PART I [Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents unaudited consolidated financial statements, detailing a significant financial turnaround with substantial revenue growth and improved net income Consolidated Balance Sheet Summary (in thousands) | Metric | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $214,905 | $120,483 | | Total Assets | $2,952,868 | $3,041,049 | | Total Liabilities | $744,859 | $801,275 | | Total Equity | $2,208,009 | $2,239,774 | Consolidated Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Total Revenues | $172,315 | $50,633 | | Total Operating Expenses | $179,088 | $98,071 | | Net Income (Loss) | $15,123 | $(55,287) | | Income (Loss) Attributable to Common Stockholders | $10,216 | $(56,519) | | Basic and Diluted EPS | $0.05 | $(0.26) | Consolidated Statement of Cash Flows Summary (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net Cash Provided By (Used In) Operating Activities | $13,148 | $(38,175) | | Net Cash Provided By (Used In) Investing Activities | $164,356 | $(6,526) | | Net Cash Used In Financing Activities | $(85,832) | $(6,181) | | Net Increase (Decrease) in Cash | $91,672 | $(50,882) | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=41&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the operational recovery, strategic asset sales, share repurchases, and debt repayments, highlighting strong liquidity and future acquisition plans - Demand began to recover in February 2022 as Omicron-related case counts subsided, with corporate transient and group demand accelerating, reducing reliance on leisure demand which was dominant in 2021[130](index=130&type=chunk)[131](index=131&type=chunk) - In Q1 2022, the company sold three hotels in Chicago for combined gross proceeds of **$197.0 million** (**$67.5 million** + **$129.5 million**), recording a total gain of **$22.9 million**[135](index=135&type=chunk) - The company repurchased **3.9 million** shares of common stock for **$43.5 million** and repaid **$35.0 million** of its unsecured senior notes, also electing to early terminate the covenant relief period on its unsecured debt in March 2022[137](index=137&type=chunk)[138](index=138&type=chunk)[139](index=139&type=chunk) Existing Portfolio Performance (12 hotels owned during both periods) | Metric | Q1 2022 | Q1 2021 | Change | | :--- | :--- | :--- | :--- | | Occupancy | 53.1% | 23.4% | +2,970 bps | | ADR | $279.95 | $206.44 | +35.6% | | RevPAR | $148.65 | $48.31 | +207.7% | - As of March 31, 2022, the company had **$214.9 million** in unrestricted cash and **$500.0 million** of available capacity under its unsecured revolving credit facility[191](index=191&type=chunk) - Subsequent to the quarter end, in May 2022, the company entered into an agreement to acquire The Confidante Miami Beach for a purchase price of **$232.0 million**, with an expected closing by the end of Q2 2022[123](index=123&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=71&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company's primary market risk is interest rate volatility on variable-rate debt, with a majority of debt fixed to mitigate this exposure - The company's main market risk is from adverse changes in interest rates on its variable-rate debt[213](index=213&type=chunk) - As of March 31, 2022, **61.8%** of the company's debt obligations are fixed-rate, which mitigates interest rate risk[214](index=214&type=chunk) - A **100 basis point** increase or decrease in market interest rates on variable-rate debt would change future consolidated earnings and cash flows by approximately **$2.2 million** annually[214](index=214&type=chunk) [Controls and Procedures](index=71&type=section&id=Item%204.%20Controls%20and%20Procedures) The CEO and CFO concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - The CEO and CFO have concluded that as of the end of the period, the company's disclosure controls and procedures were effective[216](index=216&type=chunk)[217](index=217&type=chunk) - There were no changes in internal control over financial reporting during the fiscal quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[218](index=218&type=chunk) PART II—OTHER INFORMATION [Legal Proceedings](index=73&type=section&id=Item%201.%20Legal%20Proceedings) The company reports no material legal proceedings for the period - The company reported no legal proceedings[220](index=220&type=chunk) [Risk Factors](index=73&type=section&id=Item%201A.%20Risk%20Factors) The company reports no new or materially changed risk factors from those disclosed in its latest Annual Report on Form 10-K - There are no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K[221](index=221&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=73&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section details the company's stock repurchase activity, including shares repurchased and remaining authorization under its program Issuer Purchases of Equity Securities (Q1 2022) | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased as Part of Publicly Announced Program | | :--- | :--- | :--- | :--- | | Jan 2022 | — | — | — | | Feb 2022 | 219,823 | $11.69 | — | | Mar 2022 | 3,947,908 | $11.19 | 3,879,025 | | **Total** | **4,167,731** | **$11.21** | **3,879,025** | - During Q1 2022, the Company repurchased **3,879,025** shares of its common stock for **$43.5 million**, leaving **$456.6 million** remaining under the stock repurchase program[222](index=222&type=chunk) [Defaults Upon Senior Securities](index=73&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reports no defaults upon its senior securities - The company reported no defaults upon senior securities[225](index=225&type=chunk) [Mine Safety Disclosures](index=73&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company's business - This item is not applicable to the company's business[226](index=226&type=chunk) [Other Information](index=73&type=section&id=Item%205.%20Other%20Information) The company reports no other information for this period - The company reported no other information[227](index=227&type=chunk) [Exhibits](index=74&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, debt agreements, and required certifications - The report includes a list of filed exhibits, such as Articles of Amendment, Bylaws, debt agreements, incentive plans, and Sarbanes-Oxley certifications[228](index=228&type=chunk)

Financial Data and Key Metrics Changes - Total revenue for Q4 2021 was $174 million, a 3.9% increase from the prior quarter, marking the highest quarterly revenue since the pandemic began [20][58] - Adjusted EBITDAre for Q4 was $31 million, while adjusted FFO was $0.08 per diluted share; for the full year, adjusted EBITDAre was $67 million and adjusted FFO was $0.04 per diluted share [59] - Comparable portfolio occupancy was 55.6%, a 150 basis point increase from the prior quarter [20] Business Line Data and Key Metrics Changes - Resort hotels in Wailea and Key West achieved record profitability due to strong leisure demand, while urban hotels faced challenges [11][12] - Comparable portfolio ADR (Average Daily Rate) was $246, 50% higher than Q4 2020 and just above Q4 2019 levels [21] - Food and beverage revenue increased by 33% from Q3 2021, with banquet sales per group room rising 45% from the prior quarter [26][27] Market Data and Key Metrics Changes - Group segment accounted for roughly 25% of total demand, with nearly 100,000 total group room nights in Q4, a 32% increase from Q3 [36] - Group room nights for Q1 2022 are pacing nearly 20% higher sequentially from the prior quarter, despite some cancellations due to the Omicron variant [40] - Transient activity accounted for approximately 70% of total room nights in Q4, with comparable transient rate at $253, reflecting a 3.3% increase from pre-pandemic levels [42] Company Strategy and Development Direction - The company is focused on capital recycling and has completed nearly $500 million in transactions recently to enhance portfolio quality [12][52] - Plans to invest between $130 million and $150 million into hotels in 2022, focusing on enhancing value and future earnings potential [50] - The CEO search process is in the final stages, with a focus on identifying candidates who can advance the company's strategy and create shareholder value [14][15] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about significant earnings growth in 2022, driven by a recovery in group demand and business travel [53][54] - The company anticipates that group demand will become a more meaningful component of total room nights, returning to pre-pandemic distribution levels [41] - Despite challenges from the Omicron variant, management noted improvements in booking activity and a positive outlook for the recovery of hotel demand [47][48] Other Important Information - The company has eliminated nearly $14 million in annual costs since the pandemic began, which are expected to be sustainable even as business levels increase [29] - The company recognized $2.6 million in restoration expenses and a $1.7 million impairment charge due to hurricane damage at two hotels [60] - The company ended Q4 2021 with approximately $230 million in cash and cash equivalents, with significant capacity for additional capital allocation [57] Q&A Session Summary Question: Update on CEO search process and potential strategic alternatives - Management indicated that the CEO search is in the final phases, with a conclusion expected within two months [65][66] - The board is continuously evaluating how to create shareholder value and is confident in the company's positive trajectory [67][68] Question: Thoughts on aggressive disposition of assets - Management is evaluating the portfolio asset-by-asset and is committed to holding meetings at hotels to understand market conditions better [71][72] - Several assets are currently under consideration for disposition, with plans to maximize cash flows and value [73][74] Question: Optimism on acquisitions and redevelopment - Management remains optimistic about finding good acquisition opportunities despite a higher cost of equity [89] - The focus will be on balancing internal investment opportunities and potential acquisitions [95][96] Question: Expectations for multiple acquisitions and share repurchases by year-end - Management indicated that while they cannot predict specific outcomes, they are positioned to execute on acquisitions if opportunities arise [101][102] - The company is actively looking at both on-market and off-market transactions [104] Question: Clarification on RevPAR expectations for 2022 - Management acknowledged that January saw a decline in RevPAR but expects a rebound as group contributions increase in the coming months [109][110] Question: Wage costs and inflationary pressures - Management noted that the ability to pass on wage increases to guests will depend on hotel type and occupancy levels, but rates remain strong [112][114]

