Sunstone Hotel Investors, Inc 10-Q for FY2022 Q2

Sunstone Hotel Investors, Inc. (SHO)

10-Q 2022-08-03 For: 2022-06-30

Added on April 05, 2026

About this 10-Q

Sunstone Hotel Investors, Inc filed this 10-Q on August 3, 2022, covering the quarter ended June 30, 2022 (FY2022 Q2).

Headline figures

Quarter ended June 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.

Revenue: $251.28M; up 114.4% from $117.21M a year earlier
Net income: $37.69M; compared with a net loss of $27.92M a year earlier
Diluted EPS: $0.15; compared with -$0.16 a year earlier

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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)


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


Large accelerated filer ☒		Accelerated filer ☐

Non-accelerated filer ☐		Smaller reporting company ☐

		Emerging growth company ☐


		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



	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



	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


													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



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

Total hotels owned as of June 30, 2022		15


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.


	June 30, 2022				December 31, 2021
	Carrying Amount (1)		Fair Value (2)		Carrying Amount (1)		Fair Value (2)
Debt	$	805,443	$	789,665	$	611,437	$	590,359


									Estimated Fair Value of Assets (Liabilities) (1)
		Strike / Capped			Effective	Maturity	Notional		June 30,		December 31,
Hedged Debt	Type	Rate		Index	Date	Date	Amount		2022		2021
Hilton San Diego Bayfront	Cap	6.000	%	1-Month LIBOR	December 9, 2021	December 15, 2022	$	220,000	$	5	$	3
Term Loan 1	Swap	1.591	%	1-Month LIBOR	October 29, 2015	September 2, 2022	$	85,000		65		(744)
Term Loan 2	Swap	1.853	%	1-Month LIBOR	January 29, 2016	January 31, 2023	$	100,000		570		(1,484)
									$	640	$	(2,225)


				Trailing 12-Month
		Percentage of		Total Consolidated
	Number of Hotels	Total Rooms		Revenue
California	5	34	%	38	%
Florida	3	17	%	14	%
Hawaii	1	7	%	21	%
Massachusetts	2	19	%	15	%


	January		February		March		April		May		June
2022	37.9	%	53.6	%	67.9	%	75.7	%	73.4	%	75.1	%
2021	14.0	%	24.5	%	31.7	%	42.0	%	47.3	%	50.7	%


	Payment due by period
			Less Than		1 to 3		3 to 5		More than
	Total		1 year		years		years		5 years
Notes payable (1)	$	805,443	$	2,043	$	295,100	$	65,000	$	443,300
Interest obligations on notes payable (2)		121,030		30,391		47,784		36,026		6,829
Operating lease obligations, including imputed interest (3)		29,087		6,723		13,421		5,877		3,066
Construction commitments		76,931		76,931		—		—		—
Total	$	1,032,491	$	116,088	$	356,305	$	106,903	$	453,195


					Maximum Number (or
				Total Number of	Appropriate Dollar
				Shares Purchased	Value) of Shares that
	Total Number			as Part of Publicly	May Yet Be Purchased
	of Shares	Average Price Paid		Announced Plans	Under the Plans or
Period	Purchased	per Share		or Programs	Programs
April 1, 2022 - April 30, 2022	457,634	$	10.95	457,634	$	451,602,381
May 1, 2022 - May 31, 2022	1,471,634	$	11.03	1,471,634	$	435,365,947
June 1, 2022 - June 30, 2022	1,306,690	$	10.10	1,306,690	$	422,162,861
Total	3,235,958	$	10.65	3,235,958	$	422,162,861



	June 30,		December 31,
	2022		2021
	(unaudited)
Land	$	672,531	$	604,692
Buildings and improvements		2,741,546		2,729,461
Furniture, fixtures and equipment		410,042		431,780
Intangible assets		42,408		43,117
Construction in progress		83,252		41,260
Investment in hotel properties, gross		3,949,779		3,850,310
Accumulated depreciation and amortization		(1,101,979)		(1,130,294)
Investment in hotel properties, net	$	2,847,800	$	2,720,016


		June 30,		December 31,
		2022		2021
		(unaudited)
Note payable requiring payments of interest only, bearing a blended rate of one-month LIBOR plus 105 basis points, resulting in effective interest rates of 2.305% and 1.140% at June 30, 2022 and December 31, 2021, respectively; matures on December 9, 2022 with one remaining one-year option to extend (subject to a 25 basis point increase in the LIBOR spread), which the Company intends to exercise. The note is collateralized by a first deed of trust on one hotel property.		$	220,000	$	220,000
Note payable requiring payments of interest and principal, with a fixed rate of 4.15%; matures on December 11, 2024. The note is collateralized by a first deed of trust on one hotel property.			77,143		78,137
Unsecured Term Loan 1 requiring payments of interest only, with a blended interest rate based on a pricing grid with a range of 135 to 220 basis points, depending on the Company's leverage ratios, plus the greater of one-month LIBOR or 25 basis points as of June 30, 2022, and a range of 135 to 235 basis points, depending on the Company's leverage ratios, plus the greater of one-month LIBOR or 25 basis points as of December 31, 2021. LIBOR has been swapped to a fixed rate of 1.591%, resulting in effective interest rates of 2.941% and 3.941% at June 30, 2022 and December 31, 2021, respectively. Matures on September 3, 2022.	(1)		19,400		19,400
Unsecured Term Loan 2 requiring payments of interest only, with a blended interest rate based on a pricing grid with a range of 135 to 220 basis points, depending on the Company's leverage ratios, plus the greater of one-month LIBOR or 25 basis points as of June 30, 2022, and a range of 135 to 235 basis points, depending on the Company's leverage ratios, plus the greater of one-month LIBOR or 25 basis points as of December 31, 2021. LIBOR has been swapped to a fixed rate of 1.853%, resulting in effective interest rates of 3.203% and 4.203% at June 30, 2022 and December 31, 2021, respectively. Matures on January 31, 2023.	(1)		88,900		88,900
Unsecured revolving credit facility requiring payments of interest only, with a blended interest rate based on a pricing grid with a range of 140 to 225 basis points, depending on the Company's leverage ratios, plus the greater of one-month LIBOR or 25 basis points, resulting in an effective interest rate of 3.18597% at June 30, 2022. Matures on April 14, 2023. The interests of 13 hotel subsidiaries are pledged to the credit facility.	(1)		230,000		—
Unsecured Series A Senior Notes requiring semi-annual payments of interest only, bearing interest at 5.94%. Matures on January 10, 2026.			65,000		90,000
Unsecured Series B Senior Notes requiring semi-annual payments of interest only, bearing interest at 6.04%. Matures on January 10, 2028.			105,000		115,000
Total notes payable		$	805,443	$	611,437

