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Table of Contents

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, 2021

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 2, 2021, there were 219,333,783 shares of Sunstone Hotel Investors, Inc.’s common stock, $0.01 par value per share, outstanding.

Table of Contents

SUNSTONE HOTEL INVESTORS, INC.

QUARTERLY REPORT ON

FORM 10-Q

For the Quarterly Period Ended September 30, 2021

TABLE OF CONTENTS

Page

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

2

Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020

2

Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020

3

Unaudited Consolidated Statements of Equity for the Three Quarters and Nine Months Ended September 30, 2021 and 2020

4

Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020

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

46

Item 4.

Controls and Procedures

46

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

47

Item 1A.

Risk Factors

47

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

Item 3.

Defaults Upon Senior Securities

47

Item 4.

Mine Safety Disclosures

47

Item 5.

Other Information

47

Item 6.

Exhibits

48

SIGNATURES

50

Table of Contents

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,

    

2021

    

2020

(unaudited)

ASSETS

Current assets:

Cash and cash equivalents

$

179,487

$

368,406

Restricted cash

42,124

47,733

Accounts receivable, net

28,349

8,566

Prepaid expenses and other current assets

18,512

10,440

Assets held for sale, net

13,759

Total current assets

282,231

435,145

Investment in hotel properties, net

2,669,169

2,461,498

Finance lease right-of-use asset, net

45,079

46,182

Operating lease right-of-use assets, net

23,971

26,093

Deferred financing costs, net

2,928

4,354

Other assets, net

11,217

12,445

Total assets

$

3,034,595

$

2,985,717

LIABILITIES AND EQUITY

Current liabilities:

Accounts payable and accrued expenses

$

48,740

$

37,326

Accrued payroll and employee benefits

18,057

15,392

Dividends and distributions payable

3,112

3,208

Other current liabilities

57,129

32,606

Current portion of notes payable, net

87,396

2,261

Liabilities of assets held for sale

5,490

Total current liabilities

219,924

90,793

Notes payable, less current portion, net

655,713

742,528

Finance lease obligation, less current portion

15,568

15,569

Operating lease obligations, less current portion

26,432

29,954

Other liabilities

14,495

17,494

Total liabilities

932,132

896,338

Commitments and contingencies (Note 12)

Equity:

Stockholders’ equity:

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

6.95% Series E Cumulative Redeemable Preferred Stock, zero shares and 4,600,000 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively, stated at liquidation preference of $25.00 per share

115,000

6.45% Series F Cumulative Redeemable Preferred Stock, zero shares and 3,000,000 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively, stated at liquidation preference of $25.00 per share

75,000

Series G Cumulative Redeemable Preferred Stock, 2,650,000 shares and zero shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively, stated at liquidation preference of $25.00 per share

66,250

6.125% Series H Cumulative Redeemable Preferred Stock, 4,600,000 shares and zero shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively, stated at liquidation preference of $25.00 per share

115,000

5.70% Series I Cumulative Redeemable Preferred Stock, 4,000,000 shares and zero shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively, stated at liquidation preference of $25.00 per share

100,000

Common stock, $0.01 par value, 500,000,000 shares authorized, 219,333,783 shares issued and outstanding at September 30, 2021 and 215,593,401 shares issued and outstanding at December 31, 2020

2,193

2,156

Additional paid in capital

2,629,148

2,586,108

Retained earnings

810,075

913,766

Cumulative dividends and distributions

(1,660,675)

(1,643,386)

Total stockholders’ equity

2,061,991

2,048,644

Noncontrolling interest in consolidated joint venture

40,472

40,735

Total equity

2,102,463

2,089,379

Total liabilities and equity

$

3,034,595

$

2,985,717

See accompanying notes to consolidated financial statements.