PART I [Business Overview](index=3&type=section&id=Item%201.%20Business) Sunstone Hotel Investors, Inc. operates as a REIT, acquiring and managing high-quality hotels in urban and resort destinations - **Sunstone Hotel Investors, Inc.** is a **REIT** incorporated in Maryland since **June 28, 2004**, focusing on acquiring, owning, asset managing, and renovating **"Long-Term Relevant Real Estate®" (LTRR®)** hotels in urban and resort destination locations[14](index=14&type=chunk)[15](index=15&type=chunk) - As of **December 31, 2021**, the company had interests in **17** hotels (**16** held for investment) with **8,125** rooms across **7** states and Washington, DC, primarily **upper upscale and nationally branded**, operated by **third-party managers**[14](index=14&type=chunk)[15](index=15&type=chunk)[16](index=16&type=chunk) - The **COVID-19 pandemic** led to **temporary suspension of operations at 14 hotels** in **March 2020**; all hotels were open and operating by **December 31, 2021**, with **leisure demand dominating** and business/group demand improving but **remaining below pre-pandemic levels**[18](index=18&type=chunk)[20](index=20&type=chunk) - The company's **competitive strengths** include a **high-quality LTRR® portfolio** in key markets, **nationally recognized brands**, **well-maintained assets**, **proactive asset management**, **disciplined acquisitions**, **significant liquidity** (**$162.7 million** cash, **$500.0 million** undrawn credit facility as of **Dec 31, 2021**), **flexible capital structure**, **low leverage**, **strong access to capital**, and a **seasoned management team**[21](index=21&type=chunk)[22](index=22&type=chunk)[28](index=28&type=chunk) [Company Overview and Operations](index=3&type=section&id=Our%20Company) Sunstone Hotel Investors, Inc. is a Maryland-incorporated REIT focused on acquiring, owning, and managing 'Long-Term Relevant Real Estate®' hotels - **Sunstone Hotel Investors, Inc.** was incorporated in Maryland on **June 28, 2004**, and operates as a **REIT**[14](index=14&type=chunk) - As of **December 31, 2021**, the company had interests in **17** hotels (**16** held for investment) with **8,125** rooms across **7** states and Washington, DC[14](index=14&type=chunk) - The business strategy is to acquire, own, asset manage, and renovate **"Long-Term Relevant Real Estate®" (LTRR®)** in urban and resort destination locations[15](index=15&type=chunk) - Hotels are operated by **third-party managers under long-term management agreements**[16](index=16&type=chunk) [COVID-19 Pandemic Impact](index=4&type=section&id=Impact%20of%20the%20COVID-19%20Pandemic%20on%20our%20Business) The COVID-19 pandemic significantly impacted hotel operations, leading to temporary closures and a shift towards leisure demand - In **March 2020**, the **COVID-19 pandemic** led to **significant cancellations and travel restrictions**, causing **temporary suspension of operations at 14 hotels**[18](index=18&type=chunk) - All hotels were open and operating by **December 31, 2021**, with **enhanced safety protocols**[18](index=18&type=chunk)[19](index=19&type=chunk) - **Leisure demand** was the primary business source in **2021**, while **business transient and group demand remained below pre-pandemic levels**[20](index=20&type=chunk) [Competitive Advantages](index=4&type=section&id=Competitive%20Strengths) The company leverages a high-quality portfolio, strong market presence, proactive asset management, and robust financial liquidity - Focus on owning **"Long-Term Relevant Real Estate®" (LTRR®)** in desirable markets with **high barriers to entry**[21](index=21&type=chunk)[22](index=22&type=chunk) - Most hotels operate under **nationally recognized brands**, enhancing appeal and driving business[24](index=24&type=chunk) - **Proactive asset management team maximizes long-term value** through oversight, innovation, and capital improvements[26](index=26&type=chunk) - **Significant liquidity** (**$162.7 million** cash, **$42.2 million** restricted cash, and **$500.0 million** undrawn credit facility as of **Dec 31, 2021**), **flexible capital structure**, and **low leverage**[28](index=28&type=chunk) [Strategic Approach](index=6&type=section&id=Business%20Strategy) The company's strategy focuses on maximizing stockholder value through asset management, capital recycling, and balance sheet flexibility - Strategy is to **maximize stockholder value** through **focused asset management** and **disciplined capital recycling** (acquisitions and dispositions) while maintaining **balance sheet flexibility and strength**[30](index=30&type=chunk) - Goal is to maintain **appropriate leverage and financial flexibility** to create value throughout all phases of the operating and financial cycles[30](index=30&type=chunk) [Market Competition](index=6&type=section&id=Competition) The hotel industry is highly competitive, facing challenges from other hotels, alternative lodging, and intense acquisition competition - The hotel industry is **highly competitive**, with competition based on location, physical attributes, service levels, and reputation[31](index=31&type=chunk) - Competition for hotel acquisitions is **widespread**, including institutional pension funds, private equity investors, and other **REITs**, some with **substantially greater financial resources**[32](index=32&type=chunk) [Third-Party Management Agreements](index=6&type=section&id=Management%20Agreements) All hotels are managed by third parties under long-term agreements, including base and incentive fees, and chain service reimbursements - All hotels are managed by **third parties** under management agreements with the **TRS Lessee** or its subsidiaries[33](index=33&type=chunk) - New management agreements in **2021** for Four Seasons Resort Napa Valley and Montage Healdsburg specify **base management fees** (**2.5%** and **2.0-3.0%** of adjusted gross receipts/operating revenues, respectively) and **incentive fees**[33](index=33&type=chunk)[34](index=34&type=chunk) - Managers furnish **chain services** (e.g., computer systems, reservations, marketing) whose costs are **reimbursed by the company**[35](index=35&type=chunk) [Franchise Operations](index=7&type=section&id=Franchise%20Agreements) Five hotels operate under franchise agreements, requiring compliance with brand standards and capital expenditure reserve contributions - As of **December 31, 2021**, **five** hotels were operated subject to **franchise agreements**, providing **nationally recognized brands** and **centralized reservation systems**[37](index=37&type=chunk) - Franchise agreements require **compliance with brand standards** and reservation of up to **5.0%** of gross revenues into a **capital expenditures reserve fund**[39](index=39&type=chunk) | Hotel | Expiration Date | | :--- | :--- | | Embassy Suites Chicago | October 26, 2024 | | The Bidwell Marriott Portland | October 26, 2024 | | Hilton Garden Inn Chicago Downtown/Magnificent Mile | January 19, 2027 | | Hilton New Orleans St. Charles | May 31, 2028 | | Hyatt Centric Chicago Magnificent Mile (1) | June 3, 2039 | [REIT Tax Status](index=7&type=section&id=Tax%20Status) The company operates as a REIT, requiring distribution of at least 90% of taxable income while remaining subject to certain taxes - The company elected to be taxed as a **REIT** under the Internal Revenue Code, commencing with the taxable year ended **December 31, 2004**, requiring distribution of at least **90%** of **REIT taxable income**[41](index=41&type=chunk) - As a **REIT**, the company may still be subject to **certain federal, state, and local taxes** on income and property, and **federal income and excise tax on undistributed income**[41](index=41&type=chunk) [TRS Structure](index=7&type=section&id=Taxable%20REIT%20Subsidiary) The company utilizes a Taxable REIT Subsidiary (TRS) to lease hotels and conduct non-REIT qualifying activities, subject to arm's-length transaction rules - The company owns a **wholly-owned Taxable REIT Subsidiary (TRS)**, Sunstone Hotel TRS Lessee, Inc., which leases hotels from the Operating Partnership[46](index=46&type=chunk) - A **TRS** is a **fully taxable corporation** that can earn income not qualifying for a **REIT** and perform activities prohibited to a **REIT**, but cannot directly operate hotels[42](index=42&type=chunk) - Leases between the company and the **TRS Lessee** must contain **economic terms similar to those between unrelated parties** to avoid a **100% excise tax** on non-arm's-length transactions[46](index=46&type=chunk) [Leasehold Interests](index=8&type=section&id=Ground%2C%20Building%20and%20Airspace%20Lease%20Agreements) Several hotels are subject to ground, building, or airspace leases with varying terms, requiring rental payments and potential lessor consent for assignments - As of **December 31, 2021**, **two** hotels (Hilton San Diego Bayfront and Hyatt Centric Chicago Magnificent Mile) were subject to **ground/building leases**, and **one** (JW Marriott New Orleans) to an **airspace lease**[48](index=48&type=chunk) - After the sale of the Hyatt Centric Chicago Magnificent Mile in **February 2022**, remaining ground and airspace leases (including **renewal options**) will range from approximately **22 to 50 years**[48](index=48&type=chunk) - Leases generally require **rental payments and payments for costs and expenses**, and proposed sales or assignments of leasehold interests may require **lessor consent**[49](index=49&type=chunk) [Headquarters Information](index=8&type=section&id=Corporate%20Office) The company's corporate headquarters are leased in Irvine, California, with the lease terminating in August 2028 - The company leases its headquarters at **200 Spectrum Center Drive, 21st Floor, Irvine, California 92618**[50](index=50&type=chunk) - The corporate office lease terminates on **August 31, 2028**[50](index=50&type=chunk) [Employee Information and Benefits](index=8&type=section&id=Human%20Capital%20Resources) The company employs 42 individuals, none unionized, and offers comprehensive compensation and benefits, with a commitment to diversity - As of **February 1, 2022**, the company had **42** employees; **none are represented by a labor union**. Hotel day-to-day operations staff are employees of management companies[51](index=51&type=chunk) - The corporate office temporarily closed in **March 2020** due to **COVID-19** and reopened for **fully-vaccinated employees** in **July 2021**, with **protection protocols implemented**[52](index=52&type=chunk) - Compensation and benefits programs include **subsidized medical, dental, and vision insurance; life and disability insurance; stock grant program; 401(k) plan; profit sharing plan; and gym membership**[53](index=53&type=chunk) - **Committed to diversity and inclusion**: **40%** female and **24%** ethnic/racial minorities as of **December 31, 2021**[55](index=55&type=chunk) [ESG Initiatives](index=9&type=section&id=Corporate%20Responsibility) The company integrates environmental, social, and governance (ESG) initiatives into its operations and investments, overseen by its governance committee - **Committed to ensuring environmental, social, and governance (ESG) initiatives** are part of operating and investment strategies, overseen by the **Nominating and Corporate Governance Committee**[57](index=57&type=chunk) - Invests in renovations and initiatives to **reduce energy, water, and waste impacts** (e.g., LED lighting, low-flow plumbing, bulk amenity dispensers) and publishes an **annual Corporate Responsibility Report**[58](index=58&type=chunk) [Environmental Compliance and Risks](index=9&type=section&id=Environmental%20Reviews) Environmental reviews are conducted, but the company may still face liability for hazardous substance remediation costs under various laws - **Environmental reviews (Phase I site assessments)** have been conducted on all hotels, though they may not reveal all environmental conditions or liabilities[59](index=59&type=chunk) - The company may be **liable for hazardous substance remediation costs** under various federal, state, and local laws, **regardless of fault**, with **potentially substantial costs**[60](index=60&type=chunk) - **Customary unsecured environmental indemnities** are provided to certain lenders and buyers, with **no term or damage limitation**[62](index=62&type=chunk) [Americans with Disabilities Act Compliance](index=10&type=section&id=ADA%20Regulation) Properties must comply with ADA Title III, requiring barrier removal, with potential capital expenditures or fines for noncompliance - Properties must comply with **Title III of the Americans with Disabilities Act (ADA)**, requiring **removal of structural barriers to access for persons with disabilities**[63](index=63&type=chunk) - The company believes its properties are in **substantial compliance**, but **noncompliance could result in capital expenditures, fines, or damages**[63](index=63&type=chunk) [Inflationary Impact](index=10&type=section&id=Inflation) Inflation impacts various operating expenses, potentially causing hotel expenses to rise faster than revenues - **Inflation affects expenses** such as wages, employee-related benefits, food, commodities, taxes, insurance, utilities, and borrowing costs[64](index=64&type=chunk) - **Hotel expenses may increase at higher rates than hotel revenue**[64](index=64&type=chunk) [SEC Filings Availability](index=10&type=section&id=Securities%20Exchange%20Act%20Reports) Periodic and current SEC reports are publicly available on the company's and SEC's websites - Periodic and current **SEC reports** (**10-K, 10-Q, 8-K, proxy statements**) are available **free of charge** on the company's website (www.sunstonehotels.com) and the SEC's website (www.sec.gov)[65](index=65&type=chunk) [Executive Officer Details](index=10&type=section&id=Information%20about%20our%20Executive%20Officers) Key executive officers include the Chairman and Interim CEO, CFO, CIO, General Counsel, and COO, with extensive industry experience | Name | Age | Position | | :--- | :--- | :--- | | Douglas M. Pasquale | 67 | Chairman of the Board and Interim Chief Executive Officer | | Bryan A. Giglia | 45 | Executive Vice President and Chief Financial Officer | | Robert C. Springer | 44 | Executive Vice President and Chief Investment Officer | | David M. Klein | 52 | Executive Vice President and General Counsel | | Christopher G. Ostapovicz | 52 | Senior Vice President and Chief Operating Officer | - **Douglas M. Pasquale** serves as **Chairman of the Board** since **May 2015** and **Interim CEO** since **September 2021**, with **extensive experience in real estate and hospitality**[69](index=69&type=chunk)[71](index=71&type=chunk) - **Bryan A. Giglia** is **Executive Vice President and Chief Financial Officer**, having joined the company in **2004** and holding **various finance roles**[72](index=72&type=chunk) - **Robert C. Springer** is **Executive Vice President and Chief Investment Officer**, with prior experience in **merchant banking at Goldman, Sachs & Co. and hospitality consulting**[73](index=73&type=chunk) [Risk Factors](index=11&type=section&id=Item%201A.