Table of Contents
UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2025
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-32319
Sunstone Hotel Investors, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Maryland
20-1296886
(State or Other Jurisdiction ofIncorporation or Organization)
(I.R.S. EmployerIdentification Number)
15 Enterprise, Suite 200Aliso Viejo, California
92656
(Address of Principal Executive Offices)
(Zip Code)
Registrant’s telephone number, including area code: (949) 330-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
SHO
New York Stock Exchange
Series H Cumulative Redeemable Preferred Stock, $0.01 par value
SHO.PRH
Series I Cumulative Redeemable Preferred Stock, $0.01 par value
SHO.PRI
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of April 30, 2025, there were 198,858,961 shares of Sunstone Hotel Investors, Inc.’s common stock, $0.01 par value per share, outstanding.
SUNSTONE HOTEL INVESTORS, INC.
QUARTERLY REPORT ON
For the Quarterly Period Ended March 31, 2025
TABLE OF CONTENTS
Page
PART I—FINANCIAL INFORMATION
Item 1.
Financial Statements
2
Consolidated Balance Sheets as of March 31, 2025 (unaudited) and December 31, 2024
Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2025 and 2024
3
Unaudited Consolidated Statements of Equity for the Three Months Ended March 31, 2025 and 2024
4
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2025 and 2024
6
Notes to Unaudited Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
22
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
35
Item 4.
Controls and Procedures
PART II—OTHER INFORMATION
Legal Proceedings
36
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
37
SIGNATURES
38
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
March 31,
December 31,
2025
2024
(unaudited)
ASSETS
Investment in hotel properties, net
$
2,855,188
2,856,032
Operating lease right-of-use assets, net
7,782
8,464
Cash and cash equivalents
72,334
107,199
Restricted cash
76,460
73,078
Accounts receivable, net
50,371
34,109
Prepaid expenses and other assets, net
34,547
27,757
Total assets
3,096,682
3,106,639
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Debt, net of unamortized deferred financing costs
841,559
841,047
Operating lease obligations
11,196
12,019
Accounts payable and accrued expenses
58,264
52,722
Dividends and distributions payable
22,742
24,137
Other liabilities
85,413
72,694
Total liabilities
1,019,174
1,002,619
Commitments and contingencies (Note 13)
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, 100,000,000 shares authorized:
Series G Cumulative Redeemable Preferred Stock, 2,650,000 shares issued and outstanding at both March 31, 2025 and December 31, 2024, stated at liquidation preference of $25.00 per share
66,250
6.125% Series H Cumulative Redeemable Preferred Stock, 4,600,000 shares issued and outstanding at both March 31, 2025 and December 31, 2024, stated at liquidation preference of $25.00 per share
115,000
5.70% Series I Cumulative Redeemable Preferred Stock, 4,000,000 shares issued and outstanding at both March 31, 2025 and December 31, 2024, stated at liquidation preference of $25.00 per share
100,000
Common stock, $0.01 par value, 500,000,000 shares authorized, 200,369,510 shares issued and outstanding at March 31, 2025 and 200,824,993 shares issued and outstanding at December 31, 2024
2,004
2,008
Additional paid in capital
2,385,648
2,395,702
Distributions in excess of retained earnings
(591,394)
(574,940)
Total stockholders’ equity
2,077,508
2,104,020
Total liabilities and stockholders' equity
See accompanying notes to unaudited consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended March 31,
REVENUES
Room
144,921
135,815
Food and beverage
67,128
61,339
Other operating
22,016
20,012
Total revenues
234,065
217,166
OPERATING EXPENSES
39,110
35,551
48,821
44,315
5,860
5,944
Advertising and promotion
13,116
12,132
Repairs and maintenance
9,685
8,710
Utilities
6,741
Franchise costs
4,459
4,205
Property tax, ground lease and insurance
18,897
18,925
Other property-level expenses
29,725
27,623
Corporate overhead
8,905
7,518
Depreciation and amortization
32,275
29,040
Total operating expenses
217,594
199,907
Interest and other income
1,564
5,453
Interest expense
(12,682)
(11,010)
Gain on sale of assets, net
—
457
Gain on extinguishment of debt
21
Income before income taxes
5,353
12,180
Income tax (provision) benefit, net
(98)
855
NET INCOME
5,255
13,035
Preferred stock dividends
(3,931)
(3,683)
INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
1,324
9,352
Basic and diluted per share amounts:
Basic income attributable to common stockholders per common share
0.01
0.05
Diluted income attributable to common stockholders per common share
Basic weighted average common shares outstanding
200,410
202,631
Diluted weighted average common shares outstanding
201,444
202,958
UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY
Distributions
Preferred Stock
Common Stock
in Excess of
Number of
Additional
Retained
Shares
Amount
Paid in Capital
Earnings
Total Equity
Balance at December 31, 2024 (audited)
11,250,000
281,250
200,824,993
Amortization of deferred stock compensation
2,236
Issuance of restricted common stock, net
367,149
(4,282)
(4,278)
Forfeiture of restricted common stock
(861)
Common stock distributions declared at $0.09 per share
(17,778)
Series G preferred stock dividends declared at $0.281250 per share
(745)
Series H preferred stock dividends declared at $0.382813 per share
(1,761)
Series I preferred stock dividends declared at $0.356250 per share
(1,425)
Repurchases of outstanding common stock
(821,771)
(8)
(8,008)
(8,016)
Net income
Balance at March 31, 2025
200,369,510
Balance at December 31, 2023 (audited)
203,479,585
2,035
2,416,417
(533,064)
2,166,638
2,887
194,813
(3,219)
(3,217)
Common stock distributions declared at $0.07 per share
(14,364)
Series G preferred stock dividends declared at $0.187500 per share
(497)
Balance at March 31, 2024
203,674,398
2,037
2,416,085
(538,076)
2,161,296
5
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by operating activities:
Bad debt expense
76
80
(457)
(21)
Noncash interest on derivatives, net
982
(2,042)
Depreciation
31,894
28,782
Amortization of franchise fees and other intangibles
381
258
Amortization of deferred financing costs
863
739
2,064
2,770
Gain on insurance recoveries
(99)
Changes in operating assets and liabilities:
(16,312)
(5,568)
Prepaid expenses and other assets
(7,633)
(6,400)
Accounts payable and other liabilities
14,701
7,319
Operating lease right-of-use assets and obligations
(141)
(11)
Net cash provided by operating activities
32,031
38,484
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from property insurance
73
Renovations and additions to hotel properties and other assets
(28,189)
(27,664)
Net cash used in investing activities
(28,116)
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchases of common stock for employee tax obligations
Payments on notes payable
(537)
Dividends and distributions paid
(23,104)
(29,769)
Net cash used in financing activities
(35,398)
(33,523)
Net decrease in cash and cash equivalents and restricted cash
(31,483)
(22,703)
Cash and cash equivalents and restricted cash, beginning of period
180,277
493,698
Cash and cash equivalents and restricted cash, end of period
148,794
470,995
Supplemental Disclosure of Cash Flow Information
400,678
70,317
Total cash and cash equivalents and restricted cash shown on the consolidated statements of cash flows
Cash paid for interest, net of capitalized interest
13,004
15,306
Cash (refunds) paid for income taxes, net
(145)
3,137
Operating cash flows used for operating leases
1,505
1,360
Changes in operating lease right-of-use assets
1,203
1,136
Changes in operating lease obligations
(1,344)
(1,147)
Changes in operating lease right-of-use assets and lease obligations, net
Supplemental Disclosure of Noncash Investing and Financing Activities
Accrued renovations and additions to hotel properties and other assets
19,642
14,512
Operating lease right-of-use asset obtained in exchange for operating lease obligation
521
Amortization of deferred stock compensation — construction activities
172
117
18,243
7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
Sunstone Hotel Investors, Inc. (the “Company”) was incorporated in Maryland on June 28, 2004 in anticipation of an initial public offering of common stock, which was consummated on October 26, 2004. The Company elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes, commencing with its taxable year ended on December 31, 2004. The Company, through its 100% controlling interest in Sunstone Hotel Partnership, LLC (the “Operating Partnership”), of which the Company is the sole managing member, and the subsidiaries of the Operating Partnership, including Sunstone Hotel TRS Lessee, Inc. (the “TRS Lessee”) and its subsidiaries, invests in hotels where it can add value through capital investment, hotel repositioning, and asset management. In addition, the Company seeks to capitalize on its portfolio’s embedded value and balance sheet strength to actively recycle past investments into new growth and value creation opportunities in order to deliver strong stockholder returns and superior per share net asset value growth.
