Sunstone Hotel Investors(SHO) - 2024 Q1 - Quarterly Report

PART I—FINANCIAL INFORMATION This section presents the Company's unaudited consolidated financial statements, management's discussion, and market risk disclosures Item 1. Financial Statements This section presents the Company's unaudited consolidated financial statements and related notes, detailing financial position, performance, and cash flows, with Q1 2024 revenues and net income declining due to renovations and a property disposition Consolidated Balance Sheets This section provides a snapshot of the Company's assets, liabilities, and equity at specific points in time Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2024 | December 31, 2023 | | :----------------------------------- | :------------- | :------------------ | | Total assets | $3,142,100 | $3,149,321 | | Cash and cash equivalents | $400,678 | $426,403 | | Debt, net of unamortized deferred financing costs | $814,410 | $814,559 | | Total liabilities | $980,804 | $982,683 | | Total stockholders' equity | $2,161,296 | $2,166,638 | Unaudited Consolidated Statements of Operations This section details the Company's revenues, expenses, and net income over a specific period Consolidated Statements of Operations Highlights (Three Months Ended March 31, in thousands, except per share data) | Metric | 2024 | 2023 | Change ($) | Change (%) | | :----------------------------------- | :----- | :----- | :--------- | :--------- | | Total revenues | $217,166 | $243,443 | $(26,277) | (10.8)% | | Total operating expenses | $199,907 | $218,654 | $(18,747) | (8.6)% | | Interest and other income | $5,453 | $541 | $4,912 | 907.9% | | Interest expense | $(11,010) | $(13,794) | $2,784 | 20.2% | | NET INCOME | $13,035 | $21,087 | $(8,052) | (38.2)% | | INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS | $9,352 | $17,319 | $(7,967) | (46.0)% | | Basic and diluted per share amounts | $0.05 | $0.08 | $(0.03) | (37.5)% | Unaudited Consolidated Statements of Equity This section outlines changes in the Company's equity, including net income, distributions, and stock transactions Changes in Stockholders' Equity (Three Months Ended March 31, in thousands) | Metric | March 31, 2024 | December 31, 2023 | | :----------------------------------- | :------------- | :------------------ | | Balance at period end | $2,161,296 | $2,166,638 | | Net income | $13,035 | $21,087 | | Common stock distributions declared | $(14,364) | $(10,449) | | Preferred stock dividends declared | $(3,683) | $(3,768) | | Issuance of restricted common stock, net | $(3,217) | $(3,348) | Unaudited Consolidated Statements of Cash Flows This section categorizes cash inflows and outflows from operating, investing, and financing activities Consolidated Statements of Cash Flows Highlights (Three Months Ended March 31, in thousands) | Cash Flow Activity | 2024 | 2023 | | :----------------------------------- | :----- | :----- | | Net cash provided by operating activities | $38,484 | $47,248 | | Net cash used in investing activities | $(27,664) | $(22,474) | | Net cash used in financing activities | $(33,523) | $(36,479) | | Net decrease in cash and cash equivalents and restricted cash | $(22,703) | $(11,705) | | Cash and cash equivalents and restricted cash, end of period | $470,995 | $145,501 | Notes to Unaudited Consolidated Financial Statements This section provides detailed explanations of the accounting policies, significant estimates, and specific financial statement line items 1. Organization and Description of Business This note describes the Company's business as a REIT and its hotel portfolio - Sunstone Hotel Investors, Inc. operates as a self-managed and self-administered Real Estate Investment Trust (REIT), investing in hotels through its Operating Partnership and TRS Lessee[27] - As of March 31, 2024, the Company owned 14 hotels, a decrease from 15 hotels as of March 31, 2023[29] 2. Summary of Significant Accounting Policies This note outlines the key accounting principles and methods used in preparing the financial statements - The Company applies the two-class method for computing earnings per share, including unvested share-based payment awards with non-forfeitable dividend rights as participating securities[35][37] - No hotels were impaired during the three months