Sunstone Hotel Investors swings to $38.7M Q3 profit
A July hotel sale recorded a $31.5 million net gain, and nine-month operating cash flow was $161.183 million.
Sentiment and the balance of points
Rhea-AI Sentiment reads the wording of the document, how positive or negative its language is on a 1 to 5 scale. The balance of points shown with the takes weighs what the document actually discloses, so the two can disagree, for example when a trial that missed its main goal is described in upbeat language.
Sunstone Hotel Investors, Inc. (SHO) reported third-quarter revenue of $233.718 million, versus $229.323 million a year earlier. Net income attributable to common stockholders was $38.693 million, compared with a $2.940 million loss; diluted earnings per share were $0.21, versus a $0.02 loss. Nine-month operating cash flow was $161.183 million, versus $145.133 million.
In July, the company sold Hyatt Regency San Francisco, California, for a gross sale price of $279.0 million and recorded a $31.5 million net gain. For the nine months ended September 30, 2026, it repurchased common and preferred stock for $186.752 million; $321.1 million remained available under its $500.0 million repurchase program as of September 30, 2026.
At September 30, 2026, cash and restricted cash totaled $317.886 million, while total debt principal was $955.0 million. The $500.0 million credit facility had no amount outstanding and $500.0 million available for borrowing, subject to compliance with financial covenants. The 2026 ATM agreements permit common-stock sales with an aggregate offering price of up to $300.0 million.
How this balance works
Rhea-AI gives every point it takes from this document a weight. Minor counts 1, Moderate 3 and Major 9, so one Major point outweighs several Minor ones. The bar adds up the weights on each side, and when neither side holds more than 65% of the total the balance reads Mixed.
It reads the document as published, with the same rules for every company, and it does not look at what the market expected or at how the stock traded, so a point can be objectively good on a day the stock falls.
Rhea-AI Sentiment measures something else, the tone of the wording.
Positive
- Moderate pointCommon-stockholder income was $38.693 million, versus a $2.940 million loss.
- Moderate pointNine-month operating cash flow was $161.183 million, versus $145.133 million.
- Minor pointThe July hotel sale recorded a $31.5 million net gain.
Negative
- None.
Filing Explained
At September 30, 2026, 176,575,057 common shares were outstanding, versus 189,709,516 at year-end, alongside 13,748,527 common shares repurchased during the nine-month period.
This quarterly report says Sunstone’s at-the-market agreements allowed up to
The company also reported repurchasing 13,748,527 common shares during the first nine months of 2026; common shares outstanding were 176,575,057 on
Key Figures
Key Terms
REIT financial
Hotel Adjusted EBITDAre financial
delayed draw financial
At the Market Agreements financial
Level 2 measurements financial
FAQ
AI-generated questions and answers. How Rhea-AI works. Not financial advice.
What were SHO’s third-quarter 2026 revenue and earnings?
What hotel did SHO sell in July 2026?
Can SHO use forward contracts under its ATM agreements?
What dividend rate applies to SHO Series G preferred stock?
AI-generated analysis. How Rhea-AI works. Not financial advice.
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
OR
For the transition period from to
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(Exact Name of Registrant as Specified in Its Charter)
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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).
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.
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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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of October 30, 2026, there were
Table of Contents
SUNSTONE HOTEL INVESTORS, INC.
QUARTERLY REPORT ON
FORM 10-Q
For the Quarterly Period Ended September 30, 2026
TABLE OF CONTENTS
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PART I—FINANCIAL INFORMATION |
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Item 1. |
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Financial Statements |
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Consolidated Balance Sheets as of September 30, 2026 (unaudited) and December 31, 2025 |
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Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2026 and 2025 |
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Unaudited Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2026 and 2025 |
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Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2026 and 2025 |
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Notes to Unaudited Consolidated Financial Statements |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Quantitative and Qualitative Disclosures about Market Risk |
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Item 4. |
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Controls and Procedures |
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PART II—OTHER INFORMATION |
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Item 1. |
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Legal Proceedings |
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Item 1A. |
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Risk Factors |
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
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Item 3. |
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Defaults Upon Senior Securities |
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Item 4. |
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Mine Safety Disclosures |
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Item 5. |
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Other Information |
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Exhibits |
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SIGNATURES |
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Table of Contents
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
SUNSTONE HOTEL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
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September 30, |
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December 31, |
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2026 |
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2025 |
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(unaudited) |
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ASSETS |
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Investment in hotel properties, net |
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$ |
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$ |
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Operating lease right-of-use assets, net |
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Cash and cash equivalents |
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Restricted cash |
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Accounts receivable, net |
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Prepaid expenses and other assets, net |
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Total assets |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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LIABILITIES |
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Debt, net of unamortized deferred financing costs |
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$ |
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$ |
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Operating lease obligations |
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Accounts payable and accrued expenses |
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Dividends and distributions payable |
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Other liabilities |
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Total liabilities |
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Commitments and contingencies (Note 14) |
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STOCKHOLDERS’ EQUITY |
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Preferred stock, $ |
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Series G Cumulative Redeemable Preferred Stock, |
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Common stock, $ |
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Additional paid in capital |
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Distributions in excess of retained earnings |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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See accompanying notes to unaudited consolidated financial statements.