As a REIT, certain tax laws limit the amount of “non-qualifying” income the Company can earn, including income derived directly from the operation of hotels. The Company leases all of its hotels to its TRS Lessee, which in turn enters into long-term management agreements with third parties to manage the operations of the Company’s hotels, in transactions that are intended to generate qualifying income.
As of March 31, 2025, the Company owned 15 hotels.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
Principles of Consolidation
The accompanying consolidated financial statements as of March 31, 2025 and December 31, 2024, and for the three months ended March 31, 2025 and 2024, include the accounts of the Company, the Operating Partnership, the TRS Lessee and their controlled subsidiaries. All significant intercompany balances and transactions have been eliminated. If the Company determines that it has an interest in a variable interest entity, the Company will consolidate the entity when it is determined to be the primary beneficiary of the entity.
The accompanying interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and in conformity with the rules and regulations of the Securities and Exchange Commission (“SEC”). In the Company’s opinion, the interim financial statements presented herein reflect all adjustments, consisting solely of normal and recurring adjustments, which are necessary to fairly present the interim financial statements. These financial statements should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024, filed with the SEC on February 21, 2025. Operating results for the three months ended March 31, 2025 are not necessarily indicative of the results that may be expected for the year ending December 31, 2025.
The Company does not have any comprehensive income other than what is included in net income. If the Company has any comprehensive income in the future such that a statement of comprehensive income would be necessary, the Company will include such statement in one continuous consolidated statement of operations.
The Company has evaluated subsequent events through the date of issuance of these financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
Summary of Significant Accounting Policies
The Company’s Annual Report on Form 10-K for the year ended December 31, 2024, filed with the SEC on February 21, 2025, contains a discussion of significant accounting policies. There have been no changes to our significant accounting policies since December 31, 2024.
New Accounting Standards and Accounting Changes
In November 2024, the Financial Accounting Standards Board issued Accounting Standards Update No. 2024-03, “Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses” (“ASU 2024-03”), to improve the disclosures about a public business entity’s expenses and address requests from investors for more detailed information about the types of expenses (including purchases of inventory, employee compensation, depreciation, and amortization) in each income statement line item that contains those expenses. All entities are required to apply the guidance prospectively and may apply it retrospectively. ASU 2024-03 is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted. The Company is currently evaluating ASU 2024-03’s additional disclosure requirements.
3. Investment in Hotel Properties
Investment in hotel properties, net consisted of the following (in thousands):
Land
645,884
Buildings and improvements
2,849,713
2,824,364
Furniture, fixtures and equipment
462,531
445,696
Intangible assets
44,063
Construction in progress
136,355
147,250
Investment in hotel properties, gross
4,138,546
4,107,257
Accumulated depreciation and amortization
(1,283,358)
(1,251,225)
4. Fair Value Measurements and Interest Rate Derivatives
Fair Value Measurements
As of March 31, 2025 and December 31, 2024, the carrying amount of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable and accounts payable and accrued expenses were representative of their fair values due to the short-term maturity of these instruments.
A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability in an orderly transaction. The hierarchy for inputs used in measuring fair value is as follows:
Level 1
Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2
Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3
Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
9
As of both March 31, 2025 and December 31, 2024, the Company measured its interest rate derivatives at fair value on a recurring basis. The Company estimated the fair value of its interest rate derivatives using Level 2 measurements based on quotes obtained from the counterparties, which are based upon the consideration that would be required to terminate the agreements.
Fair Value of Debt
As of March 31, 2025 and December 31, 2024, 52.7% and 40.8%, respectively, of the Company’s outstanding debt had fixed interest rates, including the effects of interest rate swap derivatives. The Company uses Level 3 measurements to estimate the fair value of its debt by discounting the future cash flows of each instrument at estimated market rates.
The Company’s principal balances and fair market values of its consolidated debt as of March 31, 2025 (unaudited) and December 31, 2024 were as follows (in thousands):
March 31, 2025
December 31, 2024
Carrying Amount (1)
Fair Value (2)
Debt
845,000
839,666
841,027
Interest Rate Derivatives
The Company’s interest rate derivatives, which are not designated as effective cash flow hedges, consisted of the following at March 31, 2025 (unaudited) and December 31, 2024 (in thousands):
Estimated Fair Value of Assets (Liabilities) (1)
Effective
Maturity
Notional
Hedged Debt
Type
Fixed Rate
Index
Date
Term Loan 1
Swap
3.675
%
CME Term SOFR
March 17, 2023
March 17, 2026
75,000
193
370
3.931
September 14, 2023
September 14, 2026
(206)
186
Term Loan 4
4.020
January 31, 2025
November 7, 2026
(413)
(426)
556
Noncash changes in the fair values of the Company’s interest rate derivatives resulted in an increase (decrease) to interest expense for the three months ended March 31, 2025 and 2024 as follows (unaudited and in thousands):
10
5. Prepaid Expenses and Other Assets
Prepaid expenses and other assets, net consisted of the following (in thousands):
Prepaid expenses
17,807
10,488
Inventory
10,820
10,497
Deferred financing costs
1,872
2,223
Property and equipment, net
2,078
2,267
Interest rate derivatives
Deferred rent on straight-lined third-party tenant leases
413
369
Liquor licenses
930
Other
434
427
Total prepaid expenses and other assets, net
6. Debt
Debt consisted of the following (in thousands):
Balance Outstanding as of
Rate Type
Interest Rate
Maturity Date
Unsecured Corporate Credit Facilities (1)
Fixed
(2)
5.32
July 25, 2027
175,000
Term Loan 2
Variable
5.82
January 25, 2028
Term Loan 3
(3)
5.77
May 1, 2025
225,000
(4)
5.52
November 7, 2025
Total unsecured corporate credit facilities
675,000
Unsecured Senior Notes
Series A
4.69
January 10, 2026
65,000
Series B
4.79
January 10, 2028
105,000
Total unsecured senior notes
170,000
Total debt
Unamortized deferred financing costs
(3,441)
(3,953)
As of March 31, 2025, the Company had no amount outstanding on its credit facility, with $500.0 million of capacity available for borrowing under the facility (see Note 14). The Company’s ability to draw on the credit facility is subject to the Company’s compliance with various covenants.
