Sunstone Hotel Investors(SHO) - 2025 Q2 - Quarterly Report

Introductory Information Company Details and Filing Status Sunstone Hotel Investors, Inc. filed its Quarterly Report on Form 10-Q for the period ended June 30, 2025, identifying as a large accelerated filer, with 189,969,350 shares of common stock outstanding as of August 1, 2025 - Sunstone Hotel Investors, Inc. is a Maryland corporation[2] - The filing is a Quarterly Report on Form 10-Q for the period ended June 30, 2025[2] Filer Status | Status | Indication | | :---------------------- | :--------- | | Large accelerated filer | ☒ | - As of August 1, 2025, 189,969,350 shares of common stock were outstanding[5] PART I—FINANCIAL INFORMATION Item 1. Financial Statements The financial statements for the quarter and six months ended June 30, 2025, show a decrease in net income and income attributable to common stockholders compared to the prior year, primarily driven by a loss on the sale of assets and increased operating expenses, while total assets and stockholders' equity decreased and total liabilities increased Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2025 (unaudited) | December 31, 2024 | | :----------------------------------- | :------------------------ | :------------------ | | Total assets | $3,010,987 | $3,106,639 | | Total liabilities | $1,031,001 | $1,002,619 | | Total stockholders' equity | $1,979,986 | $2,104,020 | - Total assets decreased by $95,652 thousand from December 31, 2024, to June 30, 2025[10] - Total liabilities increased by $28,382 thousand from December 31, 2024, to June 30, 2025[10] - Total stockholders' equity decreased by $124,034 thousand from December 31, 2024, to June 30, 2025[10] Unaudited Consolidated Statements of Operations Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenues | $259,772 | $247,481 | $493,837 | $464,647 | | Total operating expenses | $229,346 | $211,932 | $446,940 | $411,839 | | Net income | $10,774 | $26,142 | $16,029 | $39,177 | | Income attributable to common stockholders | $6,842 | $22,459 | $8,166 | $31,811 | | Basic and diluted EPS | $0.03 | $0.11 | $0.04 | $0.16 | - Net income decreased by 58.8% for the three months and 59.1% for the six months ended June 30, 2025, compared to 2024[12] - Income attributable to common stockholders decreased by 69.5% for the three months and 74.3% for the six months ended June 30, 2025, compared to 2024[12] Unaudited Consolidated Statements of Equity Consolidated Statements of Equity Highlights (in thousands) | Metric | December 31, 2024 (audited) | June 30, 2025 | | :-------------------------------- | :-------------------------- | :------------ | | Total Equity | $2,104,020 | $1,979,986 | | Common Stock Repurchases (6 months) | N/A | $(98,470) | | Net Income (6 months) | N/A | $16,029 | - The company repurchased 10,301,090 shares of common stock for $90,454 thousand during the three months ended June 30, 2025[14] - For the six months ended June 30, 2025, common stock repurchases totaled $98,470 thousand[14] Unaudited Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2025 | 2024 | | :------------------------------------------ | :--------- | :--------- | | Net cash provided by operating activities | $90,763 | $93,277 | | Net cash used in investing activities | $(5,596) | $(297,848) | | Net cash used in financing activities | $(120,523) | $(55,123) | | Net decrease in cash and restricted cash | $(35,356) | $(259,694) | | Cash and restricted cash, end of period | $144,921 | $234,004 | - Net cash used in investing activities significantly decreased in 2025 due to proceeds from a hotel sale and acquisition-related key money, contrasting with a large acquisition in 2024[18] - Net cash used in financing activities increased substantially in 2025, primarily driven by higher repurchases of outstanding common stock[18] Notes to Unaudited Consolidated Financial Statements The notes provide detailed information on the company's organization, accounting policies, investments, debt, equity, and other financial commitments, including the sale of a hotel, changes in preferred stock dividend rates, significant common stock repurchases, and details on debt structure and interest rate derivatives 1. Organization and Description of Business - Sunstone Hotel Investors, Inc. operates as a self-managed and self-administered REIT since December 31, 2004[22] - The company invests in hotels to add value through capital investment, repositioning, and asset management[22] - As of June 30, 2025, the Company owned 14 hotels[24] 2. Basis of Presentation and Summary of Significant Accounting Policies - The interim financial