ended March 31, 2024, and 2023, following recoverability assessments[48] - The Company is currently evaluating new accounting standards ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Tax Disclosures) for additional disclosure requirements[63][64] 3. Investment in Hotel Properties This note details the Company's investment in hotel properties, including gross value and depreciation Investment in Hotel Properties, Net (in thousands) | Metric | March 31, 2024 | December 31, 2023 | | :----------------------------------- | :------------- | :------------------ | | Investment in hotel properties, gross | $3,745,134 | $3,712,685 | | Accumulated depreciation and amortization | $(1,156,285) | $(1,127,406) | | Investment in hotel properties, net | $2,588,849 | $2,585,279 | | Construction in progress | $75,672 | $61,247 | 4. Fair Value Measurements and Interest Rate Derivatives This note provides information on the fair value of financial instruments and derivative contracts Interest Rate Derivatives Fair Value (in thousands) | Metric | March 31, 2024 | December 31, 2023 | | :--------------------------------- | :------------- | :---------------- | | Estimated Fair Value of Assets (Liabilities) | $2,058 | $16 | | Noncash interest on derivatives, net (Q1) | $(2,042) | $1,832 | Fair Value of Debt (in thousands) | Metric | March 31, 2024 | December 31, 2023 | | :-------------------- | :------------- | :---------------- | | Carrying Amount | $818,512 | $819,050 | | Fair Value | $806,482 | $805,212 | 5. Prepaid Expenses and Other Assets This note details the components of prepaid expenses and other current assets Prepaid Expenses and Other Assets, Net (in thousands) | Metric | March 31, 2024 | December 31, 2023 | | :----------------------------------- | :------------- | :------------------ | | Total prepaid expenses and other assets, net | $33,943 | $26,383 | | Prepaid expenses | $14,316 | $8,123 | | Interest rate derivatives | $2,058 | $417 | 6. Notes Payable This note outlines the Company's debt structure, including mortgage loans and credit facilities Notes Payable (in thousands) | Debt Type | March 31, 2024 | December 31, 2023 | | :----------------------------------- | :------------- | :------------------ | | Mortgage Loans | $73,512 | $74,050 | | Unsecured Corporate Credit Facilities | $575,000 | $575,000 | | Unsecured Senior Notes | $170,000 | $170,000 | | Total debt | $818,512 | $819,050 | | Debt, net of unamortized deferred financing costs | $814,410 | $814,559 | Interest Expense (Three Months Ended March 31, in thousands) | Metric | 2024 | 2023 | | :----------------------------------- | :----- | :----- | | Interest expense on debt | $12,313 | $11,417 | | Noncash interest on derivatives, net | $(2,042) | $1,832 | | Amortization of deferred financing costs | $739 | $545 | | Total interest expense | $11,010 | $13,794 | - Approximately 51.1% of the Company's outstanding debt had fixed interest rates or had been swapped to fixed interest rates as of March 31, 2024[76][142] 7. Other Liabilities This note details various other liabilities, including advance deposits and taxes payable Other Liabilities (in thousands) | Metric | March 31, 2024 | December 31, 2023 | | :----------------------------------- | :------------- | :------------------ | | Total other liabilities | $84,485 | $73,014 | | Advance deposits | $61,650 | $45,432 | | Property, sales and use taxes payable | $10,070 | $6,903 | 8. Leases This note provides information on the Company's operating lease assets and obligations Operating Lease Information (in thousands) | Metric | March 31, 2024 | December 31, 2023 | | :----------------------------------- | :------------- | :------------------ | | Right-of-use assets, net | $11,619 | $12,755 | | Lease obligations | $15,588 | $16,735 | | Weighted average remaining lease term | 29 years | N/A | | Weighted average discount rate | 5.4% | N/A | Components of Lease Expense (Three Months Ended March 31, in thousands) | Metric | 2024 | 2023 | | :----------------------------------- | :----- | :----- | | Operating lease cost | $1,352 | $1,359 | | Variable lease cost | $2,135 | $2,086 | | Sublease income | $(297) | $(297) | | Total lease cost | $3,190 | $3,148 | 9. Stockholders' Equity This note details changes in stockholders' equity, including preferred stock