%20Risk%20Factors) This section details material risks to the company's business, including industry competition, debt, and REIT status compliance - The **COVID-19 pandemic** and its variants have had, and are expected to continue to have, a **significant and uncertain impact** on the company's financial condition, results of operations, cash flows, liquidity, and stock price, with operations **remaining well below pre-pandemic levels**[82](index=82&type=chunk)[87](index=87&type=chunk)[88](index=88&type=chunk)[89](index=89&type=chunk)[90](index=90&type=chunk) - The lodging industry is **highly competitive**, with risks from other hotels, **alternative lodging options** (e.g., Airbnb), **new supply**, and **competition for hotel acquisitions**, which could **reduce occupancy, revenue, and profitability**[91](index=91&type=chunk)[92](index=92&type=chunk) - A **significant portion of hotels are geographically concentrated** in California, Florida, Hawaii, and Massachusetts, exposing the business to **disproportionate harm** from economic downturns or natural disasters in these areas[103](index=103&type=chunk) - As of **December 31, 2021**, the company had approximately **$611.4 million** of **consolidated outstanding debt**, with **$490.4 million maturing over the next five years**, which may **impair financial flexibility** and **reduce cash available for operations, capital expenditures, and distributions**[167](index=167&type=chunk) - **Failure to qualify as a REIT** for any reason could result in **corporate-level taxation**, **substantially reducing cash available for distributions** and potentially leading to **disqualification for four taxable years**[181](index=181&type=chunk)[182](index=182&type=chunk) [Unresolved Staff Comments](index=34&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company has no unresolved staff comments from the SEC - **No unresolved staff comments**[219](index=219&type=chunk) [Property Portfolio](index=34&type=section&id=Item%202.%20Properties) As of December 31, 2021, the company's portfolio consisted of 17 hotels (8,544 rooms), with one classified as held for sale | Hotel | City | State | Chain Scale Segment | Service Category | Rooms | Manager | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Boston Park Plaza | Boston | Massachusetts | Upper Upscale | Full Service | 1,060 | Highgate | | Embassy Suites Chicago | Chicago | Illinois | Upper Upscale | Full Service | 368 | Crestline | | Four Seasons Resort Napa Valley | Calistoga | California | Luxury | Full Service | 85 | Four Seasons | | Hilton Garden Inn Chicago Downtown/Magnificent Mile | Chicago | Illinois | Upscale | Full Service | 361 | Crestline | | Hilton New Orleans St. Charles | New Orleans | Louisiana | Upper Upscale | Full Service | 252 | IHR | | Hilton San Diego Bayfront (1) (2) | San Diego | California | Upper Upscale | Full Service | 1,190 | Hilton | | Hyatt Centric Chicago Magnificent Mile (1) (3) | Chicago | Illinois | Upper Upscale | Full Service | 419 | Davidson | | Hyatt Regency San Francisco | San Francisco | California | Upper Upscale | Full Service | 821 | Hyatt | | JW Marriott New Orleans (1) | New Orleans | Louisiana | Luxury | Full Service | 501 | Marriott | | Marriott Boston Long Wharf | Boston | Massachusetts | Upper Upscale | Full Service | 415 | Marriott | | Montage Healdsburg | Healdsburg | California | Luxury | Full Service | 130 | Montage | | Oceans Edge Resort & Marina | Key West | Florida | Upper Upscale | Full Service | 175 | Singh | | Renaissance Long Beach | Long Beach | California | Upper Upscale | Full Service | 374 | Marriott | | Renaissance Orlando at SeaWorld® | Orlando | Florida | Upper Upscale | Full Service | 781 | Marriott | | Renaissance Washington DC | Washington DC | District of Columbia | Upper Upscale | Full Service | 807 | Marriott | | The Bidwell Marriott Portland | Portland | Oregon | Upper Upscale | Full Service | 258 | IHR | | Wailea Beach Resort | Wailea | Hawaii | Upper Upscale | Full Service | 547 | Marriott | | **Total number of rooms** | | | | | **8,544** | | - As of **December 31, 2021**, the Hyatt Centric Chicago Magnificent Mile was **classified as held for sale** and was **subsequently sold in February 2022**[221](index=221&type=chunk) [Legal Proceedings](index=34&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in various routine legal claims and actions but does not anticipate any material adverse effect on its financial position or results of operations - The company is involved in various claims and legal actions in the **ordinary course of business**[222](index=222&type=chunk) - Management does not believe that the resolution of any such pending legal matters will have a **material adverse effect** on its financial position or results of operations[222](index=222&type=chunk) [Mine Safety Disclosures](index=34&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - This item is **not applicable**[223](index=223&type=chunk) PART II [Common Equity Market and Stockholder Matters](index=35&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on the NYSE under 'SHO', with a suspended dividend and a reauthorized stock repurchase program - The company's common stock is traded on the **New York Stock Exchange** under the symbol **"SHO."**[226](index=226&type=chunk) - As of **February 7, 2022**, there were approximately **22** holders of record of the company's common stock[226](index=226&type=chunk) - The **quarterly common stock dividend was suspended** beginning with the **second quarter of 2020** to **preserve additional liquidity** due to the **COVID-19 pandemic**[227](index=227&type=chunk) - In **February 2021**, the board **reauthorized an existing stock repurchase program**, allowing the company to acquire up to an aggregate of **$500.0 million** of its common and preferred stock, with **no stated expiration date**[229](index=229&type=chunk) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Appropriate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | | :--- | :--- | :--- | :--- | :--- | | October 1, 2021 — October 31, 2021 | — | $ — | — | $ 500,000,000 | | November 1, 2021 — November 30, 2021 | — | — | — | $ 500,000,000 | | December 1, 2021 — December 31, 2021 | — | — | — | $ 500,000,000 | | **Total** | **—** | **$ —** | **—** | **$ 500,000,000** | [Selected Financial Data](index=36&type=section&id=Item%206.%20Selected%20Financial%20Data) This section provides a five-year summary of key operating and balance sheet data, highlighting the significant impact of the COVID-19 pandemic on revenues and net income | Operating Data ($ in thousands): | 2021 | 2020 | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | :--- | :--- | | **REVENUES** | | | | | | | Room | $ 352,974 | $ 169,522 | $ 767,392 | $ 799,369 | $ 829,320 | | Food and beverage | 83,915 | 54,900 | 272,869 | 284,668 | 296,933 | | Other operating | 72,261 | 43,484 | 74,906 | 75,016 | 67,385 | | **Total revenues** | **509,150** | **267,906** | **1,115,167** | **1,159,053** | **1,193,638** | | **OPERATING EXPENSES** | | | | | | | Total operating expenses | 597,272 | 661,795 | 977,794 | 977,163 | 1,052,633 | | **NET INCOME (LOSS)** | **32,995** | **(410,506)** | **142,793** | **259,059** | **153,004** | | **INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS** | **$ 13,660** | **$ (417,519)** | **$ 122,903** | **$ 237,615** | **$ 132,546** | | Income (loss) from continuing operations attributable to common stockholders per diluted common share | $ 0.06 | $ (1.93) | $ 0.54 | $ 1.05 | $ 0.56 | | Distributions declared per common share | $ — | $ 0.05 | $ 0.74 | $ 0.69 | $ 0.73 | | Balance Sheet Data ($ in thousands): | 2021 | 2020 | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | :--- | :--- | | Investment in hotel properties, net (1) (2) | $ 2,720,016 | $ 2,461,498 | $ 2,872,353 | $ 3,030,998 | $ 3,106,066 | | Total assets (2) | $ 3,041,049 | $ 2,985,717 | $ 3,918,974 | $ 3,972,833 | $ 3,857,812 | | Total debt, net | $ 609,435 | $ 744,789 | $ 971,063 | $ 977,063 | $ 982,759 | | Total liabilities (2) | $ 801,275 | $ 896,338 | $ 1,297,903 | $ 1,261,662 | $ 1,275,634 | | Equity | $ 2,239,774 | $ 2,089,379 | $ 2,621,071 | $ 2,711,171 | $ 2,582,178 | [Management's Discussion and Analysis](index=37&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section analyzes the company's financial condition and operations, highlighting recovery from the pandemic and key financial changes - Net income of **$32.995 million** in **2021**, a **significant recovery** from a net loss of **$(410.506) million** in **2020**[268](index=268&type=chunk) - **Total revenues increased by 90.0% to $509.150 million in 2021 from $267.906 million in 2020**, driven by a **108.2% increase in room revenue**[268](index=268&type=chunk) - In **2021**, the company acquired **two** hotels (Montage Healdsburg, Four Seasons Resort Napa Valley) and disposed of **two** (Renaissance Westchester, Embassy Suites La Jolla)[238](index=238&type=chunk)[245](index=245&type=chunk)[246](index=246&type=chunk)[247](index=247&type=chunk) - **Unsecured debt agreements were amended in July and November 2021**, extending **financial covenant relief through Q3 2022** and removing certain restrictions. The company **repaid $110.0 million on its credit facility and $76.7 million on term loans in 2021**[249](index=249&type=chunk)[250](index=250&type=chunk)[251](index=251&type=chunk) - **Issued Series G, H, and I preferred stock for $215.0 million gross proceeds** and **2,913,682 common shares for $38.4 million gross proceeds** under its ATM Program in **2021**, while **redeeming Series E and F preferred stock**[255](index=255&type=chunk)[256](index=256&type=chunk)[257](index=257&type=chunk)[258](index=258&type=chunk) - As of **December 31, 2021**, the company had an **unrestricted cash balance of $120.5 million** and **$500.0 million capacity available** under its unsecured revolving credit facility[311](index=311&type=chunk) [Company Structure and Portfolio](index=37&type=section&id=Overview) Sunstone Hotel Investors, Inc. operates as a self-managed REIT, owning 100% of its Operating Partnership and TRS Lessee, with interests in 17 hotels - **Sunstone Hotel Investors, Inc.