2
Table of Contents
SUNSTONE HOTEL INVESTORS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2026 |
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2025 |
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2026 |
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2025 |
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Revenues |
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Room |
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$ |
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$ |
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$ |
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$ |
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Food and beverage |
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Other operating |
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Total revenues |
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Operating Expenses |
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Room |
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Food and beverage |
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Other operating |
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Advertising and promotion |
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Repairs and maintenance |
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Utilities |
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Franchise costs |
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Property tax, ground lease and insurance |
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Other property-level expenses |
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Corporate overhead |
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Depreciation and amortization |
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Impairment and other losses |
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— |
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— |
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— |
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Total operating expenses |
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Interest and other income |
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Interest expense |
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( |
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( |
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( |
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( |
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Gain (loss) on sale of assets |
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— |
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( |
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Loss on extinguishment of debt |
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— |
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( |
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— |
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( |
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Income before income taxes |
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Income tax provision, net |
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( |
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( |
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( |
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( |
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Net Income |
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Preferred stock dividends, net of gain on repurchases |
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( |
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( |
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( |
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( |
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Net income (loss) attributable to common stockholders |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Basic and diluted income (loss) per share |
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Basic net income (loss) attributable to common stockholders |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Diluted net income (loss) attributable to common stockholders |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Basic weighted average common shares outstanding |
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Diluted weighted average common shares outstanding |
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See accompanying notes to unaudited consolidated financial statements.
3
Table of Contents
SUNSTONE HOTEL INVESTORS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share and per share data)
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Distributions |
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Preferred Stock |
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Common Stock |
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Additional |
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in Excess of |
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Number of |
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Number of |
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Paid in |
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Retained |
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Total |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Earnings |
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Equity |
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|||||||
Balance at December 31, 2025 (audited) |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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||||||
Amortization of deferred stock compensation |
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— |
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— |
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— |
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— |
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— |
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Issuance of restricted common stock, net |
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— |
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— |
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( |
) |
|
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— |
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( |
) |
||
Common stock distributions declared at $ |
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— |
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— |
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— |
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— |
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|
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— |
|
|
|
( |
) |
|
|
( |
) |
Series G preferred stock dividends declared at $ |
|
|
— |
|
|
|
— |
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|
|
— |
|
|
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— |
|
|
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— |
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|
|
( |
) |
|
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( |
) |
Series H preferred stock dividends declared at $ |
|
|
— |
|
|
|
— |
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|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Series I preferred stock dividends declared at $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Repurchases of common stock |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
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|
( |
) |
Repurchases of Series H preferred stock |
|
|
( |
) |
|
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( |
) |
|
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— |
|
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— |
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( |
) |
||
Repurchases of Series I preferred stock |
|
|
( |
) |
|
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( |
) |
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— |
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— |
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( |
) |
||
Net income |
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— |
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— |
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— |
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— |
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— |
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Balance at March 31, 2026 |
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( |
) |
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||||||
Amortization of deferred stock compensation |
|
|
— |
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— |
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— |
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— |
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— |
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||
Issuance of restricted common stock, net |
|
|
— |
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|
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— |
|
|
|
|
|
|
|
|
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( |
) |
|
|
— |
|
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( |
) |
||
Common stock distributions declared at $ |
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— |
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— |
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— |
|
|
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— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Series G preferred stock dividends declared at $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Series H preferred stock dividends declared at $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Series I preferred stock dividends declared at $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Repurchases of common stock |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
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|
( |
) |
Repurchases of Series H preferred stock |
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|
( |
) |
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( |
) |
|
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— |
|
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— |
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( |
) |
||
Repurchases of Series I preferred stock |
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( |
) |
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( |
) |
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— |
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— |
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( |
) |
||
Net income |
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— |
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— |
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— |
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— |
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— |
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Balance at June 30, 2026 |
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( |
) |
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Amortization of deferred stock compensation |
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— |
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— |
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— |
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— |
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— |
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Forfeiture of restricted common stock |
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— |
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— |
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( |
) |
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— |
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— |
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— |
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— |
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Common stock distributions declared at $ |
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— |
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|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Series G preferred stock dividends declared at $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Series H preferred stock dividends declared at $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Series I preferred stock dividends declared at $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Repurchases of common stock |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Repurchases of Series H preferred stock |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
||
Repurchases of Series I preferred stock |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
||
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Balance at September 30, 2026 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||||
See accompanying notes to unaudited consolidated financial statements.
4
Table of Contents
SUNSTONE HOTEL INVESTORS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions |
|
|
|
|
|||||||
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Additional |
|
|
in Excess of |
|
|
|
|
|||||||||||||
|
|
Number of |
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|
|
Number of |
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|
|
|
|
Paid in |
|
|
Retained |
|
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|
|||||||
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Total Equity |
|
|||||||
Balance at December 31, 2024 (audited) |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||||
Amortization of deferred stock compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Issuance of restricted common stock, net |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
||
Forfeiture of restricted common stock |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Common stock distributions declared at $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Series G preferred stock dividends declared at $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Series H preferred stock dividends declared at $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Series I preferred stock dividends declared at $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Repurchases of common stock |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Balance at March 31, 2025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
Amortization of deferred stock compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Issuance of restricted common stock |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
||
Common stock distributions declared at $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Series G preferred stock dividends declared at $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Series H preferred stock dividends declared at $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Series I preferred stock dividends declared at $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Repurchases of common stock |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Balance at June 30, 2025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
Amortization of deferred stock compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Common stock distributions declared at $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Series G preferred stock dividends declared at $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Series H preferred stock dividends declared at $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Series I preferred stock dividends declared at $ |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Repurchases of common stock |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Balance at September 30, 2025 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||||
See accompanying notes to unaudited consolidated financial statements.
