Sunstone Hotel Investors, Inc. (SHO)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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The following discussion should be read together with the consolidated financial statements and related notes included elsewhere in this report. This discussion focuses on our financial condition and results of operations for the year ended December 31, 2024 as compared to the year ended December 31, 2023. A discussion and analysis of the year ended December 31, 2023 as compared to the year ended December 31, 2022 is included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 23, 2024, under the caption “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Overview

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Sunstone Hotel Investors, Inc. 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.

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We own hotels in convention, urban, and resort destinations that benefit from significant barriers to entry by competitors and diverse economic drivers. As of December 31, 2024, we owned 15 hotels (the “15 Hotels”). 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.

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The following tables summarize our total portfolio and room data from January 1, 2023 through December 31, 2024:

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2024 Summary

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Demand. Excluding The Confidante Miami Beach and the Renaissance Long Beach (the “Two Renovation Hotels”) due to their significant renovations as they transitioned to Andaz Miami Beach and the Marriott Long Beach Downtown, respectively, occupancy at the 12 hotels we owned during the entirety of 2023 and 2024 (the “Comparable Portfolio”) improved as follows:

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During 2024, we saw improved group and leisure demand at Marriott Boston Long Wharf, as the hotel took advantage of strong corporate demand and a solid base of group business, The Westin Washington, DC Downtown, as the hotel is attracting higher quality groups post-rebranding from a Renaissance to a Westin, and at our Northern California wine country hotels, Four Seasons Resort Napa Valley and Montage Healdsburg, as the hotels are attracting more leisure customers and higher-quality group events. In addition, leisure and business transient demand improved at Hilton San Diego Bayfront, Hyatt Regency San Francisco, and The Bidwell Marriott Portland. These improvements were partially offset by labor activity at the Hilton San Diego Bayfront during the third and fourth quarters of 2024, which led to the cancellation of certain group events and overall lower business volume at the hotel, severe weather at Renaissance Orlando at SeaWorld® during the third and fourth quarters of 2024, and continued market-wide weakness at Wailea Beach Resort.

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Acquisition. In April 2024, we acquired the fee-simple interest in the 630-room Hyatt Regency San Antonio Riverwalk, located in San Antonio, Texas, for a contractual purchase price of $230.0 million, excluding closing costs.

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Significant Renovations. During 2024, our significant renovations primarily occurred at the Two Renovation Hotels. In March 2024, we temporarily suspended operations at The Confidante Miami Beach to allow the extensive renovation work to be performed more efficiently. We expect the resort to resume operations as Andaz Miami Beach in the first quarter of 2025. The Renaissance Long Beach converted to Marriott Long Beach Downtown in March 2024. Renovation work at the hotel continued through the end of the second quarter of 2024, and the hotel began to ramp-up operations in the third quarter of 2024. In addition, during 2024 we began a soft goods renovation at Wailea Beach Resort.

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Debt Transactions. In November 2024, we entered into a delayed draw term loan agreement (“Term Loan 4”) and drew a total of $100.0 million in December 2024. Term Loan 4’s variable interest rate is based on a pricing grid with a range of 1.35% to 2.20%, depending on our leverage ratios, plus SOFR and a 0.10% adjustment. Term Loan 4 matures in November 2025, with two six-month extension options at the Company’s election, resulting in an extended maturity of November 2026.

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In December 2024, we repaid the $72.1 million mortgage secured by the JW Marriott New Orleans, using proceeds received from Term Loan 4.

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For more details on our 2024 debt transactions, see “Liquidity and Capital Resources” below.

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Capital Transactions. During 2024, we repurchased 2,764,837 shares of our common stock under our stock repurchase program at an average purchase price of $9.83 per share. As of December 31, 2024, approximately $427.5 million of authorized capacity remained under our stock repurchase program.

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Operating Activities

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Revenues. Substantially all of our revenues are derived from the operation of our hotels. Specifically, our revenues consist of the following:

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Expenses. Our expenses consist of the following:

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Other Revenue and Expense. Other revenue and expense consists of the following:

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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.

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Operating Results. The following table presents our operating results for the years ended December 31, 2024 and 2023, including the amount and percentage change in the results between the two periods.