Current portion of notes payable		$	2,043	$	21,401
Less: current portion of deferred financing costs			(397)		(707)
Carrying value of current portion of notes payable		$	1,646	$	20,694

Notes payable, less current portion		$	803,400	$	590,036
Less: long-term portion of deferred financing costs			(1,024)		(1,295)
Carrying value of notes payable, less current portion		$	802,376	$	588,741


Exhibit Number			Description
3.1			Articles of Amendment and Restatement of Sunstone Hotel Investors, Inc. (incorporated by reference to Exhibit 3.1 to the registration statement on Form S-11 (File No. 333-117141) filed by the Company).

3.2			Second Amended and Restated Bylaws of Sunstone Hotel Investors, Inc. effective as of November 15, 2018 (incorporated by reference to Exhibit 3.1 to Form 8-K, filed by the Company on November 15, 2018).

3.3			Articles Supplementary Prohibiting the Company From Electing to be Subject to Section 3-803 of the Maryland General Corporation Law Absent Shareholder Approval (incorporated by reference to Exhibit 3.1 to Form 8-K, filed by the Company on April 29, 2013).

3.4			Articles Supplementary for Series E preferred stock (incorporated by reference to Exhibit 3.5 to the registration statement on Form 8-A, filed by the Company on March 10, 2016).

3.5			Articles Supplementary for Series F preferred stock (incorporated by reference to Exhibit 3.5 to the registration statement on Form 8-A, filed by the Company on May 16, 2016).

3.6			Articles Supplementary for Series G preferred stock (incorporated by reference to Exhibit 3.1 to Form 8-K, filed by the Company on April 28, 2021).

3.7			Articles Supplementary for Series H preferred stock (incorporated by reference to Exhibit 3.3 to the registration statement on Form 8-A, filed by the Company on May 20, 2021).

3.8			Articles Supplementary for Series I preferred stock (incorporated by reference to Exhibit 3.3 to the registration statement on Form 8-A, filed by the company on July 15, 2021).

3.9			Eighth Amended and Restated Limited Liability Agreement of Sunstone Hotel Partnership LLC (incorporated by reference to Exhibit 3.2 to Form 8-K, filed by the Company on July 16, 2021).

10.1			Third Amendment to Amended and Restated Credit Agreement (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on July 8, 2021).

10.2			Third Amendment to Note and Guarantee Agreement (incorporated by reference to Exhibit 10.2 to Form 8-K, filed by the Company on July 8, 2021).

10.3			Sunstone Hotel Investors, Inc. Incentive Bonus Plan (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on August 10, 2021). #

10.4			Form of Retention Letter with Named Executive Officers (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on September 13, 2021). #

10.5			Form of Employment Agreement by and between Sunstone Hotel Investors, Inc. and Douglas M. Pasquale (incorporated by reference to Exhibit 10.2 to Form 8-K, filed by the Company on September 13, 2021). #

10.6			Form of Letter Agreement with Named Executive Officers (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on October 1, 2021). #

10.7			Form of Performance-Vesting Restricted Stock Unit Award Agreement (2022) (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on February 11, 2022). #

10.8			Form of Performance-Vesting Restricted Stock Unit Award Agreement (Transition 2022) (incorporated by reference to Exhibit 10.2 to Form 8-K, filed by the Company on February 11, 2022). #

10.9			Form of Performance-Vesting Restricted Stock Unit Award Agreement (Promotion) (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on March 7, 2022). #

10.10			Sunstone Hotel Investors, Inc. and Sunstone Hotel Partnership, LLC 2022 Incentive Award Plan (incorporated by reference to Exhibit 10-1 to Form 8-K, filed by the Company on April 28, 2022). #

10.11			Second Amended and Restated Credit Agreement (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on July 27, 2022).

31.1			Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

31.2			Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

32.1			Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

101.INS			XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.*

101.SCH			Inline XBRL Taxonomy Extension Schema Document. *

101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase Document. *


101.LAB			Inline XBRL Taxonomy Extension Label Linkbase Document. *

101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase Document. *

101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase Document. *

104			Cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 formatted in Inline XBRL (included in Exhibit 101).


*		Filed herewith.
#		Management contract or compensatory plan or arrangement.


	Sunstone Hotel Investors, Inc.

Date: August 3, 2022	By:	/s/ Aaron R. Reyes
		Aaron R. Reyes (Chief Financial Officer and Duly Authorized Officer)

7
Date: August 3, 2022	/s/ Bryan A. Giglia
	Bryan A. Giglia
	Chief Executive Officer

7
Date: August 3, 2022	/s/ Aaron R. Reyes
	Aaron R. Reyes
	Chief Financial Officer