5
Table of Contents
SUNSTONE HOTEL INVESTORS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2026 |
|
|
2025 |
|
||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
||
Net income |
|
$ |
|
|
$ |
|
||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
||
Bad debt expense |
|
|
|
|
|
|
||
(Gain) loss on sale of assets |
|
|
( |
) |
|
|
|
|
Loss on extinguishment of debt |
|
|
— |
|
|
|
|
|
Noncash interest on derivatives, net |
|
|
( |
) |
|
|
|
|
Depreciation |
|
|
|
|
|
|
||
Amortization of franchise fees and other intangibles |
|
|
|
|
|
|
||
Amortization of deferred financing costs |
|
|
|
|
|
|
||
Amortization of deferred stock compensation |
|
|
|
|
|
|
||
Impairment and other losses |
|
|
|
|
|
— |
|
|
Gain on insurance recoveries |
|
|
( |
) |
|
|
( |
) |
Amortization of deferred income related to key money |
|
|
( |
) |
|
|
— |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Accounts receivable, net |
|
|
( |
) |
|
|
|
|
Prepaid expenses and other assets |
|
|
( |
) |
|
|
( |
) |
Accounts payable and other liabilities |
|
|
|
|
|
|
||
Operating lease right-of-use assets and obligations |
|
|
( |
) |
|
|
( |
) |
Net cash provided by operating activities |
|
|
|
|
|
|
||
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
||
Proceeds from sale of hotel property |
|
|
|
|
|
|
||
Acquisition of hotel property and other assets |
|
|
— |
|
|
|
( |
) |
Acquisition-related key money proceeds |
|
|
|
|
|
|
||
Proceeds from property insurance |
|
|
|
|
|
|
||
Renovations and additions to hotel properties and other assets |
|
|
( |
) |
|
|
( |
) |
Net cash provided by (used in) investing activities |
|
|
|
|
|
( |
) |
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
||
Repurchases of common stock |
|
|
( |
) |
|
|
( |
) |
Repurchases of common stock for employee tax obligations |
|
|
( |
) |
|
|
( |
) |
Repurchases of preferred stock |
|
|
( |
) |
|
|
— |
|
Proceeds from credit facility |
|
|
|
|
|
|
||
Payments on credit facility |
|
|
( |
) |
|
|
( |
) |
Payments of deferred financing costs |
|
|
— |
|
|
|
( |
) |
Proceeds from term loans |
|
|
|
|
|
|
||
Payments on term loans |
|
|
— |
|
|
|
( |
) |
Payments on senior notes |
|
|
( |
) |
|
|
— |
|
Payment of securities registration costs |
|
|
( |
) |
|
|
— |
|
Dividends and distributions paid |
|
|
( |
) |
|
|
( |
) |
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
Net increase in cash and cash equivalents and restricted cash |
|
|
|
|
|
|
||
Cash and cash equivalents and restricted cash, beginning of period |
|
|
|
|
|
|
||
Cash and cash equivalents and restricted cash, end of period |
|
$ |
|
|
$ |
|
||
See accompanying notes to unaudited consolidated financial statements.
6
Table of Contents
SUNSTONE HOTEL INVESTORS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Supplemental Disclosure of Cash Flow Information
|
|
September 30, |
|
|||||
|
|
2026 |
|
|
2025 |
|
||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Restricted cash |
|
|
|
|
|
|
||
Total cash and cash equivalents and restricted cash shown on the consolidated statements |
|
$ |
|
|
$ |
|
||
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2026 |
|
|
2025 |
|
||
Cash paid for interest, net of capitalized interest |
|
$ |
|
|
$ |
|
||
Cash paid (refunded) for income taxes, net |
|
$ |
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
||
Changes in operating lease right-of-use assets |
|
$ |
|
|
$ |
|
||
Changes in operating lease obligations |
|
|
( |
) |
|
|
( |
) |
Changes in operating lease right-of-use assets and lease obligations, net |
|
$ |
( |
) |
|
$ |
( |
) |
Supplemental Disclosure of Noncash Investing and Financing Activities
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2026 |
|
|
2025 |
|
||
Accrued renovations and additions to hotel properties and other assets |
|
$ |
|
|
$ |
|
||
Gain on repurchases of preferred stock |
|
$ |
|
|
$ |
— |
|
|
Operating lease right-of-use asset obtained in exchange for operating lease obligation |
|
$ |
|
|
$ |
|
||
Amortization of deferred stock compensation — construction activities |
|
$ |
|
|
$ |
|
||
Dividends and distributions payable |
|
$ |
|
|
$ |
|
||
Insurance receivable related to property damage |
|
$ |
|
|
$ |
— |
|
|
See accompanying notes to unaudited consolidated financial statements.
7
Table of Contents
SUNSTONE HOTEL INVESTORS, INC.