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Summary of Operating Results. The following items significantly impact the year-over-year comparability of our operations:

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Room Revenue. Room revenue decreased $60.2 million, or 9.7%, in 2024 as compared to 2023 as follows:

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Food and Beverage Revenue. Food and beverage revenue decreased $21.3 million, or 7.7%, in 2024 as compared to 2023 as follows:

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Other Operating Revenue. Other operating revenue increased $0.8 million, or 0.9%, in 2024 as compared to 2023 as follows:

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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 operating expenses decreased $26.3 million, or 4.5%, in 2024 as compared to 2023 as follows:

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Other Property-Level Expenses. Other property-level expenses decreased $9.4 million, or 7.8%, in 2024 as compared to 2023 as follows:

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Corporate Overhead Expense. Corporate overhead expense decreased $2.4 million, or 7.5%, in 2024 as compared to 2023, primarily due to decreased payroll and related expenses, entity-level state franchise and minimum taxes, deferred stock amortization expense, and due diligence expenses. These decreased expenses were partially offset by increased professional fees.

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Depreciation and Amortization Expense. Depreciation and amortization expense decreased $2.6 million, or 2.0%, in 2024 as compared to 2023 as follows:

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Interest and Other Income. Interest and other income totaled $13.2 million and $10.5 million in 2024 and 2023, respectively. During 2024 and 2023, we recognized interest income of $12.6 million and $6.8 million, respectively. Interest income increased in 2024 as compared to 2023 due to increases in our cash balances as well as increased interest rates. In addition, we recognized property insurance recoveries of $0.4 million in 2024 related to fire damage at the Hilton San Diego Bayfront and wind-driven rain damage at Wailea Beach Resort and $3.7 million in 2023 related to property damage caused by Hurricane Ida at the Hilton New Orleans St. Charles. During 2024, we also recognized other miscellaneous income of $0.1 million.

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We expect our interest income will decrease in 2025 in accordance with our lower cash balances following our acquisition of the Hyatt Regency San Antonio Riverwalk in April 2024 and expected lower interest rates on our cash deposits relative to 2024.

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Interest Expense. We incurred interest expense as follows (in thousands):

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Interest expense decreased $1.6 million, or 3.0%, in 2024 as compared to 2023 as follows:

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The decrease in interest expense in 2024 as compared to 2023 was primarily due to $1.4 million of interest capitalized in 2024 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 2023. In addition, interest expense decreased due to a $0.8 million noncash change in the fair market value of our derivatives. These decreases were partially offset by a $0.3 million increase in interest expense incurred on our debt primarily due to increased interest on our variable rate debt and our draws of the $100.0 million available under Term Loan 4 in December 2024 and the $225.0 million available under our third term loan (“Term Loan 3”) in May 2023, partially offset by decreased interest due to our repayments of the $72.1 million loan secured by the JW Marriott New Orleans in December 2024 and the $220.0 million loan secured by the Hilton San Diego Bayfront in May 2023. The amortization of deferred financing costs caused interest expense to increase $0.3 million in 2024 as compared to 2023 due to costs incurred on Term Loan 4 and Term Loan 3.

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Our weighted average interest rate per annum, including our variable rate debt obligations and excluding capitalized interest, was approximately 5.6% and 5.8% at December 31, 2024 and 2023, respectively. Approximately 40.8% and 51.2% of our outstanding notes payable had fixed interest rates or had been swapped to fixed interest rates at December 31, 2024 and 2023, respectively. Following our purchase of an interest rate swap for Term Loan 4 in January 2025, 52.7% of our outstanding debt will have fixed interest rates or will have been swapped to fixed interest rates.

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Gain on Sale of Assets, net. Gain on sale of assets, net totaled $0.5 million and $123.8 million in 2024 and 2023, respectively, both of which related to the Boston Park Plaza. In 2024, we recognized an additional $0.5 million net gain related to a contingency resolution at the hotel, and in 2023, we recognized a $123.8 million gain on the sale of the hotel.

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Gain on Extinguishment of Debt. Gain on extinguishment of debt totaled $0.1 million and $9.9 million in 2024 and 2023, respectively, both of which were related to the remaining potential employee obligations held in escrow associated with our assignment of a hotel to the hotel’s mortgage holder in 2020. During 2024, we recognized $21,000 due to reassessments of the remaining potential obligations and $38,000 due to the release of the remaining potential obligations in conjunction with the termination of the escrow agreement during the second quarter of 2024.