statements are prepared in accordance with GAAP and SEC rules, reflecting all necessary normal and recurring adjustments[26] - There have been no changes to significant accounting policies since December 31, 2024[30] - The company is evaluating ASU 2024-03, effective for fiscal years beginning after December 15, 2026, for additional disclosure requirements regarding income statement expense disaggregation[31] 3. Investment in Hotel Properties Investment in Hotel Properties, Net (in thousands) | Metric | June 30, 2025 (unaudited) | December 31, 2024 | | :-------------------------------- | :------------------------ | :------------------ | | Investment in hotel properties, net | $2,788,498 | $2,856,032 | - In June 2025, the Company sold the Hilton New Orleans St. Charles for a gross sale price of $47.0 million, recording a loss of $8.8 million[32] 4. Fair Value Measurements and Interest Rate Derivatives - The company uses Level 2 measurements for interest rate derivatives and Level 3 measurements for debt fair value[36][37] - As of June 30, 2025, 51.0% of the company's outstanding debt had fixed interest rates, including interest rate swap derivatives[37] Noncash Interest on Derivatives, Net (in thousands) | Period | 2025 | 2024 | | :-------------------------- | :------- | :------- | | Three Months Ended June 30, | $181 | $(189) | | Six Months Ended June 30, | $1,163 | $(2,231) | 5. Prepaid Expenses and Other Assets Prepaid Expenses and Other Assets, Net (in thousands) | Metric | June 30, 2025 (unaudited) | December 31, 2024 | | :----------------------------------- | :------------------------ | :------------------ | | Total prepaid expenses and other assets, net | $28,214 | $27,757 | 6. Debt Debt Composition (in thousands) | Debt Type | June 30, 2025 (unaudited) | December 31, 2024 | | :--------------------------------------- | :------------------------ | :------------------ | | Unsecured Corporate Credit Facilities | $702,000 | $675,000 | | Unsecured Senior Notes | $170,000 | $170,000 | | Total debt | $872,000 | $845,000 | | Debt, net of unamortized deferred financing costs | $868,695 | $841,047 | - In April 2025, the Company drew down $27.0 million on its $500.0 million credit facility, leaving $473.0 million available[43] - The maturity of Term Loan 3 was extended from May 1, 2025, to May 1, 2026[44] Total Interest Expense (in thousands) | Period | 2025 | 2024 | | :-------------------------- | :------- | :------- | | Three Months Ended June 30, | $13,164 | $12,693 | | Six Months Ended June 30, | $25,846 | $23,703 | 7. Other Liabilities Other Liabilities (in thousands) | Metric | June 30, 2025 (unaudited) | December 31, 2024 | | :-------------------- | :------------------------ | :------------------ | | Total other liabilities | $73,413 | $72,694 | - The Company recognized approximately $38.0 million in revenue related to outstanding contract liabilities for the six months ended June 30, 2025[46] 8. Leases Operating Lease Balances (in thousands) | Metric | June 30, 2025 (unaudited) | December 31, 2024 | | :-------------------------- | :------------------------ | :------------------ | | Right-of-use assets, net | $6,575 | $8,464 | | Lease obligations | $9,830 | $12,019 | Total Lease Cost (in thousands) | Period | 2025 | 2024 | | :-------------------------- | :------- | :------- | | Three Months Ended June 30, | $3,331 | $3,412 | | Six Months Ended June 30, | $6,387 | $6,602 | 9. Stockholders' Equity - The annual dividend rate for Series G preferred stock increased to the greater of 4.5% or Montage Healdsburg's annual net operating income yield, and will increase to 6.5% in Q3 2025[51] - The company's stock repurchase program allows for up to $500.0 million in common and preferred stock repurchases, with $329.3 million remaining as of June 30, 2025[54][55] Common Shares Repurchased (in thousands, except share data) | Period | Number of Common Shares Repurchased | Cost, including fees and commissions | | :-------------------------- | :---------------------------------- | :----------------------------------- | | Three Months Ended June 30, 2025 | 10,301,090 | $90,454 | | Six Months Ended June 30, 2025 | 11,122,861 | $98,470 | 10. Incentive Award Plan - The Incentive Award Plan allows for various discretionary awards to employees, consultants, and non-employee directors[57] Amortization Expense (in thousands) | Period | 2025 | 2024 | | :-------------------------- | :------- | :------- | | Three Months Ended June 30, | $2,772 | $3,181 | | Six Months Ended June 30, | $4,836 | $5,951 | - In January 2025, 2022 RSR Three-Year Performance Period restricted stock units vested