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
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 September 30, 2026, the Company owned
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
Principles of Consolidation
The accompanying consolidated financial statements as of September 30, 2026 and December 31, 2025, and for the three and nine months ended September 30, 2026 and 2025, 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, 2025, filed with the SEC on February 27, 2026. Operating results for the three and nine months ended September 30, 2026 are not necessarily indicative of the results that may be expected for the year ending December 31, 2026.
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.
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.
Restricted Cash
Restricted cash primarily includes reserves for operating expenses and capital expenditures required by certain of the Company’s management and franchise agreements, as well as cash held as collateral for certain letters of credit. At times, restricted cash also includes hotel acquisition or disposition-related earnest money held in escrow reserves pending completion of the associated transaction.
8
Table of Contents
Summary of Significant Accounting Policies
The Company’s Annual Report on Form 10-K for the year ended December 31, 2025, filed with the SEC on February 27, 2026, contains a discussion of significant accounting policies. There have been no changes to our significant accounting policies since December 31, 2025.
New Accounting Standards and Accounting Changes
In November 2024, the Financial Accounting Standards Board (“FASB”) 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.
In December 2025, the FASB issued Accounting Standards Update No. 2025-11, “Interim Reporting (Topic 270): Narrow-Scope Improvements” (“ASU 2025-11”), which clarifies the scope and requirements for interim financial statement disclosures under U.S. GAAP. The guidance creates a comprehensive list of required interim disclosures and incorporates a disclosure principle that requires disclosures at interim periods when an event or change that has a material effect on the entity has occurred since the previous year-end. ASU 2025-11 may be applied prospectively or retrospectively and is effective for interim reporting periods within annual reporting periods beginning after December 15, 2027, with early adoption permitted. The Company is currently evaluating the impact of ASU 2025-11 on its consolidated financial statements.
3. Investment in Hotel Properties
Investment in hotel properties, net consisted of the following (in thousands):
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2026 |
|
|
2025 |
|
||
|
|
(unaudited) |
|
|
|
|
||
Land |
|
$ |
|
|
$ |
|
||
Buildings and improvements |
|
|
|
|
|
|
||
Furniture, fixtures and equipment |
|
|
|
|
|
|
||
Intangible assets |
|
|
|
|
|
|
||
Construction in progress |
|
|
|
|
|
|
||
Investment in hotel properties, gross |
|
|
|
|
|
|
||
Accumulated depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
Investment in hotel properties, net |
|
$ |
|
|
$ |
|
||
4. Disposals
In July 2026, the Company sold Hyatt Regency San Francisco, located in California, for a gross sale price of $
5. Fair Value Measurements and Interest Rate Derivatives
Fair Value Measurements
As of September 30, 2026 and December 31, 2025, 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:
9
Table of Contents
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. |
As of both September 30, 2026 and December 31, 2025, 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 September 30, 2026 and December 31, 2025,
The Company’s principal balances and fair market values of its consolidated debt as of September 30, 2026 (unaudited) and December 31, 2025 were as follows (in thousands):
|
|
September 30, 2026 |
|
|
December 31, 2025 |
|
||||||||||
|
|
Carrying |
|
|
Fair Value (2) |
|
|
Carrying |
|
|
Fair Value (2) |
|
||||
Debt |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Interest Rate Derivatives
The Company’s interest rate swap derivatives, which are not designated as effective cash flow hedges, consisted of the following at September 30, 2026 (unaudited) and December 31, 2025 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value of Assets (Liabilities) (1) |
|
||||||||
|
|
|
|
|
Effective |
|
Maturity |
|
Notional |
|
|
September 30, |
|
|
December 31, |
|
||||||
Hedged Debt |
|
Fixed Rate |
|
|
Date |
|
Date |
|
Amount |
|
|
2026 |
|
|
2025 |
|
||||||
Term Loan 2 |
|
|
% |
|
|
|
$ |
|
|
|
$ |
N/A |
|
|
$ |
— |
|
|||||
Term Loan 2 |
|
|
% |
|
|
|
$ |
|
|
|
|
N/A |
|
|
|
( |
) |
|||||
Term Loan 2 |
|
|
% |
|
|
|
$ |
|
|
|
|
|
( |
) |
|
|
( |
) |
||||
Term Loan 1 |
|
|
% |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
||||||
Term Loan 1 |
|
|
% |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
( |
) |
|||
Noncash changes in the fair values of the Company’s interest rate derivatives resulted in increases (decreases) to interest expense for the three and nine months ended September 30, 2026 and 2025 as follows (unaudited and in thousands):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||
|
|
2026 |
|
|
2025 |
|
|
2026 |
|
|
2025 |
|
||||||||
Noncash interest on derivatives, net |
|
$ |
|
( |
) |
|
$ |
|
( |
) |
|
$ |
|
( |
) |
|
$ |
|
|
|
10
Table of Contents
6. Prepaid Expenses and Other Assets
Prepaid expenses and other assets, net consisted of the following (in thousands):
|
|
September 30, |
|
|
December 31, |
|
||||
|
|
2026 |
|
|
2025 |
|
||||
|
|
(unaudited) |
|
|
|
|
|
|||
Prepaid expenses |
|
$ |
|
|
|
$ |
|
|
||
Inventory |
|
|
|
|
|
|
|
|
||
Deferred financing costs, net |
|
|
|
|
|
|
|
|
||
Property and equipment, net |
|
|
|
|
|
|
|
|
||
Interest rate derivatives |
|
|
|
|
|
|
|
|
||
Deferred rent on straight-lined third-party tenant leases |
