Sunstone Hotel Investors : 2024 Annual Report Annual Report 2024

Published: 2025-03-19 16:51:11 ET SHO

2024 Annual Report

SUNSTONE HOTEL INVESTORS, INC.

2024 ANNUAL REPORT

Property Locations and Room Counts

California

Louisiana

Four Seasons Resort Napa Valley, 85

Hilton New Orleans St. Charles, 252

Hilton San Diego Bayfront, 1,190

JW Marriott New Orleans, 501

Hyatt Regency San Francisco, 821

Florida

Marriott Long Beach Downtown, 376

Andaz Miami Beach, 287

Montage Healdsburg, 130

Oceans Edge Resort & Marina, Key West, 175

Oregon

Renaissance Orlando at SeaWorld®, 781

The Bidwell Marriott Portland, 258

Massachusetts

Hawaii

Marriott Boston Long Wharf, 415

Wailea Beach Resort, Maui, 545

Washington DC

Texas

The Westin Washington, DC Downtown, 807

Hyatt Regency San Antonio Riverwalk, 630

TO THE STOCKHOLDERS OF

SUNSTONE HOTEL INVESTORS, INC.:

2024 marked a year of significant progress at Sunstone with execution on all aspects of our strategy. While lodging industry operating fundamentals underperformed expectations in 2024, we took steps during the year to provide the Company with a foundation for sustained growth in earnings and net asset value ("NAV") per share. Here is a review of our strategy, 2024 highlights, and outlook.

Our Strategy

Our strategy is to produce superior relative and absolute stockholder returns by actively recycling capital, thoughtfully investing in our portfolio, and returning capital to stockholders. While it is simple and focused, we believe that a well-executed combination of hotel and resort acquisition, investment, asset management, and disposition can generate risk-adjusted returns well in excess of our cost of capital and deliver superior returns.

Capital Recycling

Hotel and resort ownership is a cyclical and capital- intensive business. We believe that the lifecycle of our investments must adhere to a time horizon that maximizes our return potential. Once we have executed our investment plan for each asset and maximized the return on our invested capital, we will harvest that value and recycle those proceeds into new growth opportunities.

Portfolio Investment

We deploy capital into our portfolio where we believe we can create value and generate returns for our investors. We focus on each asset to determine the appropriate time and amount to invest and when to harvest gains. While this is easier said than done, we

believe our disciplined approach and track record of portfolio investment have delivered significant value to our owners.

Return of Capital

In addition to capital recycling and investing in our portfolio, returning capital to our stockholders is the third lever we utilize to deliver superior stockholder returns. We look to maximize our annual dividend by distributing 100% of our taxable income. In addition to cash dividends, we will also return capital through opportunistic share repurchases, when we can repurchase at a meaningful discount to our net asset value.

Additionally, we employ an appropriately levered balance sheet, which allows us to deploy capital during all phases of the operating cycle. We expect to continue utilizing our investment capacity and moderately increasing our leverage early in the operating cycle, particularly as we become more acquisitive. We anticipate that our leverage levels will decline later in the operating cycle as earnings grow and we build more financial capacity.

Lastly, we believe in and actively employ stockholder- friendly corporate governance, open communication, robust stakeholder disclosure, and compensation practices that best align with stockholder interests. We know that stockholders not only own the Company but also have the final determination of the Company's future. As part of our corporate governance framework, we elect all directors annually, allow bylaws to be amended by stockholders, restrict the Board's ability to classify directors, allow proxy access, link a majority of our compensation to absolute and relative stockholder returns, employ a compensation clawback

2024 ANNUAL REPORT

policy, and require executives and directors to hold a meaningful ownership interest in the Company.

2024 Highlights

While lodging industry demand trends were not as robust as expected in 2024, the combination of our premier portfolio and the execution of our strategy during the year provide Sunstone a strong foundation for growth in 2025 and beyond. Our full year operating results reflect a period of heightened capital investment and our earnings decreased compared to 2023, as we experienced short-term disruption from the conversions of the Marriott Long Beach and Andaz Miami Beach, both of which will fuel future earnings growth. Moreover, during 2024, we successfully executed all aspects of our strategy: recycling capital, investing in our portfolio, and returning capital to stockholders, all of which have built a solid foundation to drive future growth in earnings and NAV per share.

Operations

Our operations in 2024 were impacted by disruption as we invested for the future, but that is now behind us, and we look forward to the growth those projects will provide in 2025 and beyond. With a more challenging demand environment during the year, we focused on the strongest segments of our business, group events and corporate travel, booking growing room nights and increasing our share of premium rated demand relative to the prior year. Additionally, we worked with our operators to scrutinize costs and enhance productivity, making significant gains across the portfolio, especially at our Wine Country resorts, where we successfully streamlined the operations without impacting the guest experience. Our comparable convention and urban hotels led the portfolio with robust group and business transient demand with significant earnings growth at our recently converted The Westin Washington, DC Downtown which is now one of the premier hotels in the city.