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During 2023, we recognized a gain of $9.9 million, comprised of $9.8 million from the relief of the majority of the potential obligations, with the funds released to us from escrow, and $0.1 million due to reassessments of the remaining potential obligations held in escrow.

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Income Tax Benefit (Provision), 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.

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In 2024, we recognized a net current income tax benefit of $1.1 million resulting from current state and federal income tax expenses, net of any refunds.

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In 2023, we recognized a net current income tax provision of $4.6 million resulting from current state and federal income tax expenses, of which $3.7 million related to the gain we recognized on the sale of the Boston Park Plaza.

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Preferred Stock Dividends. Preferred stock dividends were incurred as follows (in thousands):

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The Series G preferred stock initially accrued dividends at a rate equal to the Montage Healdsburg’s annual net operating income yield on our total investment in the resort. In the first and third quarters of 2024, the annual dividend rate increased to the greater of 3.0% and 4.5%, respectively, 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.

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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.

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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 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.

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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.

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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 net income to EBITDAre and Adjusted EBITDAre for the years ended December 31, 2024 and 2023 (in thousands):

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Adjusted EBITDAre decreased $33.8 million, or 12.8%, in 2024 as compared to 2023 primarily due to the following:

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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.

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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 net income to FFO attributable to common stockholders and Adjusted FFO attributable to common stockholders for the years ended December 31, 2024 and 2023 (in thousands):

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Adjusted FFO attributable to common stockholders decreased $33.5 million, or 17.0%, in 2024 as compared to 2023 primarily due to the same reasons noted in the discussion above regarding Adjusted EBITDAre.

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Liquidity and Capital Resources

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During the periods presented, our sources of cash included our operating activities and working capital, as well as proceeds from a hotel disposition, our term loans, and property insurance. Our primary uses of cash were for capital expenditures for hotels and other assets, an acquisition of a hotel, 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 the sources of funds we have relied on in the past will be available in the future.

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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 provided by operating activities was $170.4 million in 2024 as compared to $198.1 million in 2023. The net decrease in cash provided by operating activities in 2024 as compared to 2023 was primarily due to decreases in operating cash at the Two Renovation Hotels, as well as decreases caused by our sale of the Boston Park Plaza, and higher interest payments on our variable rate debt. These decreases were partially offset by additional operating cash provided by the newly-acquired Hyatt Regency San Antonio Riverwalk, as well additional operating cash provided by the increase in travel demand benefiting our hotels.

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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) provided by investing activities in 2024 and 2023 was as follows (in thousands):

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In 2024, we paid $229.3 million to acquire the Hyatt Regency San Antonio Riverwalk, including closing costs and prorations, and we invested $157.4 million for renovations and additions to our portfolio and other assets. These cash outflows were slightly offset by $0.4 million in property insurance proceeds received related to fire damage at the Hilton San Diego Bayfront and wind-driven rain damage at Wailea Beach Resort.

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In 2023, we received proceeds of $364.5 million from the sale of the Boston Park Plaza and insurance proceeds of $3.7 million for hurricane-related property damage at the Hilton New Orleans St. Charles. These cash inflows were partially offset by $110.1 million invested for renovations and additions to our portfolio and other assets.

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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 notes payable, including draws on our term loans, and issuance and redemption of other forms of capital, including preferred equity. Net cash used in financing activities in 2024 and 2023 was as follows (in thousands):

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During 2024, we paid $27.2 million to repurchase 2,764,837 shares of our outstanding common stock, $4.2 million to repurchase common stock to satisfy the tax obligations in connection with the vesting of restricted common stock issued to employees, $74.1 million in principal payments on our loan secured by the JW Marriott New Orleans, including $2.0 million in scheduled principal payments and $72.1 million to repay the loan, and $91.0 million in dividends and distributions to our common and preferred stockholders. We also entered into Term Loan 4, receiving $100.0 million in proceeds and paying $1.1 million in related deferred financing costs. We utilized the proceeds received from Term Loan 4 to repay the loan secured by the JW Marriott New Orleans.

