Sunstone Hotel Investors(SHO) - 2023 Q4 - Annual Report

PART I Business As a REIT, the company owns 14 upper upscale hotels, focusing on a value-add lifecycle investment approach with third-party management Portfolio Overview as of December 31, 2023 | Metric | Value | | :--- | :--- | | Number of Hotels | 14 | | Number of Rooms | 6,675 | | Locations | 6 states and Washington, DC | - The company's mission is to provide superior stockholder returns by investing in hotels where value can be added through capital investment, repositioning, and asset management, while actively recycling capital into new growth opportunities[16] - As of year-end 2023, hotels are managed by various third parties, including Marriott (6 hotels), Hyatt (2 hotels), and others like Four Seasons, Hilton, and Montage managing one hotel each[17] - As of February 23, 2024, the company had 40 employees; the workforce as of December 31, 2023, was approximately 40% female and 35% ethnic, racial minorities, and other underrepresented communities[48][52] Executive Officers as of February 23, 2024 | Name | Age | Position | | :--- | :--- | :--- | | Bryan A. Giglia | 47 | Chief Executive Officer | | Robert C. Springer | 46 | President and Chief Investment Officer | | David M. Klein | 54 | Executive Vice President and General Counsel | | Christopher G. Ostapovicz | 54 | Executive Vice President and Chief Operating Officer | | Aaron R. Reyes | 45 | Executive Vice President and Chief Financial Officer | Risk Factors The company faces material risks from industry competition, economic conditions, cybersecurity threats, and its REIT qualification requirements - The lodging industry is highly competitive, with competition based on location, price, service levels, and brand reputation; the company's upper upscale and luxury hotels are particularly susceptible to revenue decreases during economic downturns[75][78] - Cybersecurity breaches pose a significant risk, as the company and its third-party managers rely on IT systems that store sensitive guest data; past incidents at third-party managers have impacted company hotels[83][84] Geographic Concentration as of December 31, 2023 | State | Number of Hotels | Percentage of Total Rooms | Percentage of Total Consolidated Revenue | | :--- | :--- | :--- | :--- | | California | 5 | 39% | 44% | | Florida | 3 | 19% | 17% | | Hawaii | 1 | 8% | 17% | - The company faces risks from climate change, including physical risks like severe storms and transitional risks like increased regulation and shifts in consumer preferences[90][92] - As of December 31, 2023, the company had approximately $819.1 million of outstanding debt, which may restrict financial flexibility and requires a substantial portion of cash flow for debt service[148] - Failure to qualify as a REIT would result in federal and state corporate income tax on the company's income, substantially reducing cash available for distributions to stockholders[158] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - There are no unresolved staff comments[194] Cybersecurity The company's cybersecurity program relies on third-party hotel managers for property-level security while overseeing corporate systems internally - Due to its REIT structure, the company does not operate or manage its hotels and relies on third-party managers' programs to protect property-level systems from cybersecurity threats[195] - The company has implemented a corporate cybersecurity risk management program guided by frameworks such as ISO 27000 and NIST CSF[197] - The Board of Directors has delegated oversight of cybersecurity risk to the Audit Committee, which receives quarterly reports from management[200][201] Properties The company's portfolio consists of 14 Luxury and Upper Upscale hotels with 6,675 rooms across key US markets Hotel Portfolio Summary as of December 31, 2023 | Hotel | City | State | Chain Scale Segment | Rooms | Manager | | :--- | :--- | :--- | :--- | :--- | :--- | | Four Seasons Resort Napa Valley | Calistoga | California | Luxury | 85 | Four Seasons | | Hilton New Orleans St. Charles | New Orleans | Louisiana | Upper Upscale | 252 | IHR | | Hilton San Diego Bayfront | San Diego | California | Upper Upscale | 1,190 | Hilton | | Hyatt Regency San Francisco | San Francisco | California | Upper Upscale | 821 | Hyatt | | JW Marriott New Orleans | New Orleans | Louisiana | Luxury | 501 | Marriott | | Marriott Boston Long Wharf | Boston | Massachusetts | Upper Upscale | 415 | Marriott | | Montage Healdsburg | Healdsburg | California | Luxury | 130 | Montage | | Oceans Edge Resort & Marina | Key West | Florida | Upper Upscale | 175 | Singh | | Renaissance Long Beach | Long Beach | California | Upper Upscale | 374 | Marriott | | Renaissance Orlando at SeaWorld® | Orlando | Florida | Upper Upscale | 781 | Marriott | | The Bidwell Marriott Portland | Portland | Oregon | Upper Upscale | 258 | Sage | | The Confidante Miami Beach | Miami Beach | Florida | Upper Upscale | 339 | Hyatt | | The Westin Washington, DC Downtown | Washington DC | D.C. | Upper Upscale | 807 | Marriott | | Wailea Beach Resort | Wailea | Hawaii | Upper Upscale | 547 | Marriott | | Total | | | | 6,675 | | Legal Proceedings The company is not involved in any legal proceedings expected to have a material adverse effect on its financial condition - The company does not believe that any pending legal matters will have a material adverse effect on its financial position or results of operations[206] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[207] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE, and it maintains a stock repurchase program to return value to shareholders - The company's common stock is traded on the New York Stock Exchange under the symbol 'SHO'[209] - In February 2023, the board reauthorized the stock repurchase program, restoring the $500.0 million amount; from February 1 through December 31, 2023, the company repurchased 4,821,387 shares for $45.4 million, leaving $454.7 million remaining under the program[214] Common Stock Repurchases for Q4 2023 | Period | Total Number of Shares Purchased | Average Price Paid per Share | Maximum Dollar Value Remaining Under Program | | :--- | :--- | :--- | :--- | | Oct 1 - Oct 31, 2023 | 163,449 | $9.18 | $474,031,549 | | Nov 1 - Nov 30, 2023 | 1,553,308 | $9.73 | $458,913,642 | | Dec 1 - Dec 31, 2023 | 426,676 | $9.89 | $454,693,415 | | Total | 2,143,433 | $9.72 | $454,693,415 | Management's Discussion and Analysis of Financial Condition and Results of Operations Financial performance improved in 2023, driven by stronger urban travel demand, asset sales, and active capital management Portfolio Changes (2022-2023) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Hotels at start of year | 15 | 17 | | Acquisitions | 0 | 1 | | Dispositions | (1) | (3) | | Hotels at end of year | 14 | 15 | | Rooms at start of year | 7,735 | 8,544 | | Rooms from acquisitions | 0 | 339 | | Rooms from dispositions | (1,060) | (1,148) | | Rooms at end of year | 6,675 | 7,735 | - In October 2023, the company sold the Boston Park Plaza for gross proceeds of $370.0 million, recording a gain of $123.8 million[222] Consolidated Operating Results (in thousands) | | 2023 | 2022 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $986,480 | $912,053 | $74,427 | 8.2% | | Total operating expenses | $867,824 | $816,175 | $51,649 | 6.3% | | Gain on sale of assets | $123,820 | $22,946 | $100,874 | 439.6% | | NET INCOME | $206,708 | $90,766 | $115,942 | 127.7% | | INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS | $192,720 | $73,042 | $119,678 | 163.8% | Reconciliation of Net Income to Adjusted EBITDAre (in thousands) | | 2023 | 2022 | | :--- | :--- | :--- | | Net income | $206,708 | $90,766 | | EBITDAre | $266,191 | $227,959 | | Adjusted EBITDAre, excluding noncontrolling interest | $263,446 | $233,782 | Reconciliation of Net Income to Adjusted FFO (in thousands) | | 2023 | 2022 | | :--- | :--- | :--- | | Net income | $206,708 | $90,766 | | FFO attributable to common stockholders | $195,335 | $173,459 | | Adjusted FFO attributable to common stockholders | $196,513 | $184,628 | - As of December 31, 2023, the company had an unrestricted cash balance of $426.4 million and $500.0 million available for borrowing under its unsecured revolving credit facility[273] - Total debt as of December 31, 2023, was $819.1 million; approximately 51.2% of this debt had fixed interest rates or had been swapped to fixed rates[274][277] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate exposure from its variable-rate debt, which is partially mitigated by derivatives - The company uses derivative financial instruments, such as interest rate caps and swaps, to manage interest rate risk on its floating rate debt[292] - As of December 31, 2023, 51.2% of the company's debt obligations were fixed or subject to interest rate swaps; a 50 basis point change in market interest rates on its variable rate debt would change annualized interest expense by approximately $2.0 million[293] Financial Statements and Supplementary Data This section incorporates by reference the company's audited consolidated financial statements and supplementary data - This item refers to the consolidated financial statements and the report of the independent registered public accounting firm, which are included later in the filing[294] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None reported[295] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of year-end - The CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the period[296] - Management concluded that internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework[299] - Ernst & Young LLP, the independent registered public