Sunstone Hotel Investors(SHO) - 2021 Q4 - Annual Report

PART I Business Overview 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][15] - 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][15][16] - 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][20] - 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][22][28] Company Overview and Operations 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] - 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] - The business strategy is to acquire, own, asset manage, and renovate "Long-Term Relevant Real Estate®" (LTRR®) in urban and resort destination locations[15] - Hotels are operated by third-party managers under long-term management agreements[16] COVID-19 Pandemic Impact 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] - All hotels were open and operating by December 31, 2021, with enhanced safety protocols[18][19] - Leisure demand was the primary business source in 2021, while business transient and group demand remained below pre-pandemic levels[20] Competitive Advantages 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][22] - Most hotels operate under nationally recognized brands, enhancing appeal and driving business[24] - Proactive asset management team maximizes long-term value through oversight, innovation, and capital improvements[26] - 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] Strategic Approach 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] - Goal is to maintain appropriate leverage and financial flexibility to create value throughout all phases of the operating and financial cycles[30] Market 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] - Competition for hotel acquisitions is widespread, including institutional pension funds, private equity investors, and other REITs, some with substantially greater financial resources[32] Third-Party Management Agreements 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] - 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][34] - Managers furnish chain services (e.g., computer systems, reservations, marketing) whose costs are reimbursed by the company[35] Franchise Operations 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] - Franchise agreements require compliance with brand standards and reservation of up to 5.0% of gross revenues into a capital expenditures reserve fund[39] | 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 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] - 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] TRS Structure 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] - 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] - 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] Leasehold Interests 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] - 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] - Leases generally require rental payments and payments for costs and expenses, and proposed sales or assignments of leasehold interests may require lessor consent[49] Headquarters Information 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] - The corporate office lease terminates on August 31, 2028[50] Employee Information and Benefits 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] - 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] - 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] - Committed to diversity and inclusion: 40% female and 24% ethnic/racial minorities as of December 31, 2021[55] ESG Initiatives 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] - 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] Environmental Compliance and Risks 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] - 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] - Customary unsecured environmental indemnities are provided to certain lenders and buyers, with no term or damage limitation[62] Americans with Disabilities Act Compliance 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] - The company believes its properties are in substantial compliance, but noncompliance could result in capital expenditures, fines, or damages[63] Inflationary Impact 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] - Hotel expenses may increase at higher rates than hotel revenue[64] SEC Filings Availability 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 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][71] - Bryan A. Giglia is Executive Vice President and Chief Financial Officer, having joined the company in 2004 and holding various finance roles[72] - 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] Risk Factors 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][87][88][89][90] - 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][92] - 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] - 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] - 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][182] Unresolved Staff Comments The company has no unresolved staff comments from the SEC - No unresolved staff comments[219] Property Portfolio 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] Legal Proceedings 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] - 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] Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[223] PART II Common Equity Market and Stockholder Matters 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] - As of February 7, 2022, there were approximately 22 holders of record of the company's common stock[226] - 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] - 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] | 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 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 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] - 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] - 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][245][246][247] - 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][250][251] - 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][256][257][258] - 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] Company Structure and Portfolio 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] - 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] | 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 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] - The asset management team implemented detailed operating plans and safety precautions with third-party managers[240] - 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] - Labor challenges persisted in 2021, with hotels offering hiring events, sign-on/retention bonuses, and increased wages to attract and retain talented workers[242] Key Developments in 2021 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] - 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] - Acquired Montage Healdsburg for $265.0 million in April 2021 and Four Seasons Resort Napa Valley for $177.5 million in December 2021[245][246] - Sold Renaissance Westchester for $18.8 million gross proceeds and Embassy Suites La Jolla for $226.7 million gross proceeds in 2021[247] - 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][250][251] - 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][256][257][258] Revenue and Expense Analysis 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][260] - 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] | 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] - 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] - Interest expense decreased $22.4 million (42.0%) in 2021, primarily due to debt transactions and decreased interest on variable rate debt[277] - 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] - Adjusted EBITDAre, excluding noncontrolling interest, increased $155.4 million (176.2%) to $67.210 million in 2021 from $(88.148) million in 2020[294] - 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] Financial Position and Funding 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] | 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] - As of December 31, 2021, the company had $611.4 million of consolidated debt and total assets of $3.0 billion[313] - 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] | 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 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] - Quarterly revenue can be adversely affected by renovations, management effectiveness, and external factors such as economic conditions, pandemics, and natural disasters[327] | 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 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] - Hotel expenses may increase at higher rates than hotel revenue[329] Key Accounting Judgments 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] - 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] - Depreciation expense is based on estimated useful lives of assets, influenced by capital expenditures and market conditions[340] - Income taxes involve complex REIT qualification requirements, deferred tax assets/liabilities, valuation allowances, and uncertain tax positions[340] Recent Accounting Updates 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] Market Risk Disclosures 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] - As of December 31, 2021, 64.0% of the company's debt obligations had fixed interest rates[337] - 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] Financial Statements and Supplementary Data 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] Changes in and Disagreements with Accountants There have been no changes in or disagreements with accountants on accounting and financial disclosure - None[341] Controls and Procedures 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] - Management concluded that internal control over financial reporting was effective to the reasonable assurance level as of December 31, 2021[345] - 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][351] - 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] Other Information There is no other information to disclose under this item - None[359] Foreign Jurisdictions Disclosure There are no disclosures regarding foreign jurisdictions that prevent inspections - None[360] PART III Directors, Executive Officers and Corporate Governance 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] - 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] Executive Compensation 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] Security Ownership and Related Matters 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] | | 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 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] Principal Accountant Fees and Services 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] PART IV Exhibits and Financial Statement Schedules 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] - 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][372][373][374] Form 10-K Summary This item indicates that no summary is provided - None[375] 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][380] 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][391][392] - 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][396]