dividends and share repurchases - The annual dividend rate for Series G preferred stock increased in January 2024 to the greater of 3.0% or the Montage Healdsburg's annual net operating income yield, with a further increase to 4.5% expected in the second half of 2024[85][148][149] Stock Repurchase Program Activity (Three Months Ended March 31, in thousands, except share data) | Metric | 2024 | 2023 | | :----------------------------------- | :----- | :----- | | Number of common shares repurchased | — | 1,964,923 | | Cost, including fees and commissions | $— | $18,626 | | Amount available for repurchase (as of Mar 31) | $454,700 | N/A | - The Company has $300.0 million available under its 'At the Market' Agreements, with no common stock issued in Q1 2024 or Q1 2023[90] 10. Incentive Award Plan This note describes the Company's incentive award plan and related compensation expenses Amortization Expense for Incentive Awards (Three Months Ended March 31, in thousands) | Metric | 2024 | 2023 | | :----------------------------------- | :----- | :----- | | Amortization expense, including forfeitures | $2,770 | $2,427 | | Capitalized compensation cost | $117 | $118 | Non-Vested Restricted Stock Award Activity (Three Months Ended March 31, 2024) | Metric | Number of Shares | Weighted-Average Grant Date Fair Value | | :----------------------------------- | :--------------- | :------------------------------------- | | Unvested at January 1, 2024 | 1,032,266 | $11.11 | | Granted | 369,075 | $10.76 | | Vested | (471,413) | $11.20 | | Unvested at March 31, 2024 | 929,928 | $10.93 | Non-Vested Restricted Stock Unit Activity (Target Performance, Three Months Ended March 31, 2024) | Metric | Target Number of Shares | Weighted-Average Grant Date Fair Value | | :----------------------------------- | :---------------------- | :------------------------------------- | | Unvested at January 1, 2024 | 1,076,160 | $10.69 | | Granted | 475,746 | $11.50 | | Vested | (119,732) | $11.21 | | Forfeited | (50,100) | $11.21 | | Unvested at March 31, 2024 | 1,382,074 | $10.90 | 11. Commitments and Contingencies This note outlines the Company's contractual commitments, management fees, and potential liabilities Management Fees (Three Months Ended March 31, in thousands) | Metric | 2024 | 2023 | | :----------------------------------- | :----- | :----- | | Basic management fees | $5,974 | $6,728 | | Incentive management fees | $3,029 | $3,527 | | Total basic and incentive management fees | $9,003 | $10,255 | Franchise Costs (Three Months Ended March 31, in thousands) | Metric | 2024 | 2023 | | :----------------------------------- | :----- | :----- | | Franchise assessments | $3,882 | $3,611 | | Franchise royalties | $323 | $307 | | Total franchise costs | $4,205 | $3,918 | - As of March 31, 2024, the Company had $85.4 million in remaining commitments for ongoing hotel renovations[102] Geographic Concentration of Hotels (as of March 31, 2024) | Location | Number of Hotels | Percentage of Total Rooms | Trailing 12-Month Total Consolidated Revenue | | :--------- | :--------------- | :------------------------ | :------------------------------------------ | | California | 5 | 39% | 44% | | Florida | 3 | 19% | 15% | | Hawaii | 1 | 8% | 17% | 12. Subsequent Event This note discloses significant events occurring after the balance sheet date, such as property acquisitions - On April 23, 2024, the Company acquired the Hyatt Regency San Antonio Riverwalk for $230.0 million, funded by available cash and proceeds from a prior hotel sale[111] - In connection with the acquisition, Hyatt Corporation will contribute $8.0 million of key money[111] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the Company's financial condition and operating results for Q1 2024, highlighting revenue and net income declines due to renovations and a property disposition, alongside discussions on liquidity, capital, and critical accounting estimates Overview This section provides a general description of the Company's business and hotel portfolio - Sunstone Hotel Investors, Inc. operates as a self-managed and self-administered REIT, owning 14 upper upscale and luxury hotels in urban and resort destinations as of March 31, 2024[119][120] Operating Activities This section describes the Company's revenue sources, expense