|
|
|
|
|
|
|
|
||
Liquor licenses |
|
|
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
|
|
||
Total prepaid expenses and other assets, net |
|
$ |
|
|
|
$ |
|
|
||
7. Debt
In January 2026, the Company drew down the $
In April 2026, the Company drew down $
Debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
Balance Outstanding as of |
|
||||||||
|
September 30, 2026 |
|
|
|
|
September 30, |
|
|
December 31, |
|
|||||||
|
Rate Type |
|
Interest Rate |
|
|
Maturity Date |
|
2026 |
|
|
2025 |
|
|||||
|
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
|
||||
Unsecured Corporate Credit Facilities (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Term Loan 1 |
Fixed |
(2) |
|
% |
|
|
$ |
|
|
|
$ |
|
|
||||
Term Loan 2 |
Fixed |
(3) |
|
% |
|
|
|
|
|
|
|
|
|
||||
Term Loan 3 |
Floating |
|
|
% |
|
|
|
|
|
|
|
|
|
||||
Total unsecured corporate credit facilities |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Unsecured Senior Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Series A |
N/A |
(4) |
N/A |
|
|
N/A |
|
$ |
|
— |
|
|
$ |
|
|
||
Series B |
Fixed |
|
|
% |
|
|
|
|
|
|
|
|
|
||||
Total unsecured senior notes |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Total debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Unamortized deferred financing costs |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
( |
) |
|
Debt, net of unamortized deferred financing costs |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|||
11
Table of Contents
Interest Expense
Total interest incurred and expensed on the Company’s debt was as follows (unaudited and in thousands):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2026 |
|
|
2025 |
|
|
2026 |
|
|
2025 |
|
||||
Interest expense on debt |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Noncash interest on derivatives, net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Amortization of deferred financing costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Capitalized interest |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Total interest expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
8. Other Liabilities
Other liabilities consisted of the following (in thousands):
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2026 |
|
|
2025 |
|
||
|
|
(unaudited) |
|
|
|
|
||
Advance deposits |
|
$ |
|
|
$ |
|
||
Property, sales and use taxes payable |
|
|
|
|
|
|
||
Accrued interest |
|
|
|
|
|
|
||
Deferred income related to key money |
|
|
|
|
|
— |
|
|
Deferred rent |
|
|
|
|
|
|
||
Interest rate derivatives |
|
|
|
|
|
|
||
Management fees payable |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total other liabilities |
|
$ |
|
|
$ |
|
||
During the three months ended September 30, 2026 and 2025, the Company recognized approximately $
9. Leases
As of both September 30, 2026 and December 31, 2025, the Company had operating leases for ground, office, equipment, and airspace with current maturity dates ranging from 2028 through 2097, excluding renewal options. Including renewal options available to the Company, the lease maturity date extends to 2147.
12
Table of Contents
Operating leases were included on the accompanying consolidated balance sheets as follows (in thousands):
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2026 |
|
|
2025 |
|
||
|
|
(unaudited) |
|
|
|
|
||
Right-of-use assets, net (1) |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Lease obligations (1) |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Weighted average remaining lease term |
|
|
|
|
|
|||
Weighted average discount rate |
|
|
% |
|
|
|
||
The components of lease expense, as well as supplemental cash flow information for operating leases, were as follows (unaudited and in thousands):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2026 |
|
|
2025 |
|
|
2026 |
|
|
2025 |
|
||||
Operating lease cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Variable lease cost (1) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Sublease income (2) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total lease cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating cash flows for operating leases (3) |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
||||
10. Stockholders’ Equity
Series G Cumulative Redeemable Preferred Stock
The Series G preferred stock, which is callable at its $
Series H Cumulative Redeemable Preferred Stock
The Series H preferred stock, which has an annual dividend rate of
13
Table of Contents
Series H preferred stock, the Company may at its option redeem the Series H preferred stock for cash at a redemption price of $
Series I Cumulative Redeemable Preferred Stock
The Series I preferred stock, which has an annual dividend rate of
Stock Repurchase Program
In February 2026, the Company’s board of directors reauthorized and restored the Company’s existing stock repurchase program, allowing the Company to acquire up to $
Details of the Company’s common and preferred stock repurchases were as follows (dollars in thousands):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2026 |
|
|
2025 |
|
|
2026 |
|
|
2025 |
|
||||
Number of common shares |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Number of preferred shares (1) |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Total cost, including fees and commissions |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
As of September 30, 2026, $
ATM Agreements
In August 2026, the Company entered into separate “At the Market” Agreements (the “2026 ATM Agreements”) with several financial institutions, which replaced the Company's prior “At the Market” Agreements entered into in 2023 (the “2023 ATM Agreements”). In accordance with the terms of the 2026 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 $
11. 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.
