753

Dividends payable

4,360

3,513

Other current liabilities

63,715

58,884

Current portion of notes payable, net

1,646

20,694

Liabilities of assets held for sale

25,213

Total current liabilities

151,888

175,758

Notes payable, less current portion, net

802,376

588,741

Operating lease obligations, less current portion

19,796

25,120

Other liabilities

9,118

11,656

Total liabilities

983,178

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 June 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 June 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 June 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, 212,450,788 shares issued and outstanding at June 30, 2022 and 219,333,783 shares issued and outstanding at December 31, 2021

2,125

2,193

Additional paid in capital

2,494,238

2,631,484

Retained earnings

997,402

948,064

Cumulative dividends and distributions

(1,671,570)

(1,664,024)

Total stockholders’ equity

2,103,445

2,198,967

Noncontrolling interest in consolidated joint venture

40,807

Total equity

2,103,445

2,239,774

Total liabilities and equity

$

3,086,623

$

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 June 30,

Six Months Ended June 30,

    

2022

    

2021

    

2022

    

2021

REVENUES

Room

$

161,721

$

84,597

$

270,493

$

118,816

Food and beverage

71,658

15,238

111,241

20,209

Other operating

17,901

17,375

41,861

28,818

Total revenues

251,280

117,210

423,595

167,843

OPERATING EXPENSES

Room

37,342

22,946

67,803

34,586

Food and beverage

46,459

15,669

78,778

21,648

Other operating

6,089

3,486

11,525

5,291

Advertising and promotion

11,621

7,042

22,095

11,917

Repairs and maintenance

8,273

7,132

17,987

12,677

Utilities

6,239

4,683

11,944

8,834

Franchise costs

4,280

2,296

7,284

3,287

Property tax, ground lease and insurance

17,455

15,632

33,446

30,293

Other property-level expenses

30,391

16,067

54,301

26,544

Corporate overhead

8,717

9,467

19,431

16,644

Depreciation and amortization

30,893

32,729

62,253

63,499

Total operating expenses

207,759

137,149

386,847

235,220

Interest and other income (loss)

116

21

4,496

(358)

Interest expense

(5,938)

(8,065)

(11,019)

(15,714)

Gain on sale of assets

22,946

Gain (loss) on extinguishment of debt

21

88

(192)

310

Income (loss) before income taxes

37,720

(27,895)

52,979

(83,139)

Income tax provision, net

(28)

(23)

(164)

(66)

NET INCOME (LOSS)

37,692

(27,918)

52,815

(83,205)

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

(2,343)

596

(3,477)

2,571

Preferred stock dividends and redemption charge

(3,773)

(7,795)

(7,546)

(11,002)

INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS

$

31,576

$

(35,117)

$

41,792

$

(91,636)

Basic and diluted per share amounts:

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

$

0.15

$

(0.16)

$

0.19

$

(0.43)

Basic and diluted weighted average common shares outstanding

213,183

215,113

215,216

214,778

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

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)

(1,554)

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

(1,209)

(1,209)

Series G preferred stock dividends and dividends payable at $0.110259 per share

(292)

(292)

Series H preferred stock dividends and dividends payable at $0.157378 per share

(724)

(724)

Net loss

(27,322)

(596)

(27,918)

Balance at June 30, 2021

10,250,000

$

256,250

219,043,105

$

2,190

$

2,626,582

$

833,132

$

(1,654,388)

$

39,539

$

2,103,305

See accompanying notes to consolidated financial statements.

5

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Six Months Ended June 30,

    

2022

    

2021

CASH FLOWS FROM OPERATING ACTIVITIES

Net income (loss)

$

52,815

$

(83,205)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Bad debt expense

313

157

(Gain) loss on sale of assets

(22,946)

70

Loss (gain) on extinguishment of debt

192

(310)

Noncash interest on derivatives, net

(2,865)

(1,578)

Depreciation

62,011

63,478

Amortization of franchise fees and other intangibles

218

21

Amortization of deferred financing costs

1,351

1,472

Amortization of deferred stock compensation

6,431

7,411

Gain on hurricane-related damage

(4,369)

Changes in operating assets and liabilities:

Accounts receivable

(12,147)

(16,771)

Prepaid expenses and other assets

5,705

4,426

Accounts payable and other liabilities

7,063

10,191

Accrued payroll and employee benefits

(2,419)

1,384

Operating lease right-of-use assets and obligations

(700)

(669)

Net cash provided by (used in) operating activities

90,653

(13,923)

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from sale of assets

191,291

Proceeds from property insurance

4,369

Acquisitions of hotel properties and other assets

(232,506)

(195,646)

Renovations and additions to hotel properties and other assets

(62,621)

(16,785)

Net cash used in investing activities

(99,467)

(212,431)

CASH FLOWS FROM FINANCING ACTIVITIES

Acquisition of noncontrolling interest, including transaction costs

(101,348)

Proceeds from preferred stock offerings

115,000

Payment of preferred stock offering costs

(3,943)

Redemption of preferred stock

(115,000)

Proceeds from common stock offerings

38,443

Payment of common stock offering costs

(91)

(784)

Repurchases of outstanding common stock