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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, 2023

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)

15 Enterprise, Suite 200
Aliso Viejo, California

92656

(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, 2023, there were 205,444,026 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, 2023

TABLE OF CONTENTS

Page

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

2

Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022

2

Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023 and 2022

3

Unaudited Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2023 and 2022

4

Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022

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

41

Item 4.

Controls and Procedures

41

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

41

Item 1A.

Risk Factors

41

Item 2.

Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

42

Item 3.

Defaults Upon Senior Securities

42

Item 4.

Mine Safety Disclosures

42

Item 5.

Other Information

42

Item 6.

Exhibits

43

SIGNATURES

44

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,

    

2023

    

2022

(unaudited)

ASSETS

Investment in hotel properties, net

$

2,580,421

$

2,840,928

Operating lease right-of-use assets, net

13,884

15,025

Cash and cash equivalents

113,768

101,223

Restricted cash

71,228

55,983

Accounts receivable, net

28,646

42,092

Prepaid expenses and other assets, net

33,106

27,566

Assets held for sale

247,776

Total assets

$

3,088,829

$

3,082,817

LIABILITIES AND STOCKHOLDERS' EQUITY

Debt, net of unamortized deferred financing costs

$

814,702

$

812,681

Operating lease obligations

17,884

19,012

Accounts payable and accrued expenses

60,854

73,735

Dividends and distributions payable

17,765

13,995

Other liabilities

74,542

78,433

Liabilities of assets held for sale

15,397

Total liabilities

1,001,144

997,856

Commitments and contingencies (Note 12)

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, 2023 and December 31, 2022, 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, 2023 and December 31, 2022, 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, 2023 and December 31, 2022, stated at liquidation preference of $25.00 per share

100,000

100,000

Common stock, $0.01 par value, 500,000,000 shares authorized, 205,623,316 shares issued and outstanding at September 30, 2023 and 209,320,447 shares issued and outstanding at December 31, 2022

2,056

2,093

Additional paid in capital

2,434,649

2,465,595

Distributions in excess of retained earnings

(630,270)

(663,977)

Total stockholders’ equity

2,087,685

2,084,961

Total liabilities and stockholders' equity

$

3,088,829

$

3,082,817

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,

    

2023

    

2022

    

2023

    

2022

REVENUES

Room

$

158,467

$

158,400

$

484,304

$

428,893

Food and beverage

64,007

63,476

213,634

174,717

Other operating

25,226

22,438

69,317

64,299

Total revenues

247,700

244,314

767,255

667,909

OPERATING EXPENSES

Room

41,034

38,791

122,756

106,594

Food and beverage

47,777

47,181

148,309

125,959

Other operating

6,129

6,440

18,031

17,965

Advertising and promotion

12,767

12,325

39,686

34,420

Repairs and maintenance

10,060

9,382

29,112

27,369

Utilities

7,784

7,708

21,644

19,652

Franchise costs

4,278

4,145

12,756

11,429

Property tax, ground lease and insurance

21,709

19,714

60,320

53,160

Other property-level expenses

29,020

29,032

92,654

83,333

Corporate overhead

7,127

7,879

23,991

27,310

Depreciation and amortization

33,188

31,750

97,927

94,003

Total operating expenses

220,873

214,347

667,186

601,194

Interest and other income

1,218

270

6,398

4,766

Interest expense

(11,894)

(9,269)

(34,911)

(20,288)

Gain on sale of assets

22,946

Gain (loss) on extinguishment of debt, net

9

(770)

9,930

(962)

Income before income taxes

16,160

20,198

81,486

73,177

Income tax (provision) benefit, net

(602)

290

(1,763)

126

NET INCOME

15,558

20,488

79,723

73,303

Income from consolidated joint venture attributable to noncontrolling interest

(3,477)

Preferred stock dividends

(3,226)

(3,351)

(10,762)

(10,897)

INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS

$

12,332

$

17,137

$

68,961

$

58,929

Basic and diluted per share amounts:

Basic income attributable to common stockholders per common share

$

0.06

$

0.08

$

0.33

$

0.27

Diluted income attributable to common stockholders per common share

$

0.06

$

0.08

$

0.33

$

0.27

Basic weighted average common shares outstanding

205,570

211,010

206,257

213,799

Diluted weighted average common shares outstanding

205,782

211,289

206,553

213,869

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)