at 169.2% of target, resulting in the vesting of an additional 176,286 shares[62] 11. Earnings Per Share - The company applies the two-class method for computing earnings per share[64] Basic and Diluted EPS (per common share) | Period | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic income attributable to common stockholders | $0.03 | $0.11 | $0.04 | $0.16 | | Diluted income attributable to common stockholders | $0.03 | $0.11 | $0.04 | $0.16 | - The company excluded 685,065 anti-dilutive unvested time-based restricted stock awards for the three months ended June 30, 2025[67] 12. Segment Information - The company operates as a single reportable segment: Hotel Ownership[69] - The Chief Operating Decision Maker (CODM) reviews individual hotel performance using Hotel Adjusted EBITDAre[69][71][72] Hotel Adjusted EBITDAre (in thousands) | Period | 2025 | 2024 | | :-------------------------- | :--------- | :--------- | | Three Months Ended June 30, | $75,908 | $75,194 | | Six Months Ended June 30, | $136,680 | $127,489 | 13. Commitments and Contingencies Total Basic and Incentive Management Fees (in thousands) | Period | 2025 | 2024 | | :-------------------------- | :------- | :------- | | Three Months Ended June 30, | $8,843 | $6,957 | | Six Months Ended June 30, | $16,825 | $15,960 | Total Franchise Costs (in thousands) | Period | 2025 | 2024 | | :-------------------------- | :------- | :------- | | Three Months Ended June 30, | $4,843 | $4,819 | | Six Months Ended June 30, | $9,302 | $9,024 | - As of June 30, 2025, the company had $53.9 million in remaining commitments for ongoing hotel renovations[79] - The company's hotels are geographically concentrated in California, Florida, Hawaii, and Washington, DC, exposing it to unique regional risks[81][82] 14. Subsequent Events - On July 9, 2025, the company drew an additional $23.0 million on its credit facility, leaving $450.0 million available[86] - Subsequent to June 30, 2025, the company repurchased 201,314 shares of common stock for $1.8 million, with $327.5 million remaining under the stock repurchase program[87] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an in-depth analysis of the company's financial performance, liquidity, and capital resources, highlighting a significant decrease in net income and EPS due to a loss on asset sale and increased operating expenses, despite revenue growth, and covering the impact of hotel acquisitions, renovations, dispositions, non-GAAP financial measures, and critical accounting estimates Overview - The company operates as a REIT, owning 14 hotels in convention, urban, and resort destinations, with most operating under nationally recognized brands[95][96] - Revenues are primarily derived from room, food and beverage, and other operating activities[97] - Key performance indicators include Occupancy, ADR, RevPAR, EBITDAre, and FFO[99][102] Factors Affecting Operating Results - Demand for lodging is closely linked to the general economy, with upper upscale and luxury hotels more susceptible to revenue decreases during economic difficulties[101][102] - New competitive hotel supply and the growth of vacation rental services can negatively impact RevPAR and profits[102] - Inflationary pressures can increase operating costs, potentially limiting the effectiveness of operators in minimizing expenses[102] Operating Results Analysis Revenue Performance (in thousands) | Metric | Q2 2025 | Q2 2024 | Change % (QoQ) | 6M 2025 | 6M 2024 | Change % (YoY) | | :---------------- | :-------- | :-------- | :------------- | :-------- | :-------- | :------------- | | Room revenue | $156,048 | $151,296 | 3.1% | $300,969 | $287,111 | 4.8% | | Food and beverage | $78,026 | $71,367 | 9.3% | $145,154 | $132,706 | 9.4% | | Other operating | $25,698 | $24,818 | 3.5% | $47,714 | $44,830 | 6.4% | | Total revenues | $259,772 | $247,481 | 5.0% | $493,837 | $464,647 | 6.3% | - Room revenue growth was significantly impacted by the ramp-up of 'Two Renovation Hotels' (Andaz Miami Beach and Marriott Long Beach Downtown) and the acquisition of Hyatt Regency San Antonio Riverwalk, partially offset by the sale of Hilton New Orleans St. Charles[106][108][109][110][111][112][113] - Food and beverage revenue increased due to higher banquet revenues, particularly at Hilton San Diego Bayfront, Hyatt Regency San Francisco, Montage Healdsburg, and Wailea Beach Resort, and the Super Bowl in New Orleans[114][115] Expense Performance (in thousands) | Metric | Q2 2025 | Q2 2024 | Change % (QoQ) | 6M 2025 | 6M 2024 | Change % (YoY) | | :-------------------------- | :-------- | :-------- | :------------- | :-------- | :-------- | :------------- | | Total