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During 2023, we paid an additional $0.3 million to true-up the total acquisition cost of the outside 25.0% equity interest in the entity that owns the Hilton San Diego Bayfront and $0.4 million in common stock offering costs related to our shelf registration statement. In addition, we paid $56.4 million to acquire 5,971,192 shares of our outstanding common stock, $3.3 million to repurchase common stock to satisfy the tax obligations in connection with the vesting of restricted common stock issued to employees, and $59.8 million in dividends and distributions to our preferred and common stockholders. We also entered into Term Loan 3, receiving $225.0 million in proceeds and paying $2.3 million in related deferred financing costs. We utilized the proceeds received from Term Loan 3 to repay the $220.0 million loan secured by the Hilton San Diego Bayfront. We also paid $2.1 million in scheduled principal payments on our notes payable.

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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 notes payable, 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.

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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.

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While both inflation and interest rates began to decrease in the third quarter of 2024, the recent increases in inflation and interest rates have had a negative effect on our operations. We have experienced increases in 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. The ability of our hotel operators to adjust rates has mitigated the impact of increased operating costs on our financial position and results of operations. However, the increases in interest rates negatively affected our variable rate debt, resulting in increased interest payments.

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Cash Balance. As of December 31, 2024, our unrestricted cash balance was $107.2 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.

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Debt. As of December 31, 2024, we had $845.0 million of debt, $180.3 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.

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In November 2024, we entered into delayed-draw Term Loan 4 and drew a total of $100.0 million in December 2024. Term Loan 4’s variable interest rate is based on a pricing grid with a range of 1.35% to 2.20%, depending on our leverage ratios, plus SOFR and a 0.10% adjustment. 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%. Term Loan 4 has an initial term of one year with two six-month extension options at the Company’s election, resulting in an extended maturity of November 2026, upon the payment of applicable fees and the satisfaction of certain customary conditions.

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In December 2024, we repaid the $72.1 million mortgage secured by the JW Marriott New Orleans, using proceeds received from Term Loan 4.

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As of December 31, 2024, 40.8% of our outstanding debt had fixed interest rates or had been swapped to fixed interest rates, including our $175.0 million unsecured corporate-level Term Loan 1 and two unsecured corporate-level senior notes, which total $170.0 million. Following our purchase of an interest rate swap for Term Loan 4 in January 2025, 52.7% of our outstanding debt will have fixed interest rates or will have been swapped to fixed interest rates.

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The Company’s floating rate debt as of December 31, 2024 included the $175.0 million, $225.0 million, and $100.0 million unsecured corporate-level Term Loan 2, Term Loan 3, and Term Loan 4, respectively.

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We may in the future seek to obtain mortgages on one or more of our 15 unencumbered hotels (subject to certain stipulations 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 December 31, 2024. Should we obtain secured financing on any or all of our unencumbered hotels, the amount of capital available through our credit facilities or future unsecured borrowings may be reduced.

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Contractual Obligations

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The following table summarizes our payment obligations and commitments as of December 31, 2024 (in thousands):

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Capital Expenditures and Reserve Funds

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We believe we maintain all 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 $157.4 million in our portfolio and other assets during 2024

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and $110.1 million in 2023. As of December 31, 2024, we have contractual construction commitments totaling $58.1 million for ongoing renovations. During the first quarter of 2025, we will continue to incur significant capital expenditures as we complete the substantial renovation and rebranding of The Confidante Miami Beach to Andaz Miami Beach. If we renovate additional hotels in the future, our capital expenditures will likely increase.

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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 2.0% and 5.5% of the respective hotel’s applicable annual revenue. As of December 31, 2024, our balance sheet includes restricted cash of $72.9 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.

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Inflation

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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.

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Seasonality and Volatility

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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.

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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.

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Critical Accounting Estimates

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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 the related disclosure of contingent assets and liabilities.

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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.

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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 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,

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terminal capitalization rate, the estimated growth of revenues and expenses, revenue per available room and margins, as well as specific market and economic conditions.

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Accounting for the acquisition of a hotel property or other entity requires either allocating the purchase price to the assets acquired and the liabilities assumed in the transaction at their respective relative fair values for an asset acquisition or recording the assets and liabilities at their estimated fair values with any excess consideration above net assets going to goodwill for a business combination. The most difficult estimations of individual fair values are those involving long-lived assets, such as property, equipment, and intangible assets, together with any finance or operating lease right-of-use assets and their related obligations. When we acquire a hotel property or other entity, we use all available information to make these fair value determinations, including discounted cash flow analyses, market comparable data, and replacement cost data. In addition, we make significant estimations regarding capitalization rates, discount rates, average daily rates, revenue growth rates, and occupancy. We also engage independent valuation specialists to assist in the fair value determinations of the long-lived assets acquired and the liabilities assumed. The determination of fair value is subjective and is based in part on assumptions and estimates that could differ materially from actual results in future periods.