** operates as a **self-managed and self-administered REIT**, owning **100%** of Sunstone Hotel Partnership, LLC (Operating Partnership) and Sunstone Hotel TRS Lessee, Inc. (TRS Lessee)[236](index=236&type=chunk) - As of **December 31, 2021**, the company had interests in **17** hotels (**16** held for investment), primarily **LTRR®** in urban and resort destination locations[237](index=237&type=chunk) | Portfolio Data | 2021 | 2020 | | :--- | :--- | :--- | | **Hotels** | | | | Number of hotels—beginning of year | 17 | 20 | | Add: Acquisitions | 2 | — | | Less: Dispositions | (2) | (3) | | **Number of hotels—end of year** | **17** | **17** | | **Rooms** | | | | Number of rooms—beginning of year | 9,017 | 10,610 | | Add: Acquisitions | 215 | — | | Add: Room expansions | — | 9 | | Less: Dispositions | (688) | (1,602) | | **Number of rooms—end of year** | **8,544** | **9,017** | | Average rooms per hotel—end of year | 503 | 530 | [COVID-19 Operational Impact](index=37&type=section&id=COVID-19%20Impact%20and%20Response) The COVID-19 pandemic led to temporary hotel closures and a shift to leisure demand, with ongoing labor challenges despite improved occupancy - In **March 2020**, the **COVID-19 pandemic** led to **significant cancellations and travel restrictions**, resulting in the **temporary suspension of operations at 14 hotels**; all hotels were open and operating by **December 31, 2021**[239](index=239&type=chunk) - The asset management team implemented **detailed operating plans and safety precautions** with third-party managers[240](index=240&type=chunk) - **Leisure demand** was the **dominant source of business in 2021**, while business transient and group demand improved but **remained well below pre-pandemic levels**[241](index=241&type=chunk) - **Labor challenges persisted in 2021**, with hotels offering **hiring events, sign-on/retention bonuses, and increased wages** to attract and retain talented workers[242](index=242&type=chunk) [Key Developments in 2021](index=38&type=section&id=2021%20Summary) 2021 saw improved occupancy, accelerated capital projects, strategic acquisitions and dispositions, debt amendments, and capital raises - **Existing Portfolio occupancy steadily improved** from **1.1%** in **April 2020** to **62.3%** in **July 2021**, with **leisure demand moderating** in August/September due to the **Delta variant** and **accelerating again in Q4 2021**[243](index=243&type=chunk) - **Accelerated several capital projects during low demand**, including new meeting space at Boston Park Plaza, solar panels at Wailea Beach Resort, F&B reinvention at Hilton San Diego Bayfront, and ballroom/meeting space remodel at Renaissance Washington DC (rebranding to Westin)[244](index=244&type=chunk) - **Acquired Montage Healdsburg for $265.0 million in April 2021** and **Four Seasons Resort Napa Valley for $177.5 million in December 2021**[245](index=245&type=chunk)[246](index=246&type=chunk) - **Sold Renaissance Westchester for $18.8 million gross proceeds** and **Embassy Suites La Jolla for $226.7 million gross proceeds in 2021**[247](index=247&type=chunk) - **Amended unsecured debt agreements in July and November 2021**, extending **financial covenant relief through Q3 2022**, and **repaid $110.0 million on credit facility and $76.7 million on term loans**[249](index=249&type=chunk)[250](index=250&type=chunk)[251](index=251&type=chunk) - **Issued Series G, H, and I preferred stock for $215.0 million gross proceeds** and **2,913,682 common shares for $38.4 million gross proceeds**, while **redeeming Series E and F preferred stock**[255](index=255&type=chunk)[256](index=256&type=chunk)[257](index=257&type=chunk)[258](index=258&type=chunk) [Revenue and Expense Analysis](index=39&type=section&id=Operating%20Activities) This section analyzes the company's revenues and operating expenses, highlighting significant recovery in net income and key performance indicators for 2021 - **Revenues consist of room revenue, food and beverage revenue, and other operating revenue** (ancillary services, attrition/cancellation fees, tenant revenue)[259](index=259&type=chunk)[260](index=260&type=chunk) - **Expenses include room, food and beverage, other operating, advertising and promotion, repairs and maintenance, utilities, franchise costs, property tax/ground lease/insurance, other property-level, corporate overhead, depreciation and amortization, and impairment losses**[261](index=261&type=chunk) | Item | 2021 | 2020 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | **REVENUES** | | | | | | Room | $ 352,974 | $ 169,522 | $ 183,452 | 108.2 % | | Food and beverage | 83,915 | 54,900 | 29,015 | 52.9 % | | Other operating | 72,261 | 43,484 | 28,777 | 66.2 % | | **Total revenues** | **509,150** | **267,906** | **241,244** | **90.0 %** | | **OPERATING EXPENSES** | | | | | | Total operating expenses | 597,272 | 661,795 | (64,523) | (9.7)% | | **NET INCOME (LOSS)** | **32,995** | **(410,506)** | **443,501** | **108.0 %** | | **INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS** | **$ 13,660** | **$ (417,519)** | **$ 431,179** | **103.3 %** | | | Occ% | ADR | RevPAR | | :--- | :--- | :--- | :--- | | **Existing Portfolio 2021** | 44.3 % | $ 234.03 | $ 103.68 | | **Existing Portfolio 2020** | 21.7 % | $ 212.00 | $ 46.00 | | **Change** | 2,260 bps | 10.4 % | 125.4 % | - **Corporate overhead expense increased $12.1 million (43.1%) in 2021**, including **$11.1 million related to CEO transition costs** and costs due to the retirement of the chief operating officer[273](index=273&type=chunk) - **Impairment losses totaled $2.7 million in 2021** (due to Hurricane Ida damage at Hilton New Orleans St. Charles) compared to **$146.9 million in 2020** (related to three disposed hotels and an abandoned project)[275](index=275&type=chunk) - **Interest expense decreased $22.4 million (42.0%) in 2021**, primarily due to **debt transactions and decreased interest on variable rate debt**[277](index=277&type=chunk) - **Gain on sale of assets totaled $152.5 million in 2021** (Renaissance Westchester and Embassy Suites La Jolla) compared to **$34.3 million in 2020** (Renaissance Harborplace and Renaissance Los Angeles Airport)[280](index=280&type=chunk) - **Adjusted EBITDAre, excluding noncontrolling interest, increased $155.4 million (176.2%) to $67.210 million in 2021 from $(88.148) million in 2020**[294](index=294&type=chunk) - **Adjusted FFO attributable to common stockholders increased $164.9 million (105.3%) to $8.355 million in 2021 from $(156.585) million in 2020**[299](index=299&type=chunk) [Financial Position and Funding](index=50&type=section&id=Liquidity%20and%20Capital%20Resources) The company's financial position improved in 2021 with increased operating cash flow, strategic debt management, and enhanced liquidity - **Net cash provided by operating activities was $28.4 million in 2021**, a **significant improvement** from net cash used of **$116.7 million in 2020**, primarily due to **resumed hotel operations and increased travel demand**[301](index=301&type=chunk) | Item | 2021 | 2020 | | :--- | :--- | :--- | | Proceeds from sales of assets | $ 183,553 | $ 166,737 | | Disposition deposit | 4,000 | — | | Acquisitions of hotel properties and other assets | (363,498) | (1,398) | | Renovations and additions to hotel properties and other assets | (63,663) | (51,440) | | Payment for interest rate derivative | (80) | (111) | | **Net cash (used in) provided by investing activities** | **$ (239,688)** | **$ 113,788** | | Item | 2021 | 2020 | | :--- | :--- | :--- | | Proceeds from preferred stock offerings | $ 215,000 | $ — | | Payment of preferred stock offering costs | (7,287) | — | | Redemptions of preferred stock | (190,000) | — | | Proceeds from common stock offerings | 38,443 | — | | Payment of common stock offering costs | (784) | — | | Repurchases of outstanding common stock | — | (103,894) | | Repurchases of common stock for employee tax obligations | (4,877) | (3,992) | | Proceeds from credit facility | 110,000 | 300,000 | | Payments on credit facility | (110,000) | (300,000) | | Payments on notes payable | (79,884) | (149,743) | | Payments of costs related to extinguishment of debt | — | (27,975) | | Payments of deferred financing costs | (397) | (4,361) | | Dividends and distributions paid | (13,693) | (156,271) | | Distributions to noncontrolling interest | — | (2,000) | | Contributions from noncontrolling interest | 1,375 | 2,319 | | **Net cash used in financing activities** | **$ (42,104)** | **$ (445,917)** | - As of **December 31, 2021**, the company had an **unrestricted cash balance of $120.5 million** and **$500.0 million capacity available for borrowing** under its unsecured revolving credit facility[311](index=311&type=chunk) - As of **December 31, 2021**, the company had **$611.4 million of consolidated debt** and **total assets of $3.0 billion**[313](index=313&type=chunk) - **Unsecured Debt Amendments in November 2021 extended financial covenant relief through Q3 2022**, phased-in original covenants over **five quarters thereafter**, provided **term loan extension rights**, modified certain financial covenants until **Jan 1, 2024**, and set a **$0 EBITDA/NOI floor** for individual hotels until **March 31, 2022** (or **Sept 30, 2022** if senior notes are repaid)[315](index=315&type=chunk) | Payment due by period | Total | Less Than 1 year | 1 to 3 years | 3 to 5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Notes payable (1) | $ 611,437 | $ 21,401 | $ 385,036 | $ 90,000 | $ 115,000 | | Interest obligations on notes payable (2) | 81,452 | 24,890 | 30,950 | 17,349 | 8,263 | | Finance lease obligation, including imputed interest (3) | 106,608 | 1,403 | 2,806 | 2,806 | 99,593 | | Operating lease obligations, including imputed interest (4) | 35,954 | 6,993 | 14,079 | 8,984 | 5,898 | | Construction commitments | 71,737 | 71,737 | — | — | — | | Employment obligations | 3,521 | 3,521 | — | — | — | | **Total** | **$ 910,709** | **$ 129,945** | **$ 432,871** | **$ 119,139** | **$ 228,754** | [Seasonal Business Patterns](index=55&type=section&id=Seasonality%20and%20Volatility) The company's business experiences seasonality, with revenue patterns varying by hotel location and external factors impacting quarterly performance - The company experiences **seasonality in its business**, with revenue patterns varying by hotel location (e.g., **Q1 strong in Hawaii, Key West; Q2 strong for Mid-Atlantic business hotels; Q4 strong for Hawaii, Key West, Napa/Sonoma**)[327](index=327&type=chunk) - Quarterly revenue can be **adversely affected by renovations, management effectiveness, and external factors** such as economic conditions, pandemics, and natural disasters[327](index=327&type=chunk) | Revenues: | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | **2019** | | | | | | | Existing Portfolio revenues | $ 219,337 | $ 252,778 | $ 233,818 | $ 227,547 | $ 933,480 | | Quarterly Existing Portfolio revenues as a percentage of total annual revenues | 23.5 % | 27.1 % | 25.0 % | 24.4 % | 100 % | | **2020** | | | | | | | Existing Portfolio revenues | $ 163,421 | $ 5,196 | $ 19,592 | $ 30,317 | $ 218,526 | | Quarterly Existing Portfolio revenues as a percentage of total annual revenues | 74.8 % | 2.4 % | 9.0 % | 13.8 % | 100 % | | **2021** | | | | | | | Existing Portfolio revenues | $ 44,409 | $ 100,350 | $ 144,821 | $ 151,681 | $ 441,261 | | Quarterly Existing Portfolio revenues as a percentage of total annual revenues | 10.1 % | 22.7 % | 32.8 % | 34.4 % | 100 % | [Inflationary Impact on Expenses](index=56&type=section&id=Inflation) Inflation affects various operating expenses, including wages, benefits, and utilities, potentially increasing hotel expenses faster than revenues - **Inflation affects expenses** such as wages, employee-related benefits, food, commodities, taxes, property and liability insurance, utilities, and borrowing costs[329](index=329&type=chunk) - **Hotel expenses may increase at higher rates than hotel revenue**[329](index=329&type=chunk) [Key Accounting Judgments](index=56&type=section&id=Critical%20Accounting%20Estimates) Critical accounting estimates involve significant judgment in impairment assessments, acquisition accounting, depreciation, and income tax provisions - **Impairment of long-lived assets involves significant judgment** in identifying impairment indicators, estimating future undiscounted cash flows, and determining fair value using **discounted cash flow analyses, market data, and assumptions about discount rates, revenue growth, and holding periods**[331](index=331&type=chunk) - **Accounting for acquisitions requires allocation of purchase price to acquired assets and assumed liabilities at fair values**, with **difficult estimations for long-lived and intangible assets**. Classification as a business or asset acquisition impacts **capitalization of transaction costs**[331](index=331&type=chunk) - **Depreciation expense is based on estimated useful lives of assets**, influenced by capital expenditures and market conditions[340](index=340&type=chunk) - **Income taxes involve complex REIT qualification requirements, deferred tax assets/liabilities, valuation allowances, and uncertain tax positions**[340](index=340&type=chunk) [Recent Accounting Updates](index=57&type=section&id=New%20Accounting%20Standards%20and%20Accounting%20Changes) This section refers to Note 2 of the consolidated financial statements for information on recently issued accounting pronouncements - Refers to **Note 2 to the accompanying consolidated financial statements** for additional information relating to **recently issued accounting pronouncements**[335](index=335&type=chunk) [Market Risk Disclosures](index=57&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company manages interest rate risk on floating rate debt using derivatives, with 64.0% of debt fixed and a sensitivity analysis provided - The company uses **derivative financial instruments (interest rate caps and swaps)** to manage **interest rate risks** on its floating rate debt[336](index=336&type=chunk) - As of **December 31, 2021**, **64.0%** of the company's debt obligations had **fixed interest rates**[337](index=337&type=chunk) - A **100 basis point increase or decrease** in the market rate of interest on variable-rate debt would increase or decrease future consolidated earnings and cash flows by approximately **$2.2 million** (**$1.7 million** after adjusting for noncontrolling interest)[337](index=337&type=chunk) [Financial Statements and Supplementary Data](index=57&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section incorporates by reference the company's consolidated financial statements, independent auditor reports, and supplementary data - The company's **consolidated financial statements**, together with the reports of the **independent registered public accounting firm** and supplementary financial data, are included in the **Index beginning on page F-1** of this Annual Report on Form 10-K and are **incorporated by reference**[338](index=338&type=chunk) [Changes in and Disagreements with Accountants](index=58&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) There have been no changes in or disagreements with accountants on accounting and financial disclosure - **None**[341](index=341&type=chunk) [Controls and Procedures](index=58&type=section&id=Item%209A.