Distributions

Preferred Stock

Common Stock

in Excess of

Number of

Number of

Additional

Retained

    

Shares

    

Amount

    

Shares

    

Amount

    

Paid in Capital

    

 Earnings

    

Total

Balance at December 31, 2022 (audited)

11,250,000

$

281,250

209,320,447

$

2,093

$

2,465,595

$

(663,977)

$

2,084,961

Amortization of deferred stock compensation

2,545

2,545

Issuance of restricted common stock, net

55,970

1

(3,349)

(3,348)

Forfeiture of restricted common stock

(1,435)

Common stock distributions and distributions payable at $0.05 per share

(10,449)

(10,449)

Series G preferred stock dividends and dividends payable at $0.219536 per share

(582)

(582)

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

(1,964,923)

(20)

(18,606)

(18,626)

Net income

21,087

21,087

Balance at March 31, 2023

11,250,000

$

281,250

207,410,059

$

2,074

$

2,446,185

$

(657,107)

$

2,072,402

Amortization of deferred stock compensation

3,442

3,442

Issuance of restricted common stock

82,552

1

(429)

(428)

Forfeiture of restricted common stock

(6,459)

Common stock distributions and distributions payable at $0.05 per share

(10,448)

(10,448)

Series G preferred stock dividends and dividends payable at $0.219536 per share

(582)

(582)

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

(301,461)

(3)

(2,852)

(2,855)

Acquisition of noncontrolling interest, net

(299)

(299)

Net income

43,078

43,078

Balance at June 30, 2023

11,250,000

$

281,250

207,184,691

$

2,072

$

2,446,047

$

(628,245)

$

2,101,124

Amortization of deferred stock compensation

2,628

2,628

Common stock distributions and distributions payable at $0.07 per share

(14,357)

(14,357)

Series G preferred stock dividends and dividends payable at $0.015182 per share

(40)

(40)

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

(1,561,375)

(16)

(14,026)

(14,042)

Net income

15,558

15,558

Balance at September 30, 2023

11,250,000

$

281,250

205,623,316

$

2,056

$

2,434,649

$

(630,270)

$

2,087,685

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)

Distributions

Noncontrolling

Preferred Stock

Common Stock

in Excess of

Interest in

Number of

Number of

Additional

Retained

Consolidated

Shares

    

Amount

    

Shares

    

Amount

    

Paid in Capital

    

 Earnings

    

    Joint Venture    

    

Total

Balance at December 31, 2021 (audited)

11,250,000

$

281,250

219,333,783

$

2,193

$

2,631,484

$

(715,960)

$

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

$

(705,744)

$

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

$

(674,168)

$

$

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

$

(667,641)

$

$

2,103,656

See accompanying notes to consolidated financial statements.

5

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Nine Months Ended September 30,

    

2023

    

2022

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

$

79,723

$

73,303

Adjustments to reconcile net income to net cash provided by operating activities:

Bad debt expense

184

846

Gain on sale of assets

(22,946)

(Gain) loss on extinguishment of debt, net

(9,930)

962

Noncash interest on derivatives, net

(3,348)

(2,904)

Depreciation

97,540

93,573

Amortization of franchise fees and other intangibles

332

387

Amortization of deferred financing costs

1,960

1,940

Amortization of deferred stock compensation

8,263

8,661

Gain on hurricane-related damage

(3,722)

(4,369)

Changes in operating assets and liabilities:

Accounts receivable, net

7,477

(16,279)

Prepaid expenses and other assets

(5,804)

5,465

Accounts payable and other liabilities

(3,851)

12,109

Operating lease right-of-use assets and obligations

(82)

(1,050)

Net cash provided by operating activities

168,742

149,698

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from sales of assets

191,291

Disposition deposit

10,000

Proceeds from property insurance

3,722

4,369

Acquisitions of hotel properties and other assets

(232,506)

Renovations and additions to hotel properties and other assets

(73,944)

(97,539)

Net cash used in investing activities

(60,222)

(134,385)

CASH FLOWS FROM FINANCING ACTIVITIES

Acquisition of noncontrolling interest, including transaction costs

(299)

(101,348)

Payment of common stock offering costs