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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, 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 November 2, 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 September 30, 2020

TABLE OF CONTENTS

Page

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

2

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

2

Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019

3

Unaudited Consolidated Statements of Equity for the Three Quarters and Nine Months Ended September 30, 2020 and 2019

4

Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 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

26

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)

September 30,

December 31,

    

2020

    

2019

(unaudited)

ASSETS

Current assets:

Cash and cash equivalents

$

461,288

$

816,857

Restricted cash

42,346

48,116

Accounts receivable, net

4,624

35,209

Prepaid expenses and other current assets

14,500

13,550

Total current assets

522,758

913,732

Investment in hotel properties, net

2,621,476

2,872,353

Finance lease right-of-use asset, net

46,549

47,652

Operating lease right-of-use assets, net

39,489

60,629

Deferred financing costs, net

3,686

2,718

Other assets, net

12,824

21,890

Total assets

$

3,246,782

$

3,918,974

LIABILITIES AND EQUITY

Current liabilities:

Accounts payable and accrued expenses

$

44,162

$

35,614

Accrued payroll and employee benefits

15,747

25,002

Dividends and distributions payable

3,208

135,872

Other current liabilities

36,562

46,955

Current portion of notes payable, net

188,096

82,109

Total current liabilities

287,775

325,552

Notes payable, less current portion, net

743,545

888,954

Finance lease obligation, less current portion

15,569

15,570

Operating lease obligations, less current portion

45,939

49,691

Other liabilities

25,909

18,136

Total liabilities

1,118,737

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 September 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 September 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 September 30, 2020 and 224,855,351 shares issued and outstanding at December 31, 2019

2,156

2,249

Additional paid in capital

2,584,005

2,683,913

Retained earnings

951,765

1,318,455

Cumulative dividends and distributions

(1,640,178)

(1,619,779)

Total stockholders’ equity

2,087,748

2,574,838

Noncontrolling interest in consolidated joint venture

40,297

46,233

Total equity

2,128,045

2,621,071

Total liabilities and equity

$

3,246,782

$

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 September 30,

Nine Months Ended September 30,

    

2020

    

2019

    

2020

    

2019

REVENUES

Room

$

16,266

$

200,242

$

147,535

$

580,835

Food and beverage

2,109

61,366

50,312

206,183

Other operating

10,535

20,031

32,699

55,197

Total revenues

28,910

281,639

230,546

842,215

OPERATING EXPENSES

Room

13,715

52,514

65,037

152,606

Food and beverage

7,748

44,928

54,533

140,149

Other operating

1,295

4,162

6,283

12,494

Advertising and promotion

3,895

13,285

20,447

40,998

Repairs and maintenance

6,075

10,632

21,499

31,107

Utilities

4,170

7,458

13,238

20,656

Franchise costs

663

8,606

6,337

24,024

Property tax, ground lease and insurance

20,800

21,880

59,975

62,842

Other property-level expenses

9,528

30,913

47,109

97,768

Corporate overhead

6,582

7,395

22,414

22,989

Depreciation and amortization

33,005

37,573

104,290

110,484

Impairment losses

133,466

Total operating expenses

107,476

239,346

554,628

716,117

Interest and other income

139

3,762

2,751

13,497

Interest expense

(12,742)

(13,259)

(43,199)

(43,401)

Gain on sale of assets

189

189

Loss on extinguishment of debt

(210)

(210)

(Loss) income before income taxes

(91,190)

32,796

(364,551)

96,194

Income tax benefit (provision), net

83

749

(6,575)

1,185

NET (LOSS) INCOME

(91,107)

33,545

(371,126)

97,379

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

1,816

(2,508)

4,436

(6,062)

Preferred stock dividends

(3,208)

(3,208)

(9,622)

(9,622)

(LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS

$

(92,499)

$

27,829

$

(376,312)

$

81,695

Basic and diluted per share amounts:

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

$

(0.43)

$

0.12

$

(1.74)

$

0.36

Basic and diluted weighted average common shares outstanding

214,257

224,530

216,498

226,369

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

Amortization of deferred stock compensation

2,368

2,368

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

(1,210)

(1,210)

Net loss

(89,291)

(1,816)

(91,107)

Balance at September 30, 2020

4,600,000

$

115,000

3,000,000

$

75,000

215,635,550

$

2,156

$

2,584,005

$

951,765

$

(1,640,178)

$

40,297

$

2,128,045

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