categories, and key performance indicators - Revenues are primarily derived from room, food and beverage, and other operating activities, while expenses include various property-level and corporate overhead costs[121][122] - Key performance indicators include Occupancy, Average Daily Rate (ADR), Revenue per Available Room (RevPAR), EBITDAre, and Funds From Operations (FFO), with both GAAP and non-GAAP adjustments used for evaluation[124][125][126] - Operating results are influenced by overall demand for hotel rooms, new hotel development (supply), and the effectiveness of operators in managing revenues and expenses, with economic conditions and inflationary pressures being significant factors[127] Operating Results This section presents a detailed comparison of the Company's financial performance for the current and prior periods Summary of Operating Results (Three Months Ended March 31, in thousands, except statistical data) | Metric | 2024 | 2023 | Change ($) | Change (%) | | :----------------------------------- | :----- | :----- | :--------- | :--------- | | Total revenues | $217,166 | $243,443 | $(26,277) | (10.8)% | | NET INCOME | $13,035 | $21,087 | $(8,052) | (38.2)% | | INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS | $9,352 | $17,319 | $(7,967) | (46.0)% | | Interest and other income | $5,453 | $541 | $4,912 | 907.9% | | Interest expense | $(11,010) | $(13,794) | $2,784 | 20.2% | - Room revenue decreased by $16.6 million (10.9%) in Q1 2024, primarily due to a $9.4 million decrease from two renovation hotels (The Confidante Miami Beach and Renaissance Long Beach) and an $11.2 million decrease from the sale of the Boston Park Plaza[130][131] Comparable Portfolio Performance (12 hotels, Three Months Ended March 31) | Metric | 2024 | 2023 | Change | | :-------------------- | :----- | :----- | :----- | | Occupancy | 72.5% | 69.5% | +300 bps | | ADR | $329.75 | $337.27 | (2.2)% | | RevPAR | $239.07 | $234.40 | +2.0% | Non-GAAP Financial Measures (Three Months Ended March 31, in thousands) | Metric | 2024 | 2023 | Change ($) | Change (%) | | :----------------------------------- | :----- | :----- | :--------- | :--------- | | Adjusted EBITDAre | $54,511 | $60,029 | $(5,518) | (9.2)% | | Adjusted FFO attributable to common stockholders | $37,518 | $43,824 | $(6,306) | (14.4)% | Liquidity and Capital Resources This section discusses the Company's cash flows, available capital, and contractual obligations - Net cash provided by operating activities decreased to $38.5 million in Q1 2024 from $47.2 million in Q1 2023, primarily due to decreased operating cash at renovation hotels, the Boston Park Plaza sale, and higher interest payments[164][166] - Net cash used in investing activities increased to $27.7 million in Q1 2024 from $22.5 million in Q1 2023, driven by renovations and additions to hotel properties[167] - As of March 31, 2024, the Company had an unrestricted cash balance of $400.7 million, with $500.0 million capacity available under its unsecured revolving credit facility[173][174] Contractual Obligations (as of March 31, 2024, in thousands) | Obligation | Total | Less Than 1 year | 1 to 3 years | 3 to 5 years | More than 5 years | | :--------------------------------- | :------ | :--------------- | :----------- | :----------- | :---------------- | | Notes payable | $818,512 | $73,512 | $290,000 | $455,000 | $— | | Interest obligations on notes payable | $145,026 | $46,683 | $77,634 | $20,709 | $— | | Operating lease obligations | $14,616 | $5,889 | $5,524 | $2,153 | $1,050 | | Construction commitments | $85,428 | $85,428 | $— | $— | $— | Inflation This section addresses the impact of inflationary pressures on the Company's expenses and pricing strategies - Inflation negatively impacts expenses such as wages, benefits, food, commodity costs, property taxes, insurance, utilities, and borrowing costs[183] - The Company relies on hotel operators to adjust room rates and pricing to mitigate inflation, but competitive pressures may limit this ability[183] Seasonality and Volatility This section explains the seasonal nature of the lodging industry and factors causing operating result volatility - The lodging industry experiences seasonality, leading to quarterly fluctuations in revenues[184] - Operating results are subject to