Sunstone Hotel Investors(SHO) - 2021 Q2 - Quarterly Report

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