14
Table of Contents
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 September 30, 2026 and 2025, the Company’s issued and outstanding awards consisted of both time-based and performance-based restricted stock grants.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2026 |
|
|
2025 |
|
|
2026 |
|
|
2025 |
|
||||
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
|
|
Number of |
|
|
Weighted- |
|
||
Unvested at January 1, 2026 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
$ |
|
||
Vested |
|
|
( |
) |
|
$ |
|
|
Forfeited |
|
|
( |
) |
|
$ |
|
|
Unvested at September 30, 2026 |
|
|
|
|
$ |
|
||
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 or the achievement of pre-determined stock price targets during performance periods ranging from
|
|
Target |
|
|
Weighted- |
|
||
Unvested at January 1, 2026 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
$ |
|
||
Vested |
|
|
( |
) |
|
$ |
|
|
Forfeited |
|
|
( |
) |
|
$ |
|
|
Unvested at September 30, 2026 |
|
|
|
|
$ |
|
||
The restricted stock units granted during the first nine months of 2026 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
Expected volatility |
|
|
% |
|
Dividend yield (1) |
|
|
|
|
Risk-free rate |
|
|
% |
|
Expected term |
|
|
||
15
Table of Contents
12. 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.
The following table sets forth the computation of basic and diluted earnings per common share (unaudited and in thousands, except per share data):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2026 |
|
|
2025 |
|
|
2026 |
|
|
2025 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Preferred stock dividends, net of gain on repurchases |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Distributions paid to participating securities |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Undistributed income allocated to participating |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Numerator for basic and diluted net income (loss) attributable |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average basic common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Unvested restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average diluted common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic net income (loss) attributable to common stockholders per |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||
Diluted net income (loss) attributable to common stockholders |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||
In its calculation of diluted earnings per share, the Company excluded
The Company also had
16
Table of Contents
Company excluded
13. Segment Information
The Company considers each of its hotels to be an operating segment and has aggregated its hotels into a single reportable segment, Hotel Ownership. The Company’s Chief Operating Decision Maker (“CODM”) is its Chief Executive Officer.
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 accompanying 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):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2026 |
|
|
2025 |
|
|
2026 |
|
|
2025 |
|
||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Room |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Food and beverage |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other operating |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Advertising and promotion |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Repairs and maintenance |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Utilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Franchise costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Property tax, ground lease and insurance |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other property-level expenses (1) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Hotel Adjusted EBITDAre |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
17
Table of Contents
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2026 |
|
|
2025 |
|
|
2026 |
|
|
2025 |
|
||||
Reconciliation of Hotel Adjusted EBITDAre to Net |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Hotel Adjusted EBITDAre |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Non-hotel operating expenses, net (2) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Severe weather-related restoration expenses, net of insurance |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Property-level pre-opening and management transition costs (3) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Property-level legal settlement costs (3) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Taxes assessed on commercial rents (3) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Amortization of right-of-use assets and obligations |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Corporate overhead |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Impairment and other losses |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Interest and other income |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Gain (loss) on sale of assets |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Loss on extinguishment of debt |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Income tax provision, net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net income |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
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.
14. Commitments and Contingencies
Management Agreements
Management agreements with the Company’s third-party hotel managers currently require the Company to pay between
Total basic management and incentive management fees were included in other property-level expenses on the accompanying consolidated statements of operations as follows (unaudited and in thousands):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2026 |
|
|
2025 |
|
|
2026 |
|
|
2025 |
|
||||
Basic management fees |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Incentive management fees |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
||
Amortization of deferred income related to key money |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Total basic and incentive management fees |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
18
Table of Contents
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 accompanying consolidated statements of operations as follows (unaudited and in thousands):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2026 |
|
|
2025 |
|
|
2026 |
|
|
2025 |
|
||||
Franchise assessments (1) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Franchise royalties |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total franchise costs |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Renovation and Construction Commitments
At September 30, 2026, the Company had various contracts outstanding with third parties in connection with the ongoing renovations of certain of its hotel properties. The remaining commitments under these contracts at September 30, 2026 totaled $
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 September 30, 2026, the Company’s hotels were geographically concentrated as follows (unaudited):
|
|
Number of Hotels |
|
|
Percentage of |
|
|
Trailing 12- |
|
|||
Southern California |
|
|
|
|
|
% |
|
|
% |
|||
Northern California |
|
|
|
|
|
% |
|
|
% |
|||
Florida |
|
|
|
|
|
% |
|
|
% |
|||
Hawaii |
|
|
|
|
|
% |
|
|
% |
|||
Washington, DC |
|
|
|
|
|
% |
|
|
% |
|||
Maui Storms
During the first quarter of 2026, the Hawaiian Islands experienced multiple severe storms that impacted the Company’s Wailea Beach Resort, causing wind and water damage to certain guestrooms, public areas, and portions of the resort’s roofs. The Company maintains customary property, casualty, environmental, flood, and business interruption insurance at all of its hotels; however, such coverage is subject to certain limitations, conditions, and deductibles.
During the third quarter of 2026, the Company recognized a $
19
Table of Contents
The Company continues to work with its insurers to pursue additional recoveries related to repair and restoration costs. Additional storm-related costs will be recognized as incurred. Any additional business interruption insurance recoveries, if realized, are expected to be recognized in the period in which the proceeds are received or the related contingency is resolved and amounts become realizable.
Other
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.
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.