%20Controls%20and%20Procedures) Disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material changes in the last quarter - The **Interim Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of December 31, 2021**[342](index=342&type=chunk) - Management concluded that **internal control over financial reporting was effective to the reasonable assurance level as of December 31, 2021**[345](index=345&type=chunk) - **Ernst & Young LLP issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2021**[346](index=346&type=chunk)[351](index=351&type=chunk) - There was **no change in internal control over financial reporting** during the most recently completed fiscal quarter that materially affected, or is reasonably likely to materially affect, internal control over financial reporting[347](index=347&type=chunk) [Other Information](index=60&type=section&id=Item%209B.%20Other%20Information) There is no other information to disclose under this item - **None**[359](index=359&type=chunk) [Foreign Jurisdictions Disclosure](index=60&type=section&id=Item%209C.%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20that%20Prevent%20Inspections) There are no disclosures regarding foreign jurisdictions that prevent inspections - **None**[360](index=360&type=chunk) PART III [Directors, Executive Officers and Corporate Governance](index=60&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) This section incorporates information on directors, executive officers, and corporate governance from the 2022 Proxy Statement - **Information required by this Item is set forth under the captions "Proposal 1: Election of Directors," "Delinquent Section 16(a) Reports" and "Company Information" in the definitive Proxy Statement for the 2022 Annual Meeting of Stockholders, incorporated by reference**[362](index=362&type=chunk) - **Certain other information concerning executive officers is included in Part I, Item 1 of this Annual Report on Form 10-K under the caption "Information about our Executive Officers."**[363](index=363&type=chunk) [Executive Compensation](index=60&type=section&id=Item%2011.%20Executive%20Compensation) This section incorporates information on executive compensation from the 2022 Proxy Statement - **Information required by this Item is set forth under the captions "Compensation Discussion and Analysis," "Compensation Committee Report to Stockholders," "Executive Compensation" and "Compensation Committee Interlocks and Insider Participation" in the definitive Proxy Statement for the 2022 Annual Meeting of Stockholders, incorporated by reference**[363](index=363&type=chunk) [Security Ownership and Related Matters](index=60&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) This section incorporates information on security ownership and details the equity compensation plan from the 2022 Proxy Statement - **Information required by this Item is set forth under the caption "Security Ownership by Directors, Executive Officers and Five Percent Stockholders" in the definitive Proxy Statement for the 2022 Annual Meeting of Stockholders, incorporated by reference**[364](index=364&type=chunk) | | Number of securities to be issued upon exercise of outstanding awards (a) | Weighted-average exercise price of outstanding awards (b) | Number of securities remaining available for future issuance under the Long-Term Incentive Plan (excluding securities reflected in column a) (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by the Company's stockholders: | | | | | - 2004 Long-Term Incentive Plan, as amended and restated | 1,668,397 | ⸺ | ⸺ | [Related Transactions and Director Independence](index=60&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) This section incorporates information on certain relationships, related transactions, and director independence from the 2022 Proxy Statement - **Information required by this Item is set forth under the caption "Certain Relationships and Related Transactions" and "Company Information" in the definitive Proxy Statement for the 2022 Annual Meeting of Stockholders, incorporated by reference**[367](index=367&type=chunk) [Principal Accountant Fees and Services](index=60&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) This section incorporates information on principal accountant fees and services from the 2022 Proxy Statement - **Information required by this Item is set forth under the caption "Our Independent Registered Public Accounting Firm" in the definitive Proxy Statement for the 2022 Annual Meeting of Stockholders, incorporated by reference**[368](index=368&type=chunk) PART IV [Exhibits and Financial Statement Schedules](index=61&type=section&id=Item%2015.%20Exhibit%20and%20Financial%20Statement%20Schedules) This section lists the financial statements, financial statement schedules, and exhibits filed or incorporated by reference as part of the Annual Report - Includes an **index to financial statements and schedules**[370](index=370&type=chunk) - Lists **various exhibits filed or incorporated by reference**, such as Articles of Amendment and Restatement, Bylaws, Articles Supplementary for preferred stock, specimen certificates, management agreements, credit agreements, and certifications[370](index=370&type=chunk)[372](index=372&type=chunk)[373](index=373&type=chunk)[374](index=374&type=chunk) [Form 10-K Summary](index=65&type=section&id=Item%2016.%20Form%2010-K%20Summary) This item indicates that no summary is provided - **None**[375](index=375&type=chunk) SIGNATURES The report was signed on February 23, 2022, by key executives and directors - The report was **signed on February 23, 2022**, by **Bryan A. Giglia (Chief Financial Officer)** and **Douglas M. Pasquale (Chairman and Interim Chief Executive Officer)**, along with other directors[379](index=379&type=chunk)[380](index=380&type=chunk) Index to Financial Statements and Schedule This section provides an index to the consolidated financial statements, auditor's report, and schedule, including critical audit matters | Sunstone Hotel Investors, Inc.: | Page | | :--- | :--- | | Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) | F-2 | | Consolidated Balance Sheets as of December 31, 2021 and 2020 | F-4 | | Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019 | F-5 | | Consolidated Statements of Equity for the years ended December 31, 2021, 2020 and 2019 | F-6 | | Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 | F-7 | | Notes to Consolidated Financial Statements | F-9 | | Schedule III—Real Estate and Accumulated Depreciation | F-37 | - **Critical audit matters identified by Ernst & Young LLP** include the **impairment of hotel properties**, which is **highly judgmental** due to subjectivity in evaluating impairment indicators and fair value estimation[390](index=390&type=chunk)[391](index=391&type=chunk)[392](index=392&type=chunk) - Another **critical audit matter** is the **accounting for hotel property acquisitions**, which is **complex and subjective** due to **significant estimation required for intangible assets' fair values**, relying on **discounted cash flow analyses** and assumptions like average daily rates and revenue growth rates[395](index=395&type=chunk)[396](index=396&type=chunk)

Financial Data and Key Metrics Changes - Total revenue for Q3 2021 was $167 million, a 43% increase from Q2 2021, driven by a nearly 10-point sequential increase in occupancy and a 13% increase in average daily rate (ADR) compared to Q2 2021 [16][43] - Adjusted EBITDAre for Q3 2021 was $35 million, marking a return to positive quarterly FFO for the first time since 2019, with FFO at $0.10 per diluted share [43] - Year-to-date, the company has eliminated nearly $11 million in costs from its hotels, which are expected to be lasting savings [21] Business Line Data and Key Metrics Changes - Comparable portfolio ADR was just over $248 in Q3 2021, higher than 2019 levels, with significant rate growth in markets like Key West, Orlando, New Orleans, and Wailea [17][29] - Hotel EBITDA margins for comparable hotels were 24.3%, below historical levels but a significant accomplishment given the occupancy rate of just below 55% [22] - Non-room revenue increased significantly, with food and beverage revenues up 79% compared to Q2 2021, contributing to a quarterly comparable RevPAR of $207, a 41% increase from Q2 2021 [20] Market Data and Key Metrics Changes - The company experienced strong leisure demand, particularly in July, with occupancy peaking at 84% during Labor Day weekend [23] - Group room nights increased marginally to 82,000 nights, with corporate group activity growing nearly 30% and association business more than five times higher than the previous quarter [24][25] - Transient demand accounted for roughly 75% of total room nights in Q3 2021, with special corporate room nights increasing by 103% from Q2 2021 [27] Company Strategy and Development Direction - The company plans to actively recycle capital and utilize leverage and tax attributes more effectively while maintaining a solid balance sheet [12] - Recent hotel transactions reflect a commitment to value creation through the sale of non-core assets and acquisition of long-term relevant real estate [11][39] - The company aims to enhance its portfolio quality and strengthen its balance sheet through strategic transactions [36][38] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about continued growth in Q4 2021 and into 2022, despite challenges posed by the Delta variant [15][40] - The company expects strong demand for leisure travel to persist, with positive trends in group and business transient demand anticipated to accelerate [23][40] - Management is confident in the company's ability to achieve higher stabilized margins as demand normalizes [22] Other Important Information - The company has approximately $222 million in total cash and cash equivalents, with full availability on a $500 million revolving credit facility, equating to over $700 million in total liquidity [42] - The CEO search process is underway, with a commitment to finding a leader who can advance the company's strategy [13] Q&A Session Summary Question: Can you elaborate on the decision to terminate the previous CEO and what attributes the new CEO should have? - Management indicated that the board determined new leadership attributes were necessary to create more value, focusing on candidates with real estate and transaction backgrounds [55] Question: Is the company being marketed for sale during this leadership transition? - Management clarified that the board is focused on maximizing shareholder value and is actively searching for a new CEO to continue executing on growth plans [62] Question: How does the company underwrite pricing and ADR for leisure resorts? - Management noted that while current rates are high, they expect some stabilization in rates as occupancy grows, with a focus on long-term performance [64] Question: What is the current leisure versus corporate mix and future strategy? - The current mix is approximately 28% leisure and 36% business transient, with plans to increase the leisure component over time [72] Question: How has the company's view on NAV changed since recent transactions? - Management indicated that recent transactions have added value to NAV, and the overall growth of the portfolio is expected to continue to enhance NAV [76]

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q 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 (Stat ...