volatility from factors including renovations, economic conditions, natural disasters, competition, and changes in travel patterns[185] Critical Accounting Estimates This section identifies key accounting estimates requiring significant management judgment and assumptions - Critical accounting estimates include impairment of investments in hotel properties, depreciation and amortization expense, and income taxes, all requiring significant management judgment and assumptions about future events[187][188][189] Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company's primary market risk exposure is to variable interest rates on its debt. It uses derivative financial instruments to manage this risk, with 51.1% of its debt fixed or swapped to fixed rates. A 50 basis point change in variable rates would impact annual interest expense by approximately $2.0 million - The Company's primary market risk is from variable interest rates on its debt[191] - As of March 31, 2024, 51.1% of the Company's debt obligations were fixed or subject to interest rate swap derivatives[192] - A 50 basis point increase or decrease in variable interest rates would result in an approximate $2.0 million annual change in interest expense[192] Item 4. Controls and Procedures The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2024. No material changes in internal control over financial reporting occurred during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2024[194] - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2024[195] PART II—OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal, risk, and equity matters Item 1. Legal Proceedings The Company reported no legal proceedings for the quarter ended March 31, 2024 - No legal proceedings were reported for the quarter ended March 31, 2024[197] Item 1A. Risk Factors No new material risk factors were identified in this quarterly report. The Company refers to the risks detailed in its Annual Report on Form 10-K - No new risk factors were reported in this quarterly period[198] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the common stock withheld by the Company to cover employee tax obligations related to restricted share vesting. The Company's stock repurchase program had $454.7 million remaining as of March 31, 2024, with no repurchases under the program during the quarter Common Stock Withheld for Employee Tax Obligations (Quarter Ended March 31, 2024) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--------------------------------- | :------------------------- | :------------------------- | | January 1, 2024 - January 31, 2024 | 66,429 | $10.64 | | February 1, 2024 - February 29, 2024 | 207,785 | $11.02 | | March 1, 2024 - March 31, 2024 | 19,780 | $11.16 | | Total | 293,994 | $10.94 | - As of March 31, 2024, $454.7 million remained available for repurchase under the Company's stock repurchase program, with no repurchases made during the quarter[201][204] Item 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities for the quarter ended March 31, 2024 - No defaults upon senior securities were reported for the quarter ended March 31, 2024[202] Item 4. Mine Safety Disclosures The Company reported no mine safety disclosures for the quarter ended March 31, 2024 - No mine safety disclosures were reported for the quarter ended March 31, 2024[203] Item 5. Other Information No other information was reported, specifically no Rule 10b5-1 trading arrangements were adopted or terminated by directors or officers during the quarter - No Rule 10b5-1 trading arrangements were adopted or terminated by directors or officers during the quarter ended March 31, 2024[205] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including corporate governance documents, certifications from executive officers, and XBRL financial data files - Exhibits include Articles of Amendment and Restatement, Bylaws, Articles Supplementary for various preferred stock series, Certifications of Principal Executive and Financial Officers, and XBRL Instance, Schema, Calculation, Label, and Presentation Linkbase Documents[206] SIGNATURES The report was duly signed on May 6, 2024, by Aaron R. Reyes, Chief Financial Officer of Sunstone Hotel Investors, Inc - The report was signed by Aaron R. Reyes, Chief Financial Officer, on May 6, 2024[211]