2

Table of Contents

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,

    

2021

    

2020

   

2021

    

2020

REVENUES

Room

$

118,061

$

16,266

$

236,877

$

147,535

Food and beverage

27,338

2,109

47,547

50,312

Other operating

22,022

10,535

50,840

32,699

Total revenues

167,421

28,910

335,264

230,546

OPERATING EXPENSES

Room

32,106

13,715

66,692

65,037

Food and beverage

27,440

7,748

49,088

54,533

Other operating

4,643

1,295

9,934

6,283

Advertising and promotion

8,883

3,895

20,800

20,447

Repairs and maintenance

10,001

6,075

22,678

21,499

Utilities

6,164

4,170

14,998

13,238

Franchise costs

4,181

663

7,468

6,337

Property tax, ground lease and insurance

17,528

20,800

47,821

59,975

Other property-level expenses

21,633

9,528

48,177

47,109

Corporate overhead

15,422

6,582

32,066

22,414

Depreciation and amortization

32,585

33,005

96,084

104,290

Impairment losses

1,014

1,014

133,466

Total operating expenses

181,600

107,476

416,820

554,628

Interest and other income (loss)

2

139

(356)

2,751

Interest expense

(7,983)

(12,742)

(23,697)

(43,199)

Gain on sale of assets

189

189

Gain (loss) on extinguishment of debt

61

(210)

371

(210)

Loss before income taxes

(22,099)

(91,190)

(105,238)

(364,551)

Income tax (provision) benefit, net

(25)

83

(91)

(6,575)

NET LOSS

(22,124)

(91,107)

(105,329)

(371,126)

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

(933)

1,816

1,638

4,436

Preferred stock dividends and redemption charges

(6,287)

(3,208)

(17,289)

(9,622)

LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS

$

(29,344)

$

(92,499)

$

(120,980)

$

(376,312)

Basic and diluted per share amounts:

Basic and diluted loss attributable to common stockholders per common share

$

(0.13)

$

(0.43)

$

(0.56)

$

(1.74)

Basic and diluted weighted average common shares outstanding

217,709

214,257

215,765

216,498

See accompanying notes to consolidated financial statements.

3

Table of Contents

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

Amortization of deferred stock compensation

3,289

3,289

Issuance of restricted common stock

526,084

5

(5)

Forfeiture of restricted common stock

(235,406)

(2)

2

Net proceeds from issuance of Series I preferred stock

4,000,000

100,000

(3,344)

96,656

Redemption of Series F preferred stock

(3,000,000)

(75,000)

2,624

(2,624)

(75,000)

Series F preferred stock dividends at $0.183646 per share through redemption date

(551)

(551)

Series G preferred stock dividends and dividends payable at $0.061713 per share

(164)

(164)

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 $0.296875 per share

(1,187)

(1,187)

Net (loss) income

(23,057)

933

(22,124)

Balance at September 30, 2021

11,250,000

$

281,250

219,333,783

$

2,193

$

2,629,148

$

810,075

$

(1,660,675)

$

40,472

$

2,102,463

See accompanying notes to consolidated financial statements.

4

Table of Contents

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, 2019 (audited)

7,600,000

$

190,000

224,855,351

$

2,249

$

2,683,913

$

1,318,455

$

(1,619,779)

$

46,233

$

2,621,071

Amortization of deferred stock compensation

2,324

2,324

Issuance of restricted common stock, net

456,219

4

(3,996)

(3,992)

Forfeiture of restricted common stock

(355)

Common stock distributions and distributions payable at $0.05 per share

(10,777)

(10,777)

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)

Distributions to noncontrolling interest

(2,000)

(2,000)

Repurchases of outstanding common stock

(9,770,081)

(98)

(103,796)

(103,894)

Net loss

(162,061)

(458)

(162,519)

Balance at March 31, 2020

7,600,000

190,000

215,541,134

2,155

2,578,445

1,156,394

(1,633,763)

43,775

2,337,006

Amortization of deferred stock compensation

3,193

3,193

Issuance of restricted common stock

94,416

1

(1)

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

(