Sunstone Hotel Investors, Inc. (NYSE:SHO) Q2 2021 Earnings Conference Call August 4, 2021 12:00 PM ET Company Participants Aaron Reyes - Senior Vice President and Treasurer John Arabia - President, CEO & Director Bryan Giglia - Executive VP & CFO Christopher Ostapovicz - Senior VP & COO Conference Call Participants Rich Hightower - Evercore Anthony Powell - Barclays Lukas Hartwich - Green Street Bill Crow - Raymond James Michael Bellisario - Baird Floris van Dijkum - Compass Point Operator Good day. Good mo ...

Company Overview - Sunstone Hotel Investors, Inc had interests in 18 hotels comprised of 9,147 rooms as of August 3, 2021[14] - The company's strategy is to maximize stockholder value through focused asset management and disciplined capital recycling[15] Financial Performance Q2 2021 - Total revenues were $117210 thousand for the three months ended June 30, 2021[56] - Net loss was $(27918) thousand for the three months ended June 30, 2021[56] - Loss attributable to common stockholders was $(35117) thousand for the three months ended June 30, 2021[56] Balance Sheet Q2 2021 - Total assets were $3015362 thousand as of June 30, 2021[49] - Total liabilities were $912057 thousand as of June 30, 2021[53] - Total stockholders' equity was $2063766 thousand as of June 30, 2021[53] Capitalization - Market value of common equity was $2720515 thousand as of June 30, 2021[114] - Consolidated debt was $746303 thousand as of June 30, 2021[114] - Total preferred stock was $256250 thousand as of June 30, 2021[115]

[PART I—FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%E2%80%94FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) Presents Sunstone Hotel Investors, Inc.'s unaudited consolidated financial statements, including balance sheets, operations, equity, cash flows, and detailed notes [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) Outlines the company's financial position, showing decreased current assets, increased hotel property investments, and growth in total liabilities and equity | Metric | June 30, 2021 (unaudited) (in thousands) | December 31, 2020 (in thousands) | | :-------------------------------- | :--------------------------------------- | :----------------------------------- | | **ASSETS** | | | | Cash and cash equivalents | $162,898 | $368,406 | | Total current assets | $242,845 | $435,145 | | Investment in hotel properties, net | $2,687,395 | $2,461,498 | | Total assets | $3,015,362 | $2,985,717 | | **LIABILITIES AND EQUITY** | | | | Total current liabilities | $113,724 | $90,793 | | Total liabilities | $912,057 | $896,338 | | Total equity | $2,103,305 | $2,089,379 | [Unaudited Consolidated Statements of Operations](index=6&type=section&id=Unaudited%20Consolidated%20Statements%20of%20Operations) Presents revenue recovery for Q2 2021, driven by room and F&B, resulting in a reduced net loss and loss per common share Unaudited Consolidated Statements of Operations (in thousands) | Metric | Three Months Ended June 30, 2021 (in thousands) | Three Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | | :------------------------------------------ | :---------------------------------------------- | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Total revenues | $117,210 | $10,424 | $167,843 | $201,636 | | Total operating expenses | $137,149 | $115,292 | $235,220 | $447,152 | | Net loss | $(27,918) | $(117,500) | $(83,205) | $(280,019) | | Loss attributable to common stockholders | $(35,117) | $(118,545) | $(91,636) | $(283,813) | | Basic and diluted loss per common share | $(0.16) | $(0.55) | $(0.43) | $(1.30) | - Total revenues for the three months ended June 30, 2021, increased by **$106,786 thousand (1,024.4%)** compared to the same period in 2020, primarily due to a significant increase in room and food and beverage revenues[12](index=12&type=chunk)[141](index=141&type=chunk) - Net loss for the three months ended June 30, 2021, decreased by **$89,582 thousand (76.2%)** compared to the same period in 2020, indicating improved financial performance[12](index=12&type=chunk)[141](index=141&type=chunk) [Unaudited Consolidated Statements of Equity](index=7&type=section&id=Unaudited%20Consolidated%20Statements%20of%20Equity) Presents changes in preferred and common stock, additional paid-in capital, retained earnings, and noncontrolling interest, highlighting preferred stock activities Unaudited Consolidated Statements of Equity (in thousands) | Metric | Balance at Dec 31, 2020 (in thousands) | Balance at June 30, 2021 (in thousands) | | :----------------------------------- | :------------------------------------- | :------------------------------------ | | Preferred Stock Amount | $190,000 | $256,250 | | Common Stock Amount | $2,156 | $2,190 | | Additional Paid in Capital | $2,586,108 | $2,626,582 | | Retained Earnings | $913,766 | $833,132 | | Cumulative Dividends and Distributions | $(1,643,386) | $(1,654,388) | | Total Equity | $2,089,379 | $2,103,305 | - The company redeemed **4,600,000 shares of 6.95% Series E Cumulative Redeemable Preferred Stock** in June 2021, incurring a **$4.0 million** redemption charge[83](index=83&type=chunk) - Issued **2,650,000 shares of Series G preferred stock ($66.3 million liquidation preference)** in April 2021 as partial payment for the Montage Healdsburg acquisition[86](index=86&type=chunk) - Issued **4,600,000 shares of 6.125% Series H preferred stock ($115.0 million gross proceeds)** in May 2021, with proceeds used to redeem Series E preferred stock[87](index=87&type=chunk)[126](index=126&type=chunk) [Unaudited Consolidated Statements of Cash Flows](index=11&type=section&id=Unaudited%20Consolidated%20Statements%20of%20Cash%20Flows) Presents a shift in financing activities from cash used to cash provided by stock offerings, and increased cash used in investing for hotel acquisitions Unaudited Consolidated Statements of Cash Flows (in thousands) | Metric | Six Months Ended June 30, 2021 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | | :------------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | | Net cash used in operating activities | $(13,923) | $(34,929) | | Net cash used in investing activities | $(212,431) | $(30,806) | | Net cash provided by (used in) financing activities | $20,603 | $(212,858) | | Net decrease in cash and cash equivalents and restricted cash | $(205,751) | $(278,593) | | Cash and cash equivalents and restricted cash, end of period | $210,388 | $586,380 | - Acquisition of hotel properties and other assets increased significantly from **$1,346 thousand** in H1 2020 to **$195,646 thousand** in H1 2021[21](index=21&type=chunk)[191](index=191&type=chunk) - Proceeds from preferred stock offerings were **$115,000 thousand** in H1 2021, compared to none in H1 2020[21](index=21&type=chunk)[193](index=193&type=chunk) - Repurchases of outstanding common stock decreased from **$103,894 thousand** in H1 2020 to **zero** in H1 2021[21](index=21&type=chunk)[194](index=194&type=chunk) [Notes to Unaudited Consolidated Financial Statements](index=14&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) These notes detail the company's operations, accounting policies, financial instruments, REIT structure, COVID-19 impact, and capital market activities [1. Organization and Description of Business](index=14&type=section&id=1.%20Organization%20and%20Description%20of%20Business) Sunstone Hotel Investors, Inc. operates as a REIT, owning 18 hotels, with 14 temporarily impacted by COVID-19, 13 now resumed - The Company operates as a REIT, owning and managing **18 hotels** as of June 30, 2021[25](index=25&type=chunk)[27](index=27&type=chunk) - **14 hotels** temporarily suspended operations due to COVID-19 in March-April 2020; **13** have since resumed operations[27](index=27&type=chunk) [2. Summary of Significant Accounting Policies](index=16&type=section&id=2.%20Summary%20of%20Significant%20Accounting%20Policies) Outlines the company's accounting principles, including EPS calculation, policies for restricted cash, hotel investments, leases, noncontrolling interest, revenue recognition, and ASU 2020-04 adoption - The company applies the **two-class method** for earnings per share calculation, excluding unvested restricted shares if anti-dilutive[34](index=34&type=chunk)[36](index=36&type=chunk)[38](index=38&type=chunk) - Restricted cash includes reserve accounts for debt service, capital replacements, and employee-related obligations, totaling **$47.49 million** as of June 30, 2021[10](index=10&type=chunk)[39](index=39&type=chunk) - The company adopted ASU No. 2020-04 for reference rate reform, which is not expected to materially impact financial statements[61](index=61&type=chunk) [3. Investment in Hotel Properties](index=23&type=section&id=3.%20Investment%20in%20Hotel%20Properties) Net investment in hotel properties increased to **$2.69 billion** due to the **$265.0 million** Montage Healdsburg acquisition, including **$13.7 million** for intangible assets Investment in Hotel Properties (in thousands) | Metric | June 30, 2021 (unaudited) (in thousands) | December 31, 2020 (in thousands) | | :-------------------------------- | :--------------------------------------- | :----------------------------------- | | Investment in hotel properties, net | $2,687,395 | $2,461,498 | | Land | $611,538 | $571,212 | | Buildings and improvements | $2,725,893 | $2,523,750 | | Intangible assets | $34,891 | $21,192 | | Construction in progress | $27,082 | $15,831 | - Acquired Montage Healdsburg for **$265.0 million** in April 2021, funded by Series G preferred stock (**$66.3 million**) and cash[62](index=62&type=chunk) - **$13.7 million** was allocated to intangible assets for residential rental and social membership programs at Montage Healdsburg[63](index=63&type=chunk)[64](index=64&type=chunk) [4. Fair Value Measurements and Interest Rate Derivatives](index=25&type=section&id=4.%20Fair%20Value%20Measurements%20and%20Interest%20Rate%20Derivatives) Measures financial instruments at fair value, primarily interest rate derivatives using Level 2 inputs, with a **$4.13 million** liability as of June 30, 2021, and uses Level 3 for debt fair value Fair Value Measurements (in thousands) | Metric | June 30, 2021 (unaudited) (in thousands) | December 31, 2020 (in thousands) | | :-------------------------- | :--------------------------------------- | :----------------------------------- | | Interest rate swap derivatives | $4,132 (liability) | $5,710 (liability) | | Fair Value of Debt | $720,551 | $715,042 | - Noncash changes in fair values of interest rate derivatives resulted in a decrease to interest expense of **$709 thousand** for the three months and **$1,578 thousand** for the six months ended June 30, 2021[70](index=70&type=chunk) - **70.5%** of outstanding debt had fixed interest rates as of June 30, 2021, including effects of interest rate swap agreements[71](index=71&type=chunk) [5. Other Assets](index=27&type=section&id=5.