operating expenses | $229,346 | $211,932 | 8.2% | $446,940 | $411,839 | 8.5% | | Corporate overhead | $8,346 | $8,168 | 2.2% | $17,251 | $15,686 | 10.0% | | Depreciation and amortization | $34,125 | $31,112 | 9.7% | $66,400 | $60,152 | 10.4% | | Interest and other income | $2,300 | $3,503 | -34.3% | $3,864 | $8,956 | -56.9% | | Interest expense | $(13,164) | $(12,693) | -3.7% | $(25,846) | $(23,703) | -9.0% | | Loss on sale of assets, net | $(8,751) | $0 | -100.0% | $(8,751) | $457 | -2014.9% | | Net income | $10,774 | $26,142 | -58.8% | $16,029 | $39,177 | -59.1% | | Income attributable to common stockholders | $6,842 | $22,459 | -69.5% | $8,166 | $31,811 | -74.3% | - Corporate overhead increased due to professional fees, due diligence fees, board of director expenses, and a severance payment related to executive team restructuring[120][121] - Interest and other income decreased primarily due to lower cash balances following the Hyatt Regency San Antonio Riverwalk acquisition in April 2024[125][127] - Interest expense increased due to noncash changes in derivative fair values and amortization of deferred financing costs, partially offset by increased capitalized interest[129] - The company recognized an $8.8 million loss on the sale of the Hilton New Orleans St. Charles in Q2 and 6M 2025[131] Non-GAAP Financial Measures - The company uses non-GAAP measures like EBITDAre, Adjusted EBITDAre, FFO, and Adjusted FFO to provide investors with supplemental information on operating performance[136][137][138][146][147] Adjusted EBITDAre (in thousands) | Period | 2025 | 2024 | Change % | | :-------------------------- | :--------- | :--------- | :--------- | | Three Months Ended June 30, | $72,682 | $73,523 | -1.1% | | Six Months Ended June 30, | $129,938 | $128,034 | 1.5% | - Adjusted EBITDAre was impacted by the acquisition of Hyatt Regency San Antonio Riverwalk, performance of 'Two Renovation Hotels', and corporate-level changes[143][144] Adjusted FFO Attributable to Common Stockholders (in thousands) | Period | 2025 | 2024 | Change % | | :-------------------------- | :--------- | :--------- | :--------- | | Three Months Ended June 30, | $55,723 | $56,626 | -1.6% | | Six Months Ended June 30, | $97,223 | $94,144 | 3.3% | Liquidity and Capital Resources - Net cash provided by operating activities decreased to $90.8 million for the first six months of 2025, primarily due to lower interest income and increased corporate expenses[151] - Net cash used in investing activities significantly decreased to $5.6 million for the first six months of 2025, driven by proceeds from a hotel sale and key money, contrasting with a large hotel acquisition in 2024[152][153][154][155] - Net cash used in financing activities increased to $120.5 million for the first six months of 2025, mainly due to higher common stock repurchases[156][157] - The company expects future cash sources to include operating activities, credit facility borrowings, debt/equity issuances, and dispositions, with primary uses being operating expenses, capital investments, debt repayment, stock repurchases, and dividends[158][159] - As of June 30, 2025, the company had $73.6 million in unrestricted cash and $473.0 million available under its unsecured revolving credit facility[161] - As of June 30, 2025, 51.0% of the company's $872.0 million outstanding debt had fixed interest rates or was swapped to fixed rates[162][165] Contractual Obligations as of June 30, 2025 (in thousands) | Obligation | Total | Less Than 1 year | 1 to 3 years | 3 to 5 years | More than 5 years | | :--------------------------------------- | :---------- | :--------------- | :----------- | :----------- | :---------------- | | Debt | $872,000 | $290,000 | $582,000 | $0 | $0 | | Interest obligations on debt | $88,796 | $47,157 | $41,639 | $0 | $0 | | Operating lease obligations, including imputed interest | $11,410 | $4,250 | $5,046 | $1,148 | $966 | | Construction commitments | $53,881 | $53,881 | $0 | $0 | $0 | | Total | $1,026,087 | $395,288 | $628,685 | $1,148 | $966 | - The company invested $56.0 million in capital expenditures for renovations and additions during the first six months of 2025[168] - Inflationary pressures on operating costs are a concern, though hotel operators' ability to adjust room rates historically mitigates the impact[160][172] Critical Accounting Estimates - Critical accounting estimates include the impairment of investments in hotel properties, involving significant judgment in determining fair value and recoverability[176] - Income taxes, particularly related to REIT qualification