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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 June 30, 2020

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 E Cumulative Redeemable Preferred Stock, $0.01 par value

SHO.PRE

New York Stock Exchange

Series F Cumulative Redeemable Preferred Stock, $0.01 par value

SHO.PRF

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 July 31, 2020, there were 215,635,550 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 June 30, 2020

TABLE OF CONTENTS

Page

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

2

Consolidated Balance Sheets as of June 30, 2020 (unaudited) and December 31, 2019

2

Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019

3

Unaudited Consolidated Statements of Equity for the Three and Six Months Ended June 30, 2020 and 2019

4

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019

6

Notes to Unaudited Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

46

Item 4.

Controls and Procedures

46

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

48

Item 1A.

Risk Factors

48

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

49

Item 3.

Defaults Upon Senior Securities

49

Item 4.

Mine Safety Disclosures

49

Item 5.

Other Information

49

Item 6.

Exhibits

50

SIGNATURES

51

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

SUNSTONE HOTEL INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

June 30,

December 31,

    

2020

    

2019

(unaudited)

ASSETS

Current assets:

Cash and cash equivalents

$

540,420

$

816,857

Restricted cash

45,960

48,116

Accounts receivable, net

4,448

35,209

Prepaid expenses and other current assets

8,026

13,550

Assets held for sale

76,683

Total current assets

675,537

913,732

Investment in hotel properties, net

2,645,481

2,872,353

Finance lease right-of-use asset, net

46,917

47,652

Operating lease right-of-use assets, net

40,351

60,629

Deferred financing costs, net

2,305

2,718

Other assets, net

13,110

21,890

Total assets

$

3,423,701

$

3,918,974

LIABILITIES AND EQUITY

Current liabilities:

Accounts payable and accrued expenses

$

42,577

$

35,614

Accrued payroll and employee benefits

14,845

25,002

Dividends and distributions payable

3,207

135,872

Other current liabilities

36,500

46,955

Current portion of notes payable, net

188,757

82,109

Total current liabilities

285,886

325,552

Notes payable, less current portion, net

829,673

888,954

Finance lease obligation, less current portion

15,570

15,570

Operating lease obligations, less current portion

47,206

49,691

Other liabilities

25,374

18,136

Total liabilities

1,203,709

1,297,903

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, 4,600,000 shares issued and outstanding at June 30, 2020 and December 31, 2019, stated at liquidation preference of $25.00 per share

115,000

115,000

6.45% Series F Cumulative Redeemable Preferred Stock, 3,000,000 shares issued and outstanding at June 30, 2020 and December 31, 2019, stated at liquidation preference of $25.00 per share

75,000

75,000

Common stock, $0.01 par value, 500,000,000 shares authorized, 215,635,550 shares issued and outstanding at June 30, 2020 and 224,855,351 shares issued and outstanding at December 31, 2019

2,156

2,249

Additional paid in capital

2,581,637

2,683,913

Retained earnings

1,041,056

1,318,455

Cumulative dividends and distributions

(1,636,970)

(1,619,779)

Total stockholders’ equity

2,177,879

2,574,838

Noncontrolling interest in consolidated joint venture

42,113

46,233

Total equity

2,219,992

2,621,071

Total liabilities and equity

$

3,423,701

$

3,918,974

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 June 30,

Six Months Ended June 30,

    

2020

    

2019

   

2020

   

2019

REVENUES

Room

$

3,869

$

208,735

$

131,269

$

380,593

Food and beverage

213

75,704

48,203

144,817

Other operating

6,342

18,457

22,164

35,166

Total revenues

10,424

302,896

201,636

560,576

OPERATING EXPENSES

Room

7,077

51,846

51,322

100,092

Food and beverage

5,025

48,399

46,785

95,221

Other operating

1,224

4,367

4,988

8,332

Advertising and promotion

4,090

14,149

16,552

27,713

Repairs and maintenance

5,375

10,193

15,424

20,475

Utilities

3,226

6,533

9,068

13,198

Franchise costs

338

8,579

5,674

15,418

Property tax, ground lease and insurance

19,124

20,614

39,175

40,962

Other property-level expenses

8,736

34,015

37,581

66,855

Corporate overhead

8,438

8,078

15,832

15,594

Depreciation and amortization

34,539

36,524

71,285

72,911

Impairment losses

18,100

133,466

Total operating expenses

115,292

243,297

447,152

476,771

Interest and other income

306

4,811

2,612

9,735

Interest expense

(12,950)