11
Interest Expense
Total interest incurred and expensed on the Company’s debt was as follows (unaudited and in thousands):
Interest expense on debt
11,865
12,313
Capitalized interest
(1,028)
Total interest expense
12,682
11,010
7. Other Liabilities
Other liabilities consisted of the following (in thousands):
Advance deposits
60,980
48,635
Property, sales and use taxes payable
10,902
10,088
Accrued interest
2,937
5,105
Deferred rent
1,099
1,433
Interest rate derivative
619
Management fees payable
899
1,168
7,977
6,265
Total other liabilities
During the three months ended March 31, 2025 and 2024, the Company recognized approximately $23.8 million and $20.2 million, respectively, in revenue related to its outstanding contract liabilities.
8. Leases
As of both March 31, 2025 and December 31, 2024, the Company had operating leases for ground, office, equipment, and airspace leases with maturity dates ranging from 2025 through 2097, excluding renewal options. Including renewal options available to the Company, the lease maturity date extends to 2147.
Operating leases were included on the Company’s consolidated balance sheets as follows (in thousands):
Right-of-use assets, net
Lease obligations
Weighted average remaining lease term
19 years
Weighted average discount rate
5.6
12
The components of lease expense were as follows (unaudited and in thousands):
Operating lease cost
1,367
1,352
Variable lease cost (1)
1,986
2,135
Sublease income (2)
(297)
Total lease cost
3,056
3,190
9. Stockholders’ Equity
Series G Cumulative Redeemable Preferred Stock
The Series G preferred stock, which is callable at its $25.00 redemption price plus accrued and unpaid dividends by the Company at any time, initially accrued dividends at a rate equal to the Montage Healdsburg’s annual net operating income yield on the Company’s total investment in the resort. In January 2024, the annual dividend rate increased to the greater of 3.0% or the rate equal to the Montage Healdsburg’s annual net operating income yield on the Company’s total investment in the resort. Beginning with the third quarter of 2024, the annual dividend rate increased to the greater of 4.5% or the rate equal to the Montage Healdsburg’s annual net operating income yield on the Company’s total investment in the resort. Beginning in the third quarter of 2025, the annual dividend rate will increase to the greater of 6.5% or the rate equal to the Montage Healdsburg’s annual net operating income yield on the Company’s total investment in the resort. The Series G preferred stock is not convertible into any other security.
Series H Cumulative Redeemable Preferred Stock
On or after May 24, 2026, the Series H preferred stock will be redeemable at the Company’s option, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to, but not including, the redemption date. Upon the occurrence of a change of control, as defined by the Articles Supplementary for Series H preferred stock, the Company may at its option redeem the Series H preferred stock for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to, but not including, the redemption date. If the Company chooses not to redeem the Series H preferred stock upon the occurrence of a change of control, holders of the Series H preferred stock may convert their preferred shares into shares of the Company’s common stock.
Series I Cumulative Redeemable Preferred Stock
On or after July 16, 2026, the Series I preferred stock will be redeemable at the Company’s option, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to, but not including, the redemption date. Upon the occurrence of a change of control, as defined by the Articles Supplementary for Series I preferred stock, the Company may at its option redeem the Series I preferred stock for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to, but not including, the redemption date. If the Company chooses not to redeem the Series I preferred stock upon the occurrence of a change of control, holders of the Series I preferred stock may convert their preferred shares into shares of the Company’s common stock.
Stock Repurchase Program. In February 2023, the Company’s board of directors reauthorized and restored the Company’s existing stock repurchase program, allowing the Company to acquire up to an aggregate of $500.0 million of its common and preferred stock. The stock repurchase program has no stated expiration date.
13
Details of the Company’s repurchases were as follows (dollars in thousands):
Number of common shares repurchased
821,771
Cost, including fees and commissions
8,016
Number of preferred shares repurchased
As of March 31, 2025, $419.5 million remains available for repurchase under the stock repurchase program. Future repurchases will depend on various factors, including the Company’s capital needs and restrictions under its various financing agreements, as well as the price of the Company’s common and preferred stock (see Note 14).
ATM Agreements. In March 2023, the Company entered into separate “At the Market” Agreements (the “ATM Agreements”) with several financial institutions. In accordance with the terms of the ATM Agreements, the Company may from time to time offer and sell shares of its common stock having an aggregate offering price of up to $300.0 million. No common stock was issued under the ATM Agreements during the three months ended March 31, 2025 or 2024, leaving $300.0 million available for sale.
10. Incentive Award Plan
The Company’s Incentive Award Plan (the “Plan”) provides for granting discretionary awards to employees, consultants, and non-employee directors. The awards may be made in the form of options, restricted stock awards, dividend equivalents, stock payments, restricted stock units, other incentive awards, LTIP units, or share appreciation rights.
Should a stock grant be forfeited prior to its vesting, the shares covered by the stock grant are added back to the Plan and remain available for future issuance. Shares of common stock tendered or withheld to satisfy the grant or exercise price or tax withholding obligations upon the vesting of a stock grant are not added back to the Plan.
Restricted shares and units are measured at fair value on the date of grant and amortized as compensation expense over the relevant requisite service period or derived service period. The Company has elected to account for forfeitures as they occur.
As of both March 31, 2025 and 2024, the Company’s issued and outstanding awards consisted of both time-based and performance-based restricted stock grants. The Company’s amortization expense, including forfeitures related to restricted shares was as follows (unaudited and in thousands):
Amortization expense, including forfeitures
Capitalized compensation cost (1)
Restricted Stock Awards
The Company’s restricted stock awards are time-based restricted shares that generally vest over periods ranging from three years to five years from the date of grant. The following is a summary of non-vested restricted stock award activity:
Weighted-Average
Grant Date
Number of Shares
Fair Value
Unvested at January 1, 2025
688,288
10.70
Granted
309,565
11.27
Vested
(311,927)
10.95
Forfeited
Unvested at March 31, 2025
685,065
10.84
14
Restricted Stock Units
The Company’s restricted stock units are performance-based restricted shares that generally vest based on the Company’s total relative shareholder return (“RSR”) or the achievement of pre-determined stock price targets during performance periods ranging from three years to five years. The following is a summary of non-vested restricted stock unit activity at target performance:
Target Number
of Shares
1,382,074
10.90
429,587
11.48
Vested (1)
(257,911)
12.44
(118,018)
11.29
1,435,732
10.77
The restricted stock units granted during the first three months of 2025 vest based on the Company’s total relative shareholder return following a three-year performance period. The number of shares that may become vested ranges from zero to 200% of the amount granted. The grant date fair values of the restricted stock units were determined using a Monte Carlo simulation model with the following assumptions:
Expected volatility
30.0
Dividend yield (1)
Risk-free rate
4.47
Expected term
3 years
11. Earnings Per Share
The Company applies the two-class method when computing its earnings per share. Net income per share for each class of stock is calculated assuming all of the Company’s net income is distributed as dividends to each class of stock based on their contractual rights.
Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid), which include the Company’s time-based restricted stock awards, are considered participating securities and are included in the computation of earnings per share.
Basic earnings attributable to common stockholders per common share is computed based on the weighted average number of shares of common stock outstanding during each period, including shares of the Company’s performance-based restricted stock units for which all necessary conditions have been satisfied except for the passage of time. Diluted earnings attributable to common stockholders per common share is computed based on the weighted average number of shares of common stock outstanding during each period, plus potential common shares considered outstanding during the period, as long as the inclusion of such awards is not anti-dilutive. Potential common shares consist of time-based unvested restricted stock awards and performance-based restricted stock units, using the more dilutive of either the two-class method or the treasury stock method. The Company’s performance-based restricted stock units are considered for computing diluted net income per common share as of the beginning of the period in which all necessary conditions have been satisfied and the only remaining vesting condition is a service vesting condition.
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The following table sets forth the computation of basic and diluted earnings per common share (unaudited and in thousands, except per share data):
Numerator:
Distributions paid to participating securities
(62)
(65)
Numerator for basic and diluted income attributable to common stockholders
1,262
9,287
Denominator:
Weighted average basic common shares outstanding
Unvested restricted stock units
1,034
327
Weighted average diluted common shares outstanding
In its calculation of diluted earnings per share, the Company excluded 685,065 and 929,928 anti-dilutive unvested time-based restricted stock awards for the three months ended March 31, 2025 and 2024, respectively (see Note 10).
The Company also had 1,435,732 and 1,382,074 unvested performance-based restricted stock units as of March 31, 2025 and 2024, respectively, that are not considered participating securities as the awards contain forfeitable rights to dividends or dividend equivalents. The performance-based restricted stock units were granted based on either target market condition thresholds or pre-determined stock price targets (see Note 10). Based on the Company’s total relative shareholder return and the Company’s common stock performance, the Company excluded 617,591 anti-dilutive performance based restricted stock units from its calculation of diluted earnings per share for the three months ended March 31, 2025. Based on the Company’s common stock performance, the Company excluded 188,004 anti-dilutive performance-based restricted stock units from its calculations of diluted earnings per share for the three months ended March 31, 2024.
12. Segment Information
The Company considers each of its hotels to be an operating segment and allocates resources and assesses the operating performance for each hotel individually. The Company has aggregated its hotels into a single reportable segment, Hotel Ownership, based on the following aggregation criteria:
The Company’s Chief Operating Decision Maker (“CODM”) is its Chief Executive Officer. The CODM reviews and makes decisions on all facets of the Company’s business using all available financial and non-financial data for each hotel individually. Capital allocation decisions to acquire, sell, enhance, redevelop, or perform renewal and replacement expenditures are determined on a hotel-by-hotel basis. Specifically, the CODM reviews the results of each hotel to assess the hotel’s profitability. The CODM does not use aggregated data by brand, property type, or geography to formulate the Company’s operating and investment strategy, to manage its business, or to make decisions about resource allocation. The key measure the CODM uses to allocate resources and assess performance is individual hotel net income (loss) before interest expense, income taxes, depreciation, and amortization for REITs, adjusted to exclude the following items that are not reflective of its ongoing operating performance or incurred in the normal course of business (“Hotel Adjusted EBITDAre”):
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The following tables include revenues, significant hotel operating expenses, and Hotel Adjusted EBITDAre for the Company’s hotels, reconciled to the consolidated amounts included in the Company’s consolidated statements of operations, which the CODM uses to manage its business, such as how to allocate capital to its hotels and how to determine the Company’s acquisition and disposition strategies (in thousands):
Revenues
Operating Expenses
38,266
47,891
5,771
12,501
9,537
19,029
19,104
Other property-level expenses (1)
29,098
28,966
173,293
164,871
Hotel Adjusted EBITDAre
60,772
52,295
Reconciliation of Hotel Adjusted EBITDAre to Net Income
Non-hotel operating expenses, net (2)
(10)
Pre-opening expenses (3)
(3,253)
Property-level COVID-19 relief grant (3)
1,343
Taxes assessed on commercial rents (3)
(163)
Amortization of right-of use assets and obligations
288
(8,905)
(7,518)
(32,275)
(29,040)
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The CODM does not receive asset information by segment. Assets reported to the CODM are consistent with those included on the Company’s consolidated balance sheets, with particular emphasis on the Company’s cash and cash equivalents, restricted cash, and debt.
13. Commitments and Contingencies
Management Agreements
Management agreements with the Company’s third-party hotel managers currently require the Company to pay between 2.0% and 3.0% of total revenue of the managed hotels to the third-party managers each month as a basic management fee. In addition to basic management fees, provided that certain operating thresholds are met, the Company may also be required to pay incentive management fees to certain of its third-party managers.
Total basic management and incentive management fees were included in other property-level expenses on the Company’s consolidated statements of operations as follows (unaudited and in thousands):
Basic management fees
6,397
5,974
Incentive management fees
1,585
3,029
Total basic and incentive management fees
7,982
9,003
License and Franchise Agreements
The Company has entered into license and franchise agreements related to certain of its hotels. The license and franchise agreements require the Company to, among other things, pay monthly fees that are calculated based on specified percentages of certain revenues. The license and franchise agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of the hotels which are established by the franchisors to maintain uniformity in the system created by each such franchisor. Such standards generally regulate the appearance of the hotel, quality and type of goods and services offered, signage, and protection of trademarks. Compliance with such standards may from time to time require the Company to make significant expenditures for capital improvements.
Total license and franchise fees were included in franchise costs on the Company’s consolidated statements of operations as follows (unaudited and in thousands):
Franchise assessments (1)
4,061
3,882
Franchise royalties
398
323
Total franchise costs
Renovation and Construction Commitments
At March 31, 2025, the Company had various contracts outstanding with third parties in connection with the ongoing renovations of certain of its hotels. The remaining commitments under these contracts at March 31, 2025 totaled $51.3 million.
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Concentration of Risk
The concentration of the Company’s hotels in California, Florida, Hawaii, and Washington, DC exposes the Company’s business to economic and severe weather conditions, competition, and real and personal property tax rates unique to these locales.
As of March 31, 2025, our hotels were geographically concentrated as follows (unaudited):
Trailing 12-Month
Percentage of
Total Consolidated
Number of Hotels
Total Rooms
Revenue
Northern California
Southern California
Florida
Hawaii
1
Washington, DC
The Company has provided customary unsecured indemnities to certain lenders, including in particular, environmental indemnities. The Company has performed due diligence on the potential environmental risks, including obtaining an independent environmental review from outside environmental consultants. These indemnities obligate the Company to reimburse the indemnified parties for damages related to certain environmental matters. There is no term or damage limitation on these indemnities; however, if an environmental matter arises, the Company could have recourse against other previous owners or a claim against its environmental insurance policies.
At March 31, 2025, the Company had $0.2 million of outstanding irrevocable letters of credit to guarantee the Company’s financial obligations related to workers’ compensation insurance programs from prior policy years. The beneficiaries of these letters of credit may draw upon the letters of credit in the event of a contractual default by the Company relating to each respective obligation. No draws have been made through March 31, 2025.