and the TRS Lessee, require estimates for deferred tax assets and liabilities and uncertain tax positions[176][177][178][179] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk exposure is to interest rate fluctuations on its variable rate debt, which it mitigates through interest rate derivatives, with 51.0% of its debt fixed or swapped to fixed rates as of June 30, 2025 - The company's future income and cash flows are dependent upon prevailing market interest rates due to variable interest rate debt[180] - As of June 30, 2025, 51.0% of the company's debt obligations were fixed or subject to interest rate swap derivatives[181] - A 50 basis point increase or decrease in the market interest rate on variable rate debt would result in an approximate $2.1 million annual increase or decrease in interest expense[181] Item 4. Controls and Procedures The company's CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2025, with no material changes in internal control over financial reporting during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2025[183] - No material change in internal control over financial reporting occurred during the quarter[184] PART II—OTHER INFORMATION Item 1. Legal Proceedings There are no legal proceedings to report for the period - No legal proceedings are reported[186] Item 1A. Risk Factors No new material risk factors have been identified for the current reporting period, and readers are directed to the company's Annual Report on Form 10-K for a detailed discussion of existing risk factors - No new risk factors are reported in this quarterly report[186] - Readers should refer to the Annual Report on Form 10-K for a detailed discussion of risk factors[90] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the second quarter of 2025, the company repurchased 10,301,090 shares of its common stock for $90.5 million under its existing stock repurchase program, leaving $329.3 million available for future repurchases Common Stock Repurchases (Q2 2025) | 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 | | :----------------------------- | :------------------------------- | :--------------------------- | :----------------------------------------------------------------------- | :------------------------------------------------------------------------------------------------- | | April 1, 2025 - April 30, 2025 | 1,510,549 | $8.44 | 1,510,549 | $406,754,207 | | May 1, 2025 - May 31, 2025 | 3,784,152 | $8.81 | 3,784,152 | $373,413,087 | | June 1, 2025 - June 30, 2025 | 5,006,389 | $8.82 | 5,006,389 | $329,263,171 | | Total | 10,301,090 | $8.76 | 10,301,090 | $329,263,171 | - The company repurchased 10,301,090 shares of common stock for a total purchase price of $90.5 million during the three months ended June 30, 2025[192] - $329.3 million remains available under the stock repurchase program as of June 30, 2025[192] Item 3. Defaults Upon Senior Securities There are no defaults upon senior securities to report for the period - No defaults upon senior securities are reported[189] Item 4. Mine Safety Disclosures There are no mine safety disclosures to report for the period - No mine safety disclosures are reported[190] Item 5. Other Information This section reiterates details of the stock repurchase program and confirms no changes to Rule 10b5-1 trading arrangements by directors or officers during the quarter - The company's stock repurchase program, reauthorized in February 2023, allows for up to $500.0 million in common and preferred stock repurchases, with $329.3 million remaining as of June 30, 2025[192] - No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the quarter ended June 30, 2025[193] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including organizational documents, employment agreements, incentive plans, certifications, and XBRL data - The report includes various exhibits such as Articles of Amendment and Restatement, Bylaws, Articles Supplementary for preferred stock, and the Limited Liability Agreement of Sunstone Hotel Partnership LLC[194] - Employment agreements for Bryan A. Giglia and Aaron Reyes, and an amendment to the 2022 Incentive Award Plan are filed as exhibits[194] - Certifications by the Principal Executive Officer and Principal Financial Officer, as well as XBRL Instance Document and Taxonomy Extension Documents, are included[194] SIGNATURES The report was duly signed on August 6, 2025, by Aaron R. Reyes, Chief Financial Officer and Duly Authorized Officer - The report was signed on August 6, 2025[198] - The report was signed by Aaron R. Reyes, Chief Financial Officer and Duly Authorized Officer[198]