(15,816)

(30,457)

(30,142)

(Loss) income before income taxes

(117,512)

48,594

(273,361)

63,398

Income tax benefit (provision), net

12

(2,676)

(6,658)

436

NET (LOSS) INCOME

(117,500)

45,918

(280,019)

63,834

Loss (income) from consolidated joint venture attributable to noncontrolling interest

2,162

(1,955)

2,620

(3,554)

Preferred stock dividends

(3,207)

(3,207)

(6,414)

(6,414)

(LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS

$

(118,545)

$

40,756

$

(283,813)

$

53,866

Basic and diluted per share amounts:

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

$

(0.55)

$

0.18

$

(1.30)

$

0.24

Basic and diluted weighted average common shares outstanding

214,225

227,389

217,631

227,305

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)

Preferred Stock

Noncontrolling

Series E

Series F

Common Stock

Cumulative

Interest in

Number of

Number of

Number of

Additional

Retained

Dividends and

Consolidated

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

Paid in Capital

    

 Earnings

    

Distributions

    

Joint Venture

  

Total Equity

Balance at December 31, 2019 (audited)

4,600,000

$

115,000

3,000,000

$

75,000

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

4,600,000

115,000

3,000,000

75,000

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

(1,209)

(1,209)

Contribution from noncontrolling interest

500

500

Net loss

(115,338)

(2,162)

(117,500)

Balance at June 30, 2020

4,600,000

$

115,000

3,000,000

$

75,000

215,635,550

$

2,156

$

2,581,637

$

1,041,056

$

(1,636,970)

$

42,113

$

2,219,992

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)

Preferred Stock

Noncontrolling

Series E

Series F

Common Stock

Cumulative

Interest in

Number of

Number of

Number of

Additional

Retained

Dividends and

Consolidated

Shares

  

Amount

Shares

   

Amount

  

Shares

   

Amount

   

Paid in Capital

   

 Earnings

   

Distributions

   

Joint Venture

  

Total Equity

Balance at December 31, 2018 (audited)

4,600,000

$

115,000

3,000,000

$

75,000

228,246,247

$

2,282

$

2,728,684

$

1,182,722

$

(1,440,202)

$

47,685

$

2,711,171

Amortization of deferred stock compensation

2,221

2,221

Issuance of restricted common stock, net

345,132

4

(4,439)

(4,435)

Forfeiture of restricted common stock

(3,932)

Common stock distributions and distributions payable at $0.05 per share

(11,429)

(11,429)

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

(1,950)

(1,950)

Net income

16,317

1,599

17,916

Balance at March 31, 2019

4,600,000

115,000

3,000,000

75,000

228,587,447

2,286

2,726,466

1,199,039

(1,454,838)

47,334

2,710,287

Amortization of deferred stock compensation

3,002

3,002

Issuance of restricted common stock

51,840

Common stock distributions and distributions payable at $0.05 per share

(11,411)

(11,411)

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

(788)

(788)

Repurchases of outstanding common stock

(432,464)

(4)

(5,731)

(5,735)

Net income

43,963

1,955

45,918

Balance at June 30, 2019

4,600,000

$

115,000

3,000,000

$

75,000

228,206,823

$

2,282

$

2,723,737

$

1,243,002

$

(1,469,456)

$

48,501

2,738,066

See accompanying notes to consolidated financial statements.

5

Table of Contents

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Six Months Ended June 30,

    

2020

    

2019

CASH FLOWS FROM OPERATING ACTIVITIES

Net (loss) income

$

(280,019)

$

63,834

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

Bad debt expense

367

275

Noncash interest on derivatives and finance lease obligations, net

6,296

5,753

Depreciation

71,264

72,854

Amortization of franchise fees and other intangibles

21

57

Amortization of deferred financing costs

1,396

1,396

Amortization of deferred stock compensation

5,271

5,022

Impairment losses

133,466

Deferred income taxes, net

7,415

(636)

Changes in operating assets and liabilities:

Accounts receivable

30,394

(14,671)

Prepaid expenses and other assets

6,447

4,578

Accounts payable and other liabilities

(6,497)

2,493

Accrued payroll and employee benefits

(10,157)

(