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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.

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New Accounting Standards and Accounting Changes

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See Note 2 to the accompanying consolidated financial statements for additional information relating to recently issued accounting pronouncements.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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The following discussion should be read together with the consolidated financial statements and related notes included elsewhere in this report. This discussion focuses on our financial condition and results of operations for the year ended December 31, 2023 as compared to the year ended December 31, 2022. A discussion and analysis of the year ended December 31, 2022 as compared to the year ended December 31, 2021 is included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 23, 2023, under the caption “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Overview

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Sunstone Hotel Investors, Inc. is a Maryland corporation. We operate as a self-managed and self-administered real estate investment trust. 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, 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., which, directly or indirectly, leases all of our hotels from the Operating Partnership, and engages independent third-parties to manage our hotels.

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We own hotels in urban and resort destinations that benefit from significant barriers to entry by competitors and diverse economic drivers. As of December 31, 2023, we owned 14 hotels (the “14 Hotels”). 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.

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The following tables summarize our total portfolio and room data from January 1, 2022 through December 31, 2023:

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2023 Summary

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Demand. Occupancy during 2023 improved as compared to 2022 at the 13 hotels we owned during both years (the “Existing Portfolio”) and was as follows:

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During 2023, demand for both urban and convention travel improved, with strong occupancy growth in Boston, Portland, New Orleans, San Diego and San Francisco. In 2023, we experienced some softness in demand at our resort properties as leisure demand continues to normalize post-pandemic and was negatively impacted by a surge in U.S. travelers going abroad, combined with lower levels of international travelers visiting the United States. In addition, the Wailea Beach Resort was negatively impacted by the Maui wildfires.

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Dispositions. In October 2023, we sold the Boston Park Plaza for gross proceeds of $370.0 million, excluding closing costs, and recorded a gain of $123.8 million.

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Significant Renovations. During 2023, our significant renovations primarily consisted of the conversion and launch of the Renaissance Washington DC to The Westin Washington, DC Downtown in October 2023 and the commencement of the transformational conversion of The Confidante Miami Beach to Andaz Miami Beach. In addition, during the fourth quarter of 2023, we began a substantial renovation of the Renaissance Long Beach in preparation for its conversion to Marriott Long Beach Downtown.

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Debt Transactions. In May 2023, we entered into a term loan agreement (“Term Loan 3”) and drew a total of $225.0 million. Term Loan 3’s variable interest rate is based on a pricing grid with a range of 1.35% to 2.20%, depending on our leverage ratios, plus SOFR and a 0.10% adjustment. Term Loan 3 matures in May 2025, with a one-time option to extend the loan by twelve months to May 2026 upon the payment of applicable fees and the satisfaction of certain customary conditions.

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In May 2023, we repaid the $220.0 million mortgage secured by the Hilton San Diego Bayfront, using proceeds received from Term Loan 3, and the mortgage’s related interest rate cap derivative was terminated.

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For more details on our 2023 debt transactions, see “Liquidity and Capital Resources” below.

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Capital Transactions. During 2023, we repurchased 5,971,192 shares of our common stock under our stock repurchase program at an average purchase price of $9.43 per share. As of December 31, 2023, approximately $454.7 million of authorized capacity remained under our stock repurchase program.

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Operating Activities

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Revenues. Substantially all of our revenues are derived from the operation of our hotels. Specifically, our revenues consist of the following:

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Expenses. Our expenses consist of the following:

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Other Revenue and Expense. Other revenue and expense consists of the following:

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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.

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Operating Results. The following table presents our operating results for our total portfolio for the years ended December 31, 2023 and 2022, including the amount and percentage change in the results between the two periods.

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Summary of Operating Results. The following items significantly impact the year-over-year comparability of our operations:

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Room Revenue. Room revenue increased $43.1 million, or 7.5%, in 2023 as compared to 2022 as follows:

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