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

☐

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

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.

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.

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.

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


		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