15. Subsequent Events
In October 2026, the Company entered into
Subsequent to the end of the third quarter of 2026 and through the date of issuance of these financial statements, the Company repurchased
20
Table of Contents
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 Securities Exchange Act of 1934, as amended (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 27, 2026, under the caption “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, including but not limited to the following factors:
21
Table of Contents
These factors may cause our actual results or 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.
22
Table of Contents
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 September 30, 2026, we owned 13 hotels, which average 475 rooms in size. Following the July 1, 2026, rebranding of Oceans Edge Resort & Marina as Hilton Key West Resort & Marina, all of our hotels are operated under nationally recognized brands.
Maui Storms
During the first quarter of 2026, the Hawaiian Islands experienced multiple severe storms that impacted our Wailea Beach Resort, causing wind and water damage to certain guestrooms, public areas, and portions of the resort’s roofs. We maintain customary property, casualty, environmental, flood, and business interruption insurance at all of our hotels; however, such coverage is subject to certain limitations, conditions, and deductibles.
During the third quarter of 2026, we recognized a $0.6 million net benefit related to storm-related repair and restoration activity. For the nine months ended September 30, 2026, storm-related repair and restoration costs were fully offset by insurance proceeds. We also recognized a $1.6 million loss related to the write-off of storm-damaged assets, $2.4 million of property insurance claim recoveries, and $1.2 million of business interruption insurance proceeds related to storm-related lost profits, all of which were recognized during the second quarter of 2026. These amounts were recorded in impairment and other losses, interest and other income, and other operating revenue, respectively, in the consolidated statements of operations. No additional storm-related write-offs or business interruption insurance proceeds were recorded during the third quarter of 2026.
We continue to work with our insurers to pursue additional recoveries related to repair and restoration costs. Additional storm-related costs will be recognized as incurred. Any additional business interruption insurance recoveries, if realized, are expected to be recognized in the period in which the proceeds are received or the related contingency is resolved and amounts become realizable.
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:
23
Table of Contents
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:
24
Table of Contents
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.
25
Table of Contents
Operating Results. The following table presents our unaudited operating results for the three months ended September 30, 2026 and 2025, including the amount and percentage change in the results between the two periods.
|
|
Three Months Ended September 30, |
||||||||||||||
|
|
2026 |
|
|
2025 |
|
|
Change $ |
|
|
Change % |
|||||
|
|
(in thousands, except statistical data) |
||||||||||||||
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Room |
|
$ |
140,053 |
|
|
$ |
139,523 |
|
|
$ |
530 |
|
|
0.4 |
% |
|
Food and beverage |
|
|
68,601 |
|
|
|
64,419 |
|
|
|
4,182 |
|
|
6.5 |
% |
|
Other operating |
|
|
25,064 |
|
|
|
25,381 |
|
|
|
(317) |
|
|
(1.2) |
% |
|
Total revenues |
|
|
233,718 |
|
|
|
229,323 |
|
|
|
4,395 |
|
|
1.9 |
% |
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating |
|
|
151,363 |
|
|
|
149,608 |
|
|
|
1,755 |
|
|
1.2 |
% |
|
Other property-level expenses |
|
|
27,853 |
|
|
|
26,926 |
|
|
|
927 |
|
|
3.4 |
% |
|
Corporate overhead |
|
|
6,410 |
|
|
|
6,970 |
|
|
|
(560) |
|
|
(8.0) |
% |
|
Depreciation and amortization |
|
|
30,287 |
|
|
|
33,928 |
|
|
|
(3,641) |
|
|
(10.7) |
% |
|
Total operating expenses |
|
|
215,913 |
|
|
|
217,432 |
|
|
|
(1,519) |
|
|
(0.7) |
% |
|
Interest and other income |
|
|
2,620 |
|
|
|
3,160 |
|
|
|
(540) |
|
|
(17.1) |
% |
|
Interest expense |
|
|
(10,729) |
|
|
|
(13,412) |
|
|
|
2,683 |
|
|
20.0 |
% |
|
Gain on sale of assets |
|
|
31,489 |
|
|
|
— |
|
|
|
31,489 |
|
|
100.0 |
% |
|
Loss on extinguishment of debt |
|
|
— |
|
|
|
(180) |
|
|
|
180 |
|
|
100.0 |
% |
|
Income before income taxes |
|
|
41,185 |
|
|
|
1,459 |
|
|
|
39,726 |
|
|
2,722.8 |
% |
|
Income tax provision, net |
|
|
(296) |
|
|
|
(137) |
|
|
|
(159) |
|
|
(116.1) |
% |
|
NET INCOME |
|
|
40,889 |
|
|
|
1,322 |
|
|
|
39,567 |
|
|
2,993.0 |
% |
|
Preferred stock dividends, net of gain on repurchases |
|
|
(2,196) |
|
|
|
(4,262) |
|
|
|
2,066 |
|
|
48.5 |
% |
|
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON |
|
$ |
38,693 |
|
|
$ |
(2,940) |
|
|
$ |
41,633 |
|
|
1,416.1 |
% |
|
26
Table of Contents
The following table presents our unaudited operating results for the nine months ended September 30, 2026 and 2025, including the amount and percentage change in the results between the two periods.