%20Other%20Assets) Other assets, net, decreased to **$11.33 million** due to reductions in property and equipment, deferred rent, and other receivables Other Assets, Net (in thousands) | Metric | June 30, 2021 (unaudited) (in thousands) | December 31, 2020 (in thousands) | | :--------------------------------------- | :--------------------------------------- | :----------------------------------- | | Property and equipment, net | $6,256 | $6,767 | | Deferred rent on straight-lined third-party tenant leases | $2,567 | $2,819 | | Other receivables | $2,077 | $2,633 | | Total other assets, net | $11,333 | $12,445 | [6. Notes Payable](index=29&type=section&id=6.%20Notes%20Payable) Total notes payable remained stable at **$746.30 million**, with cash trap provisions triggered on three loans due to declining hotel performance Notes Payable (in thousands) | Metric | June 30, 2021 (unaudited) (in thousands) | December 31, 2020 (in thousands) | | :--------------------------------------- | :--------------------------------------- | :----------------------------------- | | Total notes payable | $746,303 | $747,945 | | Current portion of notes payable | $3,375 | $3,305 | | Carrying value of notes payable, less current portion | $741,337 | $742,528 | - Cash trap provisions were triggered for loans secured by Embassy Suites La Jolla, JW Marriott New Orleans (January 2021), and Hilton San Diego Bayfront (May 2021)[74](index=74&type=chunk) - The company had **$500.0 million** capacity available under its revolving credit facility with no outstanding amount as of June 30, 2021[75](index=75&type=chunk) - Unsecured Debt Amendments waived financial covenants through Q1 2022, with testing resuming March 31, 2022[76](index=76&type=chunk) Interest Expense (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Interest expense on debt and finance lease obligation | $8,037 | $12,037 | $15,820 | $22,765 | | Noncash interest on derivatives | $(709) | $216 | $(1,578) | $6,296 | | Amortization of deferred financing costs | $737 | $697 | $1,472 | $1,396 | | Total interest expense | $8,065 | $12,950 | $15,714 | $30,457 | [7. Other Current Liabilities and Other Liabilities](index=31&type=section&id=7.%20Other%20Current%20Liabilities%20and%20Other%20Liabilities) Other current liabilities increased to **$50.69 million** due to higher taxes and advance deposits, while other liabilities decreased to **$13.61 million** from reduced deferred revenue and derivatives Other Current Liabilities and Other Liabilities (in thousands) | Metric | June 30, 2021 (unaudited) (in thousands) | December 31, 2020 (in thousands) | | :-------------------------------- | :--------------------------------------- | :----------------------------------- | | **Other Current Liabilities:** | | | | Property, sales and use taxes payable | $14,676 | $10,134 | | Advance deposits | $26,167 | $13,341 | | Total other current liabilities | $50,693 | $32,606 | | **Other Liabilities:** | | | | Deferred revenue | $6,385 | $7,911 | | Interest rate swap derivatives | $4,132 | $5,710 | | Total other liabilities | $13,612 | $17,494 | [8. Leases](index=32&type=section&id=8.%20Leases) The company holds finance and operating leases, with finance lease ROU assets at **$45.45 million** and operating lease ROU assets at **$24.94 million**, and total lease cost of **$2.10 million** for Q2 2021 Lease Assets and Obligations (in thousands) | Metric | June 30, 2021 (unaudited) (in thousands) | December 31, 2020 (in thousands) | | :--------------------------------------- | :--------------------------------------- | :----------------------------------- | | Finance Lease Right-of-use asset, net | $45,447 | $46,182 | | Finance Lease Total lease obligation | $15,570 | $15,570 | | Operating Leases Right-of-use assets, net | $24,939 | $26,093 | | Operating Leases Total lease obligations | $33,160 | $34,982 | Total Lease Cost (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :---------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total lease cost | $2,097 | $2,370 | $4,136 | $5,531 | [9. Stockholders' Equity](index=32&type=section&id=9.%20Stockholders%27%20Equity) Actively managed capital structure by redeeming Series E preferred stock, issuing Series G and H preferred stock, issuing common stock under ATM, and reauthorizing a **$500 million** stock repurchase program - Redeemed all **4,600,000 shares of 6.95% Series E Cumulative Redeemable Preferred Stock** in June 2021 at **$25.00 per share**, plus accrued dividends[83](index=83&type=chunk) - Issued **2,650,000 shares of Series G preferred stock** as partial payment for the Montage Healdsburg acquisition in April 2021[86](index=86&type=chunk) - Issued **4,600,000 shares of 6.125% Series H Cumulative Redeemable Preferred Stock** in May 2021 for **$115.0 million** gross proceeds[87](index=87&type=chunk) - Issued **2,913,682 shares of common stock** under ATM Agreements for **$38.4 million** gross proceeds in June 2021, with **$137.0 million** remaining available[89](index=89&type=chunk) - Reauthorized a **$500.0 million** stock repurchase program in February 2021, with no repurchases under this program as of June 30, 2021[88](index=88&type=chunk) [10. Long-Term Incentive Plan](index=34&type=section&id=10.%20Long-Term%20Incentive%20Plan) Details the Long-Term Incentive Plan (LTIP), granting restricted shares vesting over three years, with amortization expense of **$4.66 million** for Q2 2021 and **$7.41 million** for H1 2021 Amortization Expense and Forfeitures (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Amortization expense, including forfeitures | $4,659 | $3,064 | $7,411 | $5,271 | | Capitalized compensation cost | $125 | $129 | $242 | $246 | - Restricted shares granted under the LTIP generally vest over **three years**[90](index=90&type=chunk) [11. Commitments and Contingencies](index=36&type=section&id=11.%20Commitments%20and%20Contingencies) Details various commitments, including **$36.5 million** in renovation and construction, and regional concentration of its hotel portfolio, exposing it to specific risks, with **$10.9 million** in restricted cash for employee obligations Total Basic and Incentive Management Fees (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total basic and incentive management fees | $3,073 | $164 | $4,376 | $5,555 | Total Franchise Costs (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :---------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total franchise costs | $2,296 | $338 | $3,287 | $5,674 | - Renovation and construction commitments totaled **$36.5 million** at June 30, 2021[98](index=98&type=chunk) - **13 of 18 hotels** are concentrated in California (**31%** of rooms, **34%** of revenue), Florida (**10%** of rooms, **16%** of revenue), Hawaii (**6%** of rooms, **21%** of revenue), Illinois (**13%** of rooms, **5%** of revenue), and Massachusetts (**16%** of rooms, **11%** of revenue)[100](index=100&type=chunk) - **$10.9 million** remains in restricted cash for potential employee-related obligations related to the Hilton Times Square assignment[101](index=101&type=chunk) [12. Subsequent Events](index=38&type=section&id=12.%20Subsequent%20Events) Subsequent to June 30, 2021, the company amended its Unsecured Debt Agreements, issued **4,000,000 shares of Series I preferred stock** for **$100.0 million**, plans to redeem Series F preferred stock, and is under contract to acquire a West Coast hotel for less than **$200 million** - Amended Unsecured Debt Agreements on July 2, 2021, removing restrictions on unencumbered hotel acquisitions and debt prepayment requirements from asset sales/equity issuances during the covenant waiver period[105](index=105&type=chunk) - Issued **4,000,000 shares of 5.70% Series I Cumulative Redeemable Preferred Stock** for **$100.0 million** on July 16, 2021[106](index=106&type=chunk) - Plans to redeem all **3,000,000 shares of Series F preferred stock** in August 2021 using **$75.0 million** from Series I preferred stock proceeds[108](index=108&type=chunk) - Under contract to acquire a West Coast hotel for less than **$200 million**, expected to be financed with cash on hand and credit facility borrowings[109](index=109&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=43&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Provides management's perspective on financial performance, condition, and outlook, detailing COVID-19 impact, hotel demand recovery, strategic capital activities, operating results, liquidity, capital resources, and critical accounting policies, emphasizing non-GAAP measures [Overview](index=43&type=section&id=Overview) Sunstone Hotel Investors, Inc., a self-managed REIT, focuses on urban and resort hotels, experienced COVID-19 impact, but saw H1 2021 occupancy improvements, strategic acquisitions, stock issuances, and a reauthorized repurchase program - The company owns **18 hotels**, averaging **508 rooms**, primarily branded, in urban and resort destination locations[116](index=116&type=chunk) - Occupancy at **17 hotels** increased from **1.6%** in April 2020 to **48.8%** in June 2021, driven by leisure demand and vaccine distribution[121](index=121&type=chunk) - Acquired Montage Healdsburg for **$265.0 million** in April 2021, funded by Series G preferred stock and cash[123](index=123&type=chunk) - Issued Series H preferred stock (**$115.0 million**) to redeem Series E preferred stock and issued common stock (**$38.4 million**) under ATM program[126](index=126&type=chunk)[127](index=127&type=chunk) - Temporarily suspended common stock quarterly dividend and reauthorized a **$500.0 million** stock repurchase program[128](index=128&type=chunk) [Operating Activities](index=47&type=section&id=Operating%20Activities) Operating activities show significant Q2 2021 revenue rebound, driven by room and F&B, reflecting COVID-19 recovery, though H1 revenues remain below 2020, with performance assessed using non-GAAP measures like EBITDAre and FFO Total Revenues and Operating Expenses (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenues | $117,210 | $10,424 | $167,843 | $201,636 | | Total operating expenses | $137,149 | $115,292 | $235,220 | $447,152 | | Net loss | $(27,918) | $(117,500) | $(83,205) | $(280,019) | | Loss attributable to common stockholders | $(35,117) | $(118,545) | $(91,636) | $(283,813) | - Room revenue increased by **2,086.5%** for the three months ended June 30, 2021, compared to the same period in 2020, with occupancy up **4,090 basis points** and ADR up **103.0%**[145](index=145&type=chunk) - Adjusted EBITDAre, excluding noncontrolling interest, increased by **$62.3 million (132.6%)** for the three months and **$33.5 million (102.0%)** for the six months ended June 30, 2021, compared to the same periods in 2020, driven by recovery at the **17 hotels** and the Montage Healdsburg acquisition[182](index=182&type=chunk) - Adjusted FFO attributable to common stockholders increased by **$64.0 million (97.5%)** for the three months and **$36.5 million (54.5%)** for the six months ended June 30, 2021, compared to the same periods in 2020[187](index=187&type=chunk) [Liquidity and Capital Resources](index=69&type=section&id=Liquidity%20and%20Capital%20Resources) Liquidity improved in H1 2021 with decreased cash used in operations and positive cash from financing, driven by stock offerings and hotel acquisitions. The company maintains **$162.9 million** unrestricted cash and **$500.0 million** credit facility availability, with **$746.3 million** total debt - Net cash used in operating activities decreased to **$13.9 million** for H1 2021 from **$34.9 million** for H1 2020, due to resumed hotel operations and increased travel demand[189](index=189&type=chunk) - Net cash provided by financing activities was **$20.6 million** for H1 2021, a significant improvement from **$212.9 million** used in H1 2020, driven by preferred and common stock issuances[193](index=193&type=chunk) - Unrestricted cash balance was **$162.9 million** as of June 30, 2021, with **$500.0 million** available under the unsecured revolving credit facility[204](index=204&type=chunk) - Total consolidated debt was **$746.3 million** as of June 30, 2021, with **70.5%** having fixed interest rates[206](index=206&type=chunk)[209](index=209&type=chunk) Contractual Obligations and Commitments (in thousands) | Obligation Type | Total | Less Than 1 year | 1 to 3 years | 3 to 5 years | More than 5 years | | :------------------------------------ | :---------- | :--------------- | :----------- | :----------- | :---------------- | | Notes payable | $746,303 | $3,375 | $412,173 | $215,755 | $115,000 | | Interest obligations on notes payable | $103,446 | $29,425 | $40,732 | $22,272 | $11,017 | | Finance lease obligation | $107,311 | $1,403 | $2,806 | $2,806 | $100,296 | | Operating lease obligations | $39,204 | $6,882 | $13,926 | $11,483 | $6,913 | | Construction commitments | $36,495 | $36,495 | — | — | — | | Employment obligations | $2,277 | $2,277 | — | — | — | | **Total** | **$1,035,036** | **$79,857** | **$469,637** | **$252,316** | **$233,226** | [Capital Expenditures and Reserve Funds](index=77&type=section&id=Capital%20Expenditures%20and%20Reserve%20Funds) The company invested **$16.8 million** in capital expenditures in H1 2021, with **$36.5 million** in remaining commitments, and holds **$31.9 million** in FF&E reserve accounts, with some funding requirements temporarily suspended - Invested **$16.8 million** in capital expenditures during H1 2021[214](index=214&type=chunk) - Contractual construction commitments totaled **$36.5 million** as of June 30, 2021[214](index=214&type=chunk) - **$31.9 million** held in FF&E reserve accounts as restricted cash for future capital expenditures[215](index=215&type=chunk) - Some third-party managers have suspended FF&E reserve funding requirements through 2021 due to COVID-19[215](index=215&type=chunk) [Seasonality and Volatility](index=77&type=section&id=Seasonality%20and%20Volatility) The lodging industry and the company's business experience seasonality, with revenue fluctuations based on geography and time, and are subject to volatility from economic conditions, pandemics, natural disasters, and competition - The company's business experiences seasonality, with revenue patterns varying by quarter and geographic location (e.g., Q1 strong in Hawaii, Key West, New Orleans, Orlando; Q2 strong for Mid-Atlantic business hotels; Q4 strong for Hawaii and Key West)[216](index=216&type=chunk) - Operating results are affected by economic conditions, pandemics (COVID-19), natural disasters, competition, and changes in travel[216](index=216&type=chunk) [Inflation](index=77&type=section&id=Inflation) Inflation can increase operating expenses such as labor, benefits, food, commodities, taxes, insurance, and utilities, which may not always be offset by increased room rates - Inflation may increase costs for labor, employee benefits, food, commodities, taxes, property and liability insurance, and utilities[217](index=217&type=chunk) [Critical Accounting Policies](index=77&type=section&id=Critical%20Accounting%20Policies) The company's critical accounting policies involve significant judgments and estimates for impairment of long-lived assets, acquisition-related assets and liabilities, depreciation and amortization, and income taxes, materially affecting reported financial results - Impairment losses on long-lived assets are recorded when future undiscounted net cash flows are less than the carrying amount, requiring judgment in estimating fair value through discounted cash flow analyses[219](index=219&type=chunk)[220](index=220&type=chunk)[44](index=44&type=chunk) - Acquisition accounting involves allocating purchase price to assets and liabilities at fair value, distinguishing between business and asset acquisitions, which impacts expense recognition[221](index=221&type=chunk) - Depreciation and amortization expense relies on estimated useful lives of assets (**5-40 years** for buildings, **3-12 years** for FF&E), with changes potentially affecting net income[221](index=221&type=chunk)[41](index=41&type=chunk) - Income tax accounting involves qualifying as a REIT, recognizing deferred tax assets/liabilities, and assessing uncertain tax positions, with a full valuation allowance recorded on deferred tax assets in H1 2020 due to COVID-19 uncertainties[221](index=221&type=chunk)[222](index=222&type=chunk)[171](index=171&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=81&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company is exposed to market risk from variable interest rates on debt, managed with derivatives. As of June 30, 2021, **70.5%** of debt had fixed rates, and a **100 basis point** change in variable rates would impact consolidated earnings and cash flows by approximately **$2.2 million** - **70.5%** of the company's debt obligations had fixed interest rates as of June 30, 2021[226](index=226&type=chunk) - A **100 basis point** change in variable interest rates would increase/decrease consolidated earnings and cash flows by approximately **$2.2 million**, or **$1.7 million** after adjusting for noncontrolling interest[226](index=226&type=chunk) - The company uses derivative financial instruments to manage interest rate risks on floating rate debt[225](index=225&type=chunk) [Item 4. Controls and Procedures](index=81&type=section&id=Item%204.%20Controls%20and%20Procedures) The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material changes in internal control over financial reporting during the quarter - CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2021[228](index=228&type=chunk) - No material changes in internal control over financial reporting occurred during the quarter[229](index=229&type=chunk) [PART II—OTHER INFORMATION](index=82&type=section&id=PART%20II%E2%80%94OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=82&type=section&id=Item%201.%20Legal%20Proceedings) The company reported no legal proceedings - No legal proceedings were reported[231](index=231&type=chunk) [Item 1A. Risk Factors](index=82&type=section&id=Item%201A.%20Risk%20Factors) The company reported no new risk factors for the period - No new risk factors were reported[232](index=232&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=82&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reauthorized its **$500.0 million** stock repurchase program and withheld **108,905 shares** of restricted common stock for employee tax obligations - Reauthorized a **$500.0 million** stock repurchase program in February 2021[233](index=233&type=chunk) - Withheld **108,905 shares** of restricted common stock at an average price of **$12.49 per share** in May 2021 to satisfy employee tax obligations[234](index=234&type=chunk)[235](index=235&type=chunk) [Item 3. Defaults Upon Senior Securities](index=82&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities - No defaults upon senior securities were reported[236](index=236&type=chunk) [Item 4. Mine Safety Disclosures](index=82&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) The company reported no mine safety disclosures - No mine safety disclosures were reported[237](index=237&type=chunk) [Item 5. Other Information](index=82&type=section&id=Item%205.%20Other%20Information) The company reported no other information - No other information was reported[238](index=238&type=chunk) [Item 6. Exhibits](index=83&type=section&id=Item%206.%20Exhibits) Lists all exhibits filed, including Articles of Amendment, Bylaws, Articles Supplementary for preferred stock, and required certifications - Includes Articles of Amendment and Restatement, Bylaws, and Articles Supplementary for Series E, F, G, H, and I preferred stock[239](index=239&type=chunk) - Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are filed[239](index=239&type=chunk) [SIGNATURES](index=84&type=section&id=SIGNATURES) The report was signed by Bryan A. Giglia, Chief Financial Officer and Duly Authorized Officer, on August 4, 2021 - The report was signed by Bryan A. Giglia, Chief Financial Officer, on August 4, 2021[243](index=243&type=chunk)

Sunstone Hotel Investors, Inc. (NYSE:SHO) Q1 2021 Results Earnings Conference Call May 4, 2021 12:00 PM ET Company Participants Aaron Reyes - Senior Vice President & Treasurer John Arabia - President & Chief Executive Officer Bryan Giglia - Chief Financial Officer Marc Hoffman - Chief Operating Officer Chris Ostapovicz - Senior Vice President and Co-Chief Operating Officer Conference Call Participants Rich Hightower - Evercore Danny Asad - Bank of America David Katz - Jefferies Smedes Rose - Citi Anthony Po ...

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 March 31, 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 ...