accounting firm, issued an unqualified audit report on the effectiveness of the company's internal control over financial reporting[300] Other Information The company reports no other information under this item - None[313] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections The company reports no information under this item - None[314] PART III Directors, Executive Officers and Corporate Governance Information regarding directors and corporate governance is incorporated by reference from the company's 2024 Proxy Statement - The required information is incorporated by reference from the definitive Proxy Statement to be filed with the SEC[316] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's definitive Proxy Statement - The required information is incorporated by reference from the definitive Proxy Statement to be filed with the SEC[317] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the company's definitive Proxy Statement - Most of the required information is incorporated by reference from the definitive Proxy Statement[318] - As of December 31, 2023, 2,581,199 securities were available for future issuance under the 2022 Incentive Award Plan[320] Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the Proxy Statement - The required information is incorporated by reference from the definitive Proxy Statement to be filed with the SEC[321] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the Proxy Statement - The required information is incorporated by reference from the definitive Proxy Statement to be filed with the SEC[322] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Annual Report - This item provides an index of all financial statements, schedules, and exhibits filed with or incorporated by reference into the Form 10-K[324] Form 10-K Summary The company reports no information for the Form 10-K Summary - None[330] Financial Statements and Notes Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued unqualified opinions on the company's financial statements and internal controls over financial reporting - Ernst & Young LLP issued an unqualified opinion, stating the financial statements are fairly presented in conformity with U.S. GAAP[343] - The audit firm also provided an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2023[344] - The impairment assessment of hotel properties was identified as a Critical Audit Matter due to the significant management judgment required to identify impairment indicators[347][348][349] Consolidated Financial Statements The financial statements show significant net income growth in 2023, driven by higher revenues and gains on asset sales Consolidated Balance Sheet Highlights (in thousands) | | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Investment in hotel properties, net | $2,585,279 | $2,840,928 | | Cash and cash equivalents | $426,403 | $101,223 | | Total assets | $3,149,321 | $3,082,817 | | Debt, net | $814,559 | $812,681 | | Total liabilities | $982,683 | $997,856 | | Total stockholders' equity | $2,166,638 | $2,084,961 | Consolidated Statement of Operations Highlights (in thousands) | | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :--- | :--- | :--- | | Total revenues | $986,480 | $912,053 | | Total operating expenses | $867,824 | $816,175 | | Gain on sale of assets | $123,820 | $22,946 | | Net Income | $206,708 | $90,766 | | Income attributable to common stockholders | $192,720 | $73,042 | | Diluted EPS | $0.93 | $0.34 | Consolidated Cash Flow Highlights (in thousands) | | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $198,131 | $209,384 | | Net cash provided by (used in) investing activities | $258,082 | $(165,721) | | Net cash used in financing activities | $(119,721) | $(49,174) | | Net increase (decrease) in cash | $336,492 | $(5,511) | Notes to Consolidated Financial Statements The notes detail key financial activities, including asset sales, debt management, equity repurchases, and capital expenditure commitments - In June 2022, the company acquired The Confidante Miami Beach for $232.0 million and the remaining 25% interest in the Hilton San Diego Bayfront for a total of $104.5 million[422][423] - In October 2023, the company sold the Boston Park Plaza for net proceeds of $364.5 million, recognizing a gain of $123.8 million[427] Notes Payable Summary as of Dec 31, 2023 (in thousands) | Debt Type | Balance Outstanding | | :--- | :--- | | Mortgage Loans | $74,050 | | Unsecured Corporate Credit Facilities | $575,000 | | Unsecured Senior Notes | $170,000 | | Total debt | $819,050 | - In May 2023, the company entered into a new $225.0 million term loan (Term Loan 3) and used the proceeds to repay the $220.0 million mortgage on the Hilton San Diego Bayfront[449][450] - As of December 31, 2023, the company had outstanding construction commitments totaling $64.3 million for ongoing hotel renovations[507]