The Company is subject to various claims, lawsuits and legal proceedings, including routine litigation arising in the ordinary course of business, regarding the operation of its hotels, its managers and other Company matters. While it is not possible to ascertain the ultimate outcome of such matters, the Company believes that the aggregate identifiable amount of such liabilities, if any, in excess of amounts covered by insurance will not have a material adverse impact on its financial condition or results of operations. The outcome of claims, lawsuits and legal proceedings brought against the Company, however, is subject to significant uncertainties.
14. Subsequent Events
On April 1, 2025, the Company exercised its option to extend the maturity of its $225.0 million unsecured Term Loan 3 from May 1, 2025 to May 1, 2026.
On April 10, 2025, the Company drew down $27.0 million on its $500.0 million credit facility, leaving $473.0 million of capacity available for borrowing under the facility. The Company intends to use the proceeds for general corporate purposes and expects to repay all, or substantially all, of the draw in the second quarter of 2025. The Company’s ability to draw on the credit facility is subject to the Company’s compliance with various covenants.
On May 3, 2025, the Company opened Andaz Miami Beach, following a complete transformation of the property.
Subsequent to the end of the first quarter of 2025 and through the date of issuance of these financial statements, the Company repurchased 1,510,549 shares of its common stock for $12.8 million, including fees and commissions, leaving $406.8 million remaining for repurchase under the Company’s stock repurchase program.
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Cautionary Statement
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. The Company intends such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and includes this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Company’s future plans, strategies and expectations, are generally identifiable by use of the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project,” or similar expressions. You should not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Company’s control, and which could materially affect actual results, performances or achievements. Accordingly, there is no assurance that the Company’s expectations will be realized. In evaluating these statements, you should specifically consider the risks outlined in detail in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 21, 2025, under the caption “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, including but not limited to the following factors:
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These factors may cause our actual events to differ materially from the expectations expressed or implied by any forward-looking statement. Except as otherwise required by federal securities laws, the Company disclaims any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in the
Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Sunstone Hotel Investors, Inc. (the “Company,” “we,” “our” or “us”) is a Maryland corporation. We operate as a self-managed and self-administered real estate investment trust (“REIT”). A REIT is a corporation that directly or indirectly owns real estate assets and has elected to be taxable as a real estate investment trust for federal income tax purposes. To qualify for taxation as a REIT, the REIT must meet certain requirements, including regarding the composition of its assets and the sources of its income. REITs generally are not subject to federal income taxes at the corporate level as long as they pay stockholder dividends equivalent to 100% of their taxable income. REITs are required to distribute to stockholders at least 90% of their REIT taxable income. We own, directly or indirectly, 100% of the interests of Sunstone Hotel Partnership, LLC (the “Operating Partnership”), which is the entity that directly or indirectly owns our hotels. We also own 100% of the interests of our taxable REIT subsidiary, Sunstone Hotel TRS Lessee, Inc. (the “TRS Lessee”), which, directly or indirectly, leases all of our hotels from the Operating Partnership, and engages independent third-parties to manage our hotels.
We own hotels in convention, urban, and resort destinations that benefit from significant barriers to entry by competitors and diverse economic drivers. As of March 31, 2025, we owned 15 hotels (the “15 Hotels”), which average 484 rooms in size. All of our hotels are operated under nationally recognized brands, except the Oceans Edge Resort & Marina, which has established itself in a resort destination market.
Operating Activities
Revenues. Substantially all of our revenues are derived from the operation of our hotels. Specifically, our revenues consist of the following:
Expenses. Our expenses consist of the following:
Other Revenue and Expense. Other revenue and expense consists of the following:
Operating Performance Indicators. The following performance indicators are commonly used in the hotel industry:
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Factors Affecting Our Operating Results. The primary factors affecting our operating results include overall demand for hotel rooms, the pace of new hotel development, or supply, and the relative performance of our operators in increasing revenue and controlling hotel operating expenses.
24
Operating Results. The following table presents our unaudited operating results for the three months ended March 31, 2025 and 2024, including the amount and percentage change in the results between the two periods.
Change $
Change %
(in thousands, except statistical data)
9,106
6.7
5,789
9.4
10.0
16,899
7.8
Hotel operating
146,689
135,726
10,963
8.1
2,102
7.6
1,387
18.4
3,235
11.1
17,687
8.8
(3,889)
(71.3)
(1,672)
(15.2)
(100.0)
(6,827)
(56.1)
(953)
(111.5)
(7,780)
(59.7)
(248)
(6.7)
(8,028)
(85.8)
Summary of Operating Results. The following items significantly impact the year-over-year comparability of our operations:
Room revenue. Room revenue increased $9.1 million, or 6.7%, in the first quarter of 2025 as compared to the first quarter of 2024 as follows:
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Change
Occ%
ADR
RevPAR
Comparable Portfolio
73.2
333.19
243.90
72.5
329.75
239.07
70
bps
1.0
2.0
Two Renovation Hotels
43.3
236.24
102.29
36.7
249.29
91.49
660
(5.2)
11.8
Food and beverage revenue. Food and beverage revenue increased $5.8 million, or 9.4%, in the first quarter of 2025 as compared to the first quarter of 2024, as follows:
Other operating revenue. Other operating revenue increased $2.0 million, or 10.0%, in the first quarter of 2025 as compared to the first quarter of 2024 as follows:
Hotel operating expenses. Hotel operating expenses, which are comprised of room, food and beverage, advertising and promotion, repairs and maintenance, utilities, franchise costs, property tax, ground lease and insurance, and other hotel operating expenses increased $11.0 million, or 8.1%, in the first quarter of 2025 as compared to the first quarter of 2024 as follows:
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Other property-level expenses. Other property-level expenses increased $2.1 million, or 7.6%, in the first quarter of 2025 as compared to the first quarter of 2024 as follows:
Corporate overhead expense. Corporate overhead expense increased $1.4 million, or 18.4%, in the first quarter of 2025 as compared to the first quarter of 2024, primarily due to increased payroll and related expenses resulting from a severance payment related to the elimination of the Chief Operating Officer position in the first quarter of 2025 in connection with the restructuring of our executive team. The increase in corporate overhead expense was also due to increased due diligence fees, professional fees, and entity-level state franchise and minimum taxes. These increased expenses were partially offset by decreased deferred stock amortization expense.
Depreciation and amortization expense. Depreciation and amortization expense increased $3.2 million, or 11.1%, in the first quarter of 2025 as compared to the first quarter of 2024 as follows:
Interest and other income. Interest and other income totaled $1.6 million and $5.5 million in the first quarters of 2025 and 2024, respectively.
During the first quarters of 2025 and 2024, we recognized interest income of $1.4 million and $5.5 million, respectively. Interest income decreased in the first quarter of 2025 as compared to the first quarter of 2024 due to decreases in our cash balances following our acquisition of the Hyatt Regency San Antonio Riverwalk in April 2024. In addition, during the first quarter of 2025, we recognized property insurance recoveries of $0.1 million related to 2023 fire damage at the Hilton San Diego Bayfront, as well as other miscellaneous income of $0.1 million.