Capital Recycling

Despite a subdued transaction environment in 2024, we successfully recycled proceeds from the sale of the Boston Park Plaza into the 630-room Hyatt Regency San Antonio Riverwalk for a net purchase price of $222 million after incentives, reflecting an attractive 9%

cap rate on 2024 earnings. In addition to the compelling initial yield, we have identified several value-enhancing opportunities we will capitalize on in the near term. The hotel has an ideal location, situated between two of the state's biggest leisure demand drivers, the Riverwalk and the Alamo, and is within walking distance of the convention center. This year, we are updating the meeting space to better align it with the quality level of the already renovated guestrooms. Additionally, leading up to the opening of the new $500 million Alamo Visitor Center and Museum in 2027, we will enhance the ground floor retail spaces as we expect this area will be a primary access point to the new Alamo grounds and provides the opportunity to drive additional lease revenue. We are very pleased with this investment and see considerable potential to grow group and transient business.

Portfolio Investment

In 2024, we advanced our capital investment program, building on the success of our recent conversion of The Westin Washington, DC Downtown, completing key projects and initiating work on several others expected to drive additional growth in 2025 and beyond. In August, we completed the comprehensive renovation and rebranding of the Renaissance Long Beach to the Marriott Long Beach Downtown. The fully redesigned and renovated property began to realize the benefits of our investment in the fourth quarter with revenue and earnings up materially, a trend we expect to continue into 2025 and beyond. Additionally, we renovated the meeting space at the JW Marriott New Orleans and completed the majority of the guestroom upgrades at the Wailea Beach Resort. Finally, at the end of 2024, we were nearing completion of the Andaz Miami Beach transformation. We are excited to open this new luxury ocean-front resort in March 2025.

Return of Capital

In 2024, we increased our quarterly base dividend nearly 30% to $0.09 per share and distributed nearly $70 million in common dividends. We also returned $27 million to stockholders through share repurchases at a meaningful discount to NAV for a combined capital return of nearly $100 million during the year. While our share repurchase activity remains opportunistic, our common dividend will continue to provide a more consistent return of capital. That said, over the last three years, we have repurchased

SUNSTONE HOTEL INVESTORS, INC.

$190 million of our common stock, representing approximately 9% of the total shares outstanding.

Our Outlook

Looking forward to 2025, we are optimistic that our balanced, high-quality portfolio will deliver additional same-store earnings growth which will be aided by our recently completed investments. Additionally, the successful execution of our strategy in 2024 - capital recycling, portfolio investment, and returning capital to our stockholders, has provided the Company with a solid foundation that we are confident will provide sustained earnings and NAV per share growth in the years to come.

In addition to the embedded earnings capacity that we have already built, we can utilize our balance sheet capacity to further execute our strategy and thoughtfully grow the portfolio. As always, we appreciate the continued support from our employees, our Board of Directors, our stockholders, and our partners as we continue to execute our strategy and work to deliver superior returns.

Sincerely,

Bryan A. Giglia

Chief Executive Off icer

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2024

For the transition period from

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 of

(I.R.S. Employer

Incorporation or Organization)

Identification Number)

15 Enterprise, Suite 200

Aliso 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

New York Stock Exchange

Series I Cumulative Redeemable Preferred Stock, $0.01 par value

SHO.PRI

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No  Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  No 

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.

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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit

report. ☒

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No 

The aggregate market value of the voting stock held by non-affiliates of the registrant based upon the closing sale price of the registrant's common stock on June 30, 2024 as reported on the New York Stock Exchange was approximately $2.1 billion.

The number of shares of the registrant's common stock outstanding as of February 7, 2025 was 201,019,097.

Documents Incorporated by Reference

Part III of this Report incorporates by reference information from the definitive Proxy Statement for the registrant's 2025 Annual Meeting of Stockholders.

SUNSTONE HOTEL INVESTORS, INC.

ANNUAL REPORT ON

FORM 10-K

For the Year Ended December 31, 2024

TABLE OF CONTENTS

Page

PART I

Item 1

Business

Item 1A

Risk Factors

Item 1B

Unresolved Staff Comments

Item 1C

Cybersecurity

Item 2

Properties

Item 3

Legal Proceedings

Item 4

Mine Safety Disclosures

PART II

Item 5

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Item 6

Reserved

Item 7

Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 7A Quantitative and Qualitative Disclosures About Market Risk