Interest expense. We incurred interest expense as follows (in thousands):
Interest expense increased $1.7 million, or 15.2%, in the first quarter of 2025 as compared to the same period in 2024.
The increase in interest expense during the first quarter of 2025 as compared to the same period in 2024 was primarily due to a $3.0 million noncash change in the fair market value of our derivatives, and a $0.1 million increase in the amortization of deferred financing costs due to costs incurred on Term Loan 4. These increases to interest expense were partially offset by $1.0 million of interest capitalized in the first quarter of 2025 related to the extensive renovation work at The Confidante Miami Beach as it transitions to Andaz Miami Beach, with no corresponding credit to interest expense in the first quarter of 2024. In addition, interest
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incurred on our debt decreased $0.4 million primarily due to decreased interest on our variable rate debt and our December 2024 repayment of the $72.1 million loan secured by the JW Marriott New Orleans, partially offset by increased interest expense due to our draw of the $100.0 million available under Term Loan 4 in December 2024.
Our weighted average interest rate per annum, including our variable rate debt obligations and excluding capitalized interest, was approximately 5.5% and 5.8% at March 31, 2025 and 2024, respectively. Approximately 52.7% and 51.1% of our outstanding debt had fixed interest rates or had been swapped to fixed interest rates at March 31, 2025 and 2024, respectively.
Gain on sale of assets, net. Gain on sale of assets, net totaled zero and $0.5 million for the first quarters of 2025 and 2024, respectively. In the first quarter of 2024, we recognized an additional $0.5 million net gain related to a contingency resolution at a hotel sold in a prior year.
Gain on extinguishment of debt. Gain on extinguishment of debt totaled zero and a nominal amount for the first quarters of 2025 and 2024, respectively. In the first quarter of 2024, we recorded a nominal gain associated with reassessments of the remaining potential employee-related obligations held in escrow associated with our assignment of a hotel to the hotel’s mortgage holder in 2020.
Income tax (provision) benefit, net. We lease our hotels to the TRS Lessee and its subsidiaries, which are subject to federal and state income taxes. In addition, we and the Operating Partnership may also be subject to various state and local income taxes.
In the first quarter of 2025, we recognized a current income tax provision of $0.1 million, resulting from current state and federal income tax expenses.
In the first quarter of 2024, we recognized a net current income tax benefit of $0.9 million, resulting from current state and federal income tax expenses, net of any refunds.
Preferred stock dividends. Preferred stock dividends were incurred as follows (in thousands):
Series G preferred stock
745
497
Series H preferred stock
1,761
Series I preferred stock
1,425
Total preferred stock dividends
3,931
3,683
In the first two quarters of 2024, the annual dividend rate on the Series G preferred stock was the greater of 3.0% or the rate equal to the Montage Healdsburg’s annual net operating income yield on our total investment in the resort. Beginning in the third quarter of 2024, the dividend rate increased to the greater of 4.5% or the rate equal to the Montage Healdsburg’s annual net operating income yield on our total investment in the resort. In the third quarter of 2025, the dividend rate will increase to the greater of 6.5% or the rate equal to the Montage Healdsburg’s annual net operating income yield on the Company’s total investment in the resort.
Non-GAAP Financial Measures. We use the following “non-GAAP financial measures” that we believe are useful to investors as key supplemental measures of our operating performance: EBITDAre; Adjusted EBITDAre; FFO attributable to common stockholders; and Adjusted FFO attributable to common stockholders. These measures should not be considered in isolation or as a substitute for measures of performance in accordance with accounting principles generally accepted in the United States (“GAAP”). In addition, our calculation of these measures may not be comparable to other companies that do not define such terms exactly the same as the Company. These non-GAAP measures are used in addition to and in conjunction with results presented in accordance with GAAP. They should not be considered as alternatives to net income (loss), cash flow from operations, or any other operating performance measure prescribed by GAAP. These non-GAAP financial measures reflect additional ways of viewing our operations that we believe, when viewed with our GAAP results and the reconciliations to the corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business than could be obtained absent this disclosure. We strongly encourage investors to review our financial information in its entirety and not to rely on a single financial measure.
We present EBITDAre in accordance with guidelines established by the National Association of Real Estate Investment Trusts (“Nareit”), as defined in its September 2017 white paper “Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate.” We believe EBITDAre is a useful performance measure to help investors evaluate and compare the results of our operations from period to period in comparison to our peers. Nareit defines EBITDAre as net income (calculated in accordance with GAAP) plus interest expense, income tax expense, depreciation and amortization, gains or losses on the disposition of depreciated property (including gains or losses on change in control), impairment write-downs of depreciated property and of investments in
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unconsolidated affiliates caused by a decrease in the value of depreciated property in the affiliate, and adjustments to reflect the entity’s share of EBITDAre of unconsolidated affiliates.
We make additional adjustments to EBITDAre when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful information to investors regarding our operating performance, and that the presentation of Adjusted EBITDAre, when combined with the primary GAAP presentation of net income, is beneficial to an investor’s complete understanding of our operating performance. In addition, we use both EBITDAre and Adjusted EBITDAre as measures in determining the value of hotel acquisitions and dispositions.
We adjust EBITDAre for the following items, which may occur in any period, and refer to this measure as Adjusted EBITDAre:
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The following table reconciles our unaudited net income to EBITDAre and Adjusted EBITDAre for the three months ended March 31, 2025 and 2024 (in thousands):
Income tax provision (benefit), net
98
(855)
EBITDAre
50,310
51,773
Amortization of right-of-use assets and obligations
Pre-opening costs
3,253
Management transition costs
1,869
Adjustments to EBITDAre, net
6,946
2,738
Adjusted EBITDAre
57,256
54,511
Adjusted EBITDAre increased $2.7 million, or 5.0%, in the first quarter of 2025 as compared to the first quarter of 2024 primarily due to the following:
We believe that the presentation of FFO attributable to common stockholders provides useful information to investors regarding our operating performance because it is a measure of our operations without regard to specified noncash items such as real estate depreciation and amortization, any real estate impairment loss and any gain or loss on sale of real estate assets, all of which are based on historical cost accounting and may be of lesser significance in evaluating our current performance. Our presentation of FFO attributable to common stockholders conforms to the Nareit definition of “FFO applicable to common shares.” Our presentation may not be comparable to FFO reported by other REITs that do not define the terms in accordance with the current Nareit definition, or that interpret the current Nareit definition differently than we do.
We also present Adjusted FFO attributable to common stockholders when evaluating our operating performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance and may facilitate comparisons of operating performance between periods and our peer companies.
We adjust FFO attributable to common stockholders for the following items, which may occur in any period, and refer to this measure as Adjusted FFO attributable to common stockholders:
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The following table reconciles our unaudited net income to FFO attributable to common stockholders and Adjusted FFO attributable to common stockholders for the three months ended March 31, 2025 and 2024 (in thousands):
Real estate depreciation and amortization
31,918
28,755
FFO attributable to common stockholders
33,242
37,650
Real estate amortization of right-of-use assets and obligations
(126)
(122)
Amortization of contract intangibles, net
315
231
Prior year income tax benefit, net
(948)
Adjustments to FFO attributable to common stockholders, net
8,258
(132)
Adjusted FFO attributable to common stockholders
41,500
37,518
Adjusted FFO attributable to common stockholders increased $4.0 million, or 10.6%, in the first quarter of 2025 as compared to the first quarter of 2024 primarily due to the same reasons noted in the discussion above regarding Adjusted EBITDAre.