Item 8

Financial Statements and Supplementary Data

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A

Controls and Procedures

Item 9B

Other Information

Item 9C

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

PART III

Item 10

Directors, Executive Officers and Corporate Governance

Item 11

Executive Compensation

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13

Certain Relationships and Related Transactions, and Director Independence

Item 14

Principal Accountant Fees and Services

PART IV

Item 15

Exhibits and Financial Statement Schedules

Item 16

Form 10-K Summary

SIGNATURES

PART I

The "Company," "we," "our," and "us" refer to Sunstone Hotel Investors, Inc., a Maryland corporation, and one or more of our subsidiaries, including Sunstone Hotel Partnership, LLC, or the Operating Partnership, and Sunstone Hotel TRS Lessee, Inc., or the TRS Lessee, and, as the context may require, Sunstone Hotel Investors only or the Operating Partnership only.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report, together with other statements and information publicly disseminated by the Company, 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. Factors that may cause actual events to differ materially from the expectations expressed or implied by any forward-looking statement include, but are not limited to the risk factors discussed in this Annual Report on Form 10-K. Accordingly, there is no assurance that the Company's expectations will be realized. 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 1.

Business

Our Company

We were incorporated in Maryland on June 28, 2004. We are a real estate investment trust ("REIT"), under the Internal Revenue Code of 1986, as amended (the "Code"). As of December 31, 2024, we owned 15 hotels, comprised of 7,253 rooms, located in 7 states and in Washington, DC. Our portfolio consists of upper upscale and luxury hotels located in major convention, resort destination, and urban markets. 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.

We own hotels in major convention, urban, and resort destinations that benefit from significant barriers to entry by competitors and diverse economic drivers. Our mission is to be the premier stewards of capital in the lodging industry, providing superior returns to our stockholders by investing in hotels where we can add value through capital investment, hotel repositioning, and asset management. In addition, we seek to capitalize on our 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.

Our hotels are operated by third-party managers under long-term management agreements with the TRS Lessee or its subsidiaries. As of December 31, 2024, our third-party managers included: subsidiaries of Marriott International, Inc. or Marriott Hotel Services, Inc. (collectively, "Marriott"), managers of six of our hotels; Hyatt Hotels Corporation ("Hyatt"), manager of three of our hotels; and Four Seasons Hotels Limited ("Four Seasons"), Hilton Worldwide Holdings Inc. ("Hilton"), Interstate Hotels & Resorts, Inc. ("IHR") (an affiliate of Aimbridge Hospitality), Montage North America, LLC ("Montage"), Sage Hospitality Group ("Sage") and Singh Hospitality, LLC ("Singh") (aka EOS Hospitality), each a manager of one of the Company's hotels.

Competitive Strengths

We believe the following competitive strengths distinguish us from other owners of lodging properties:

Asset Management. Our asset management team is responsible for maximizing the long-term value of our real estate investments by achieving above average revenue and profit performance through proactive oversight of hotel operations. Our asset management team works with our third-party managers to drive property-level innovation and benchmark best practices. We work with our operators to develop hotel-level business plans, which include positioning and capital investment plans. We believe that a proactive asset management program can help grow the revenues of our hotel portfolio and maximize operational and environmental efficiency by leveraging best practices and innovations across our hotels, and by initiating well-timed and focused capital improvements to enhance the value of our hotels.

Acquisitions. Our acquisitions team is responsible for enhancing our portfolio quality and scale by executing well- timed acquisitions and dispositions that generate attractive risk-adjusted returns on our investments. We also focus on disciplined capital recycling and may selectively sell hotels that we believe have reached the end of their investment lifecycle, no longer fit our stated strategy, are unlikely to offer long-term returns in excess of our cost of capital, will achieve a sale price in excess of our internal valuation, or that have high risk relative to their anticipated returns. We believe that our significant acquisition and disposition experience will allow us to continue to execute our strategy to recycle and redeploy capital from slower growth assets to hotels and resorts with higher long-term growth rates.

Finance. We have a highly experienced finance team focused on minimizing our cost of capital and maximizing our financial flexibility by proactively managing our capital structure and opportunistically sourcing capital for growth.

Legal. Our legal team is responsible for overseeing and supporting all Company-wide legal matters, including all legal matters related to corporate oversight and governance, investment, asset management, design and construction, finance initiatives and litigation. We believe active and direct oversight of legal matters allows the Company the flexibility to pursue opportunities while minimizing legal exposure and protecting corporate assets.

Business Strategy

As demand for lodging generally fluctuates with the overall economy, we seek to own well-located hotel and resort real estate that will maintain a high appeal with lodging travelers over long periods of time and will generate superior economic earnings materially in excess of recurring capital requirements. We employ an active approach to hotel investment that maximizes our ability to create value during our period of ownership and opportunistically dispose of the hotel to harvest gains, realize that value, and then

Disclaimer

Sunstone Hotel Investors Inc. published this content on March 19, 2025, and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on March 19, 2025 at 20:50:17.479.