Liquidity and Capital Resources
During the periods presented, our sources of cash included our operating activities and working capital, as well as proceeds from property insurance. Our primary uses of cash were for capital expenditures for hotels and other assets, operating expenses, repurchases of our common stock, repayments of notes payable, and dividends and distributions on our preferred and common stock. We cannot be certain that traditional sources of funds will be available in the future.
Operating activities. Our net cash provided by or used in operating activities fluctuates primarily as a result of changes in the net cash generated by our hotels, offset by the cash paid for corporate expenses. Our net cash provided by or used in operating activities may also be affected by changes in our portfolio resulting from hotel acquisitions, dispositions or renovations. Net cash
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provided by operating activities was $32.0 million in the first three months of 2025 as compared to $38.5 million in the first three months of 2024. The net decrease in cash provided by operating activities during the first three months of 2025 as compared to the same period in 2024 was primarily due to decreases in interest income resulting from our lower cash balances and increases in corporate-level expenses, partially offset by additional operating cash provided by the increase in travel demand benefiting our hotels as well as the acquisition of the Hyatt Regency San Antonio Riverwalk.
Investing activities. Our net cash provided by or used in investing activities fluctuates primarily as a result of acquisitions, dispositions and renovations of hotels and other assets. Net cash used in investing activities during the first three months of 2025 as compared to the first three months of 2024 was as follows (in thousands):
During the first three months of 2025, we invested $28.2 million for renovations and additions to our portfolio and other assets and received $0.1 million in property insurance proceeds related to 2023 fire damage at the Hilton San Diego Bayfront.
During the first three months of 2024, we invested $27.7 million for renovations and additions to our portfolio and other assets.
Financing activities. Our net cash provided by or used in financing activities fluctuates primarily as a result of our dividends and distributions paid, issuance and repurchase of common stock, issuance and repayment of debt, including draws on our credit facility and term loans, and issuance and redemption of other forms of capital, including preferred equity. Net cash used in financing activities during the first three months of 2025 as compared to the first three months of 2024 was as follows (in thousands):
During the first three months of 2025, we paid $8.0 million to repurchase 821,771 shares of our outstanding common stock, $4.3 million to repurchase common stock to satisfy the tax obligations in connection with the vesting of restricted common stock issued to employees and $23.1 million in dividends and distributions to our preferred and common stockholders.
During the first three months of 2024, we paid $3.2 million to repurchase common stock to satisfy the tax obligations in connection with the vesting of restricted common stock issued to employees, $0.5 million in scheduled principal payments on the loan secured by the JW Marriott New Orleans and $29.8 million in dividends and distributions to our preferred and common stockholders.
Future. We expect our primary sources of cash will continue to be our operating activities, working capital, borrowing under our credit facility, additional issuances of debt, dispositions of hotel properties and proceeds from offerings of common and preferred stock. However, there can be no assurance that our future asset sales, debt issuances or equity offerings will be successfully completed. As a result of potential increases in inflation rates and interest rates, as well as possible recessionary periods in the future, certain sources of capital may not be as readily available to us as they have in the past or may only be available at higher costs.
We expect our primary uses of cash to be for operating expenses, capital investments in our hotels, repayment of principal on our debt and credit facility, interest expense, repurchases of our common stock, distributions on our common stock, dividends on our preferred stock, and acquisitions of hotels or interests in hotels.
While inflation began to decrease in 2024, the recent uncertainty in the market in connection with certain international economic and political relationships, including political disputes and the imposition of tariffs affecting commodity costs, has had a negative effect on our operations. Prior to the recently announced tariffs, we experienced increases in wages, employee-related benefits, food costs, commodity costs, including those used to renovate or reposition our hotels, property taxes, liability insurance, utilities, and borrowing costs. The imposition of recently announced tariffs could exacerbate existing cost pressures and create additional inflationary pressures that could further impact our results of operations. The ability of our hotel operators to adjust rates has historically mitigated the impact of increased operating costs on our financial position and results of operations. In addition, any
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increases in interest rates by the Federal Reserve Board in response to increases in inflation will negatively affect our variable rate debt, resulting in increased interest payments.
Cash Balance. As of March 31, 2025, our unrestricted cash balance was $72.3 million. We believe that our current unrestricted cash balance and our ability to draw the $500.0 million capacity available for borrowing under the unsecured revolving credit facility will enable us to successfully manage our Company.
Debt. As of March 31, 2025, we had $845.0 million of debt, $148.8 million of cash and cash equivalents, including restricted cash, and total assets of $3.1 billion. We believe that by maintaining appropriate debt levels, staggering maturity dates, and maintaining a highly flexible structure, we will have lower capital costs than more highly leveraged companies, or companies with limited flexibility due to restrictive covenants.
In January 2025, we entered into an interest rate swap on Term Loan 4, which is effective January 31, 2025, expires November 7, 2026, and fixes the SOFR rate at 4.02%.
As of March 31, 2025, 52.7% of our outstanding debt had fixed interest rates or had been swapped to fixed interest rates, including our unsecured corporate-level Term Loan 1 and Term Loan 4, which totaled $275.0 million, and our two unsecured corporate-level senior notes, which totaled $170.0 million.
The Company’s floating rate debt as of March 31, 2025 included our unsecured corporate-level Term Loan 2 and Term Loan 3 which totaled $400.0 million.
In April 2025, we exercised our option to extend the maturity date of Term Loan 3 from May 2025 to May 2026. In addition, in April 2025, we drew down $27.0 million on our credit facility. We intend to use the proceeds for general corporate purposes and to repay all, or substantially all, of the draw in the second quarter of 2025.
We may in the future seek to obtain mortgages on one or more of our 15 unencumbered hotels (subject to certain provisions under our unsecured term loans and senior notes), all of which were held by subsidiaries whose interests were pledged to our credit facilities as of March 31, 2025. Should we obtain secured financing on any or all of our unencumbered hotels, the amount of capital available through our credit facility or future unsecured borrowings may be reduced.
Contractual Obligations. The following table summarizes our payment obligations and commitments as of March 31, 2025 (in thousands):
Payment due by period
Less Than
1 to 3
3 to 5
More than
Total
1 year
years
5 years
Debt (1)
780,000
Interest obligations on debt (1) (2)
96,498
46,006
50,492
Operating lease obligations, including imputed interest (3)
12,919
5,145
5,012
1,784
978
Construction commitments
51,274
1,005,691
167,425
835,504
33
Capital Expenditures and Reserve Funds
We believe we maintain each of our hotels in good repair and condition and in general conformity with applicable franchise and management agreements, ground lease, laws, and regulations. Our capital expenditures primarily relate to the ongoing maintenance of our hotels and are budgeted in the reserve accounts described in the following paragraph. We also incur capital expenditures for cyclical renovations, hotel repositionings, and development. We invested $28.2 million and $27.7 million in our portfolio and other assets during the first three months of 2025 and 2024, respectively. As of March 31, 2025, we have contractual construction commitments totaling $51.3 million for ongoing renovations. If we renovate additional hotels in the future, our capital expenditures will likely increase.
With respect to our hotels that are operated under management or franchise agreements with major national hotel brands, we are obligated to maintain an FF&E reserve account for future planned and emergency-related capital expenditures at these hotels. The amount funded into each of these reserve accounts is determined pursuant to the management and franchise agreements for each of the respective hotels, ranging between 3.0% and 5.5% of the respective hotel’s applicable annual revenue. As of March 31, 2025, our balance sheet includes restricted cash of $76.3 million, which was held in FF&E reserve accounts for future capital expenditures at the majority of our hotels. According to certain management agreements, reserve funds are to be held by the managers in restricted cash accounts, and we are not required to spend the entire amount in such reserve accounts each year.
Inflation
Inflation affects our expenses, including, without limitation, by increasing such costs as wages, employee-related benefits, food costs, commodity costs, including those used to renovate or reposition our hotels, property taxes, property and liability insurance, utilities and borrowing costs. We rely on our hotel operators to adjust room rates and pricing for hotel services to reflect the effects of inflation. However, previously contracted rates, competitive pressures, or other factors may limit the ability of our operators to respond to inflation. As a result, our expenses may increase at higher rates than our revenue.
Seasonality and Volatility
As is typical of the lodging industry, we experience seasonality in our business. Demand at certain of our hotels is affected by seasonal business patterns that can cause quarterly fluctuations in our revenues.
Quarterly revenue also may be adversely affected by renovations and repositionings, our managers’ effectiveness in generating business and by events beyond our control, such as economic and business conditions, including a U.S. recession or increased inflation, trade conflicts and tariffs, changes impacting global travel, regional or global economic slowdowns, any flu or disease-related pandemic that impacts travel or the ability to travel, weather patterns, the adverse effects of climate change, the threat of terrorism, terrorist events, civil unrest, government shutdowns, events that reduce the capacity or availability of air travel, increased competition from other hotels in our markets, new hotel supply or alternative lodging options and unexpected changes in business, commercial travel, leisure travel, and tourism.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities.
We evaluate our estimates on an ongoing basis. We base our estimates on historical experience, information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our consolidated financial statements.
Recoverability of assets that will continue to be used is measured by comparing the carrying amount of the asset to the related total future undiscounted net cash flows. If an asset’s carrying value is not recoverable through those cash flows, the asset is considered to be impaired. The impairment is measured by the difference between the asset’s carrying amount and its fair value. We perform a fair value assessment using valuation techniques such as discounted cash flows and
34
comparable sales transactions in the market to estimate the fair value of the hotel and, if appropriate and available, current estimated net sales proceeds from pending offers. Our judgment is required in determining the discount rate, terminal capitalization rate, the estimated growth of revenues and expenses, revenue per available room and margins, as well as specific market and economic conditions.
We review any uncertain tax positions and, if necessary, we will record the expected future tax consequences of uncertain tax positions in the consolidated financial statements. Tax positions not deemed to meet the “more-likely-than-not” threshold are recorded as a tax benefit or expense in the current year. We are required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which includes federal and certain states.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
To the extent that we incur debt with variable interest rates, our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We use interest rate derivatives to manage our exposure to the interest rate risks related to our floating rate debt. We have no derivative financial instruments held for trading purposes.
As of March 31, 2025, 52.7% of our debt obligations were fixed in nature or were subject to interest rate swap derivatives, which mitigates the effect of changes in interest rates on our cash interest payments. If the market rate of interest on our variable rate debt increases or decreases by 50 basis points, interest expense on an annualized basis would increase or decrease, respectively, our future consolidated earnings and cash flows by approximately $2.0 million based on the variable rates at March 31, 2025.
Item 4. Controls and Procedures
Attached as exhibits to this Form 10-Q are the certifications required by Rule 13a-14 of the Securities Exchange Act of 1934, as amended. This section includes information concerning the controls and control evaluations referred to in the certifications.
Evaluation of Disclosure Controls and Procedures. Based upon an evaluation of the effectiveness of disclosure controls and procedures, our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting. During our fiscal quarter to which this Quarterly Report on Form 10-Q relates, there has not occurred any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended March 31, 2025, the Company withheld 376,613 shares of its restricted stock at an average market value of $11.36 per share and used the proceeds to satisfy the tax obligations in connection with the vesting of restricted common shares issued to employees.
Maximum Number (or
Total Number of
Appropriate Dollar
Shares Purchased
Value) of Shares that
Total Number
as Part of Publicly
May Yet Be Purchased
Average Price Paid
Announced Plans
Under the Plans or
Period
Purchased
per Share
or Programs
Programs
January 1, 2025 - January 31, 2025
240,093
11.47
427,510,479
February 1, 2025 - February 28, 2025
129,770
11.20
March 1, 2025 - March 31, 2025
828,521
9.74
419,510,517
1,198,384
10.25
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
The following Exhibits are filed as a part of this report:
Exhibit Number
Description
3.1
Articles of Amendment and Restatement of Sunstone Hotel Investors, Inc. (incorporated by reference to Exhibit 3.1 to the registration statement on Form S-11 (File No. 333-117141) filed by the Company).
3.2
Third Amended and Restated Bylaws of Sunstone Hotel Investors, Inc. effective as of February 9, 2023 (incorporated by reference to Exhibit 3.1 to Form 8-K, filed by the Company on February 10, 2023).
3.3
Articles Supplementary Prohibiting the Company From Electing to be Subject to Section 3-803 of the Maryland General Corporation Law Absent Shareholder Approval (incorporated by reference to Exhibit 3.1 to Form 8-K, filed by the Company on April 29, 2013).
3.4
Articles Supplementary for Series G preferred stock (incorporated by reference to Exhibit 3.1 to Form 8-K, filed by the Company on April 28, 2021).
3.5
Articles Supplementary for Series H preferred stock (incorporated by reference to Exhibit 3.3 to the registration statement on Form 8-A, filed by the Company on May 20, 2021).
3.6
Articles Supplementary for Series I preferred stock (incorporated by reference to Exhibit 3.3 to the registration statement on Form 8-A, filed by the company on July 15, 2021).
3.7
Eighth Amended and Restated Limited Liability Agreement of Sunstone Hotel Partnership LLC (incorporated by reference to Exhibit 3.2 to Form 8-K, filed by the Company on July 16, 2021).
10.1
Fifth Amended and Restated Employment Agreement, dated February 18, 2025, by and among Sunstone Hotel Investors, Inc., Sunstone Hotel Partnership, LLC and Bryan A. Giglia. * #
10.2
Amended and Restated Employment Agreement, dated February 18, 2025, by and among Sunstone Hotel Investors, Inc., Sunstone Hotel Partnership, LLC and Aaron Reyes. * #
31.1
Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2
Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
101.INS
XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.*
101.SCH
Inline XBRL Taxonomy Extension Schema Document. *
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document. *
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document. *
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document. *
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document. *
104
Cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2025 formatted in Inline XBRL (included in Exhibit 101).
*
Filed herewith.
#
Management contract or compensatory plan arrangement.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 6, 2025
By:
/s/ Aaron R. Reyes
Aaron R. Reyes(Chief Financial Officer and Duly Authorized Officer)