|
|
Nine Months Ended September 30, |
||||||||||||||
|
|
2026 |
|
|
2025 |
|
|
Change $ |
|
|
Change % |
|
|
|||
|
|
(in thousands, except statistical data) |
|
|
||||||||||||
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Room |
|
$ |
469,368 |
|
|
$ |
440,492 |
|
|
$ |
28,876 |
|
|
6.6 |
% |
|
Food and beverage |
|
|
221,792 |
|
|
|
209,573 |
|
|
|
12,219 |
|
|
5.8 |
% |
|
Other operating |
|
|
79,376 |
|
|
|
73,095 |
|
|
|
6,281 |
|
|
8.6 |
% |
|
Total revenues |
|
|
770,536 |
|
|
|
723,160 |
|
|
|
47,376 |
|
|
6.6 |
% |
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating |
|
|
472,187 |
|
|
|
451,639 |
|
|
|
20,548 |
|
|
4.5 |
% |
|
Other property-level expenses |
|
|
95,550 |
|
|
|
88,184 |
|
|
|
7,366 |
|
|
8.4 |
% |
|
Corporate overhead |
|
|
22,005 |
|
|
|
24,221 |
|
|
|
(2,216) |
|
|
(9.1) |
% |
|
Depreciation and amortization |
|
|
98,724 |
|
|
|
100,328 |
|
|
|
(1,604) |
|
|
(1.6) |
% |
|
Impairment and other losses |
|
|
1,639 |
|
|
|
— |
|
|
|
1,639 |
|
|
100.0 |
% |
|
Total operating expenses |
|
|
690,105 |
|
|
|
664,372 |
|
|
|
25,733 |
|
|
3.9 |
% |
|
Interest and other income |
|
|
7,944 |
|
|
|
7,024 |
|
|
|
920 |
|
|
13.1 |
% |
|
Interest expense |
|
|
(33,788) |
|
|
|
(39,258) |
|
|
|
5,470 |
|
|
13.9 |
% |
|
Gain (loss) on sale of assets |
|
|
31,489 |
|
|
|
(8,751) |
|
|
|
40,240 |
|
|
459.8 |
% |
|
Loss on extinguishment of debt |
|
|
— |
|
|
|
(180) |
|
|
|
180 |
|
|
100.0 |
% |
|
Income before income taxes |
|
|
86,076 |
|
|
|
17,623 |
|
|
|
68,453 |
|
|
388.4 |
% |
|
Income tax provision, net |
|
|
(605) |
|
|
|
(272) |
|
|
|
(333) |
|
|
(122.4) |
% |
|
NET INCOME |
|
|
85,471 |
|
|
|
17,351 |
|
|
|
68,120 |
|
|
392.6 |
% |
|
Preferred stock dividends, net of gain on repurchases |
|
|
(4,844) |
|
|
|
(12,125) |
|
|
|
7,281 |
|
|
60.0 |
% |
|
NET INCOME ATTRIBUTABLE TO COMMON |
|
$ |
80,627 |
|
|
$ |
5,226 |
|
|
$ |
75,401 |
|
|
1,442.8 |
% |
|
Summary of Operating Results. The following items significantly impact the year-over-year comparability of our operations:
Room revenue. Room revenue increased $0.5 million, or 0.4%, in the third quarter of 2026 as compared to the third quarter of 2025 as follows:
|
|
Three Months Ended September 30, |
|
||||||||||||||||||||||||
|
|
2026 |
|
2025 |
|
Change |
|
||||||||||||||||||||
|
|
Occ% |
|
|
|
ADR |
|
RevPAR |
|
Occ% |
|
|
|
ADR |
|
RevPAR |
|
Occ% |
|
|
ADR |
|
|
RevPAR |
|
||
Comparable Portfolio |
|
73.8 |
% |
|
$ |
323.15 |
|
$ |
238.48 |
|
69.7 |
% |
|
$ |
310.18 |
|
$ |
216.20 |
|
410 |
|
bps |
4.2 |
% |
|
10.3 |
% |
27
Table of Contents
For the nine months ended September 30, 2026, room revenue increased $28.9 million, or 6.6%, as compared to the nine months ended September 30, 2025 as follows:
|
|
Nine Months Ended September 30, |
|
||||||||||||||||||||||||
|
|
2026 |
|
2025 |
|
Change |
|
||||||||||||||||||||
|
|
Occ% |
|
|
|
ADR |
|
RevPAR |
|
Occ% |
|
|
|
ADR |
|
RevPAR |
|
Occ% |
|
|
ADR |
|
|
RevPAR |
|
||
Comparable Portfolio |
|
74.6 |
% |
|
$ |
328.75 |
|
$ |
245.25 |
|
73.1 |
% |
|
$ |
319.25 |
|
$ |
233.37 |
|
150 |
|
bps |
3.0 |
% |
|
5.1 |
% |
Food and beverage revenue. Food and beverage revenue increased $4.2 million, or 6.5%, in the third quarter of 2026 as compared to the third quarter of 2025, as follows:
For the nine months ended September 30, 2026, food and beverage revenue increased $12.2 million, or 5.8%, as compared to the nine months ended September 30, 2025 as follows:
28
Table of Contents
Other operating revenue. Other operating revenue decreased $0.3 million, or 1.2%, in the third quarter of 2026 as compared to the third quarter of 2025 as follows:
For the nine months ended September 30, 2026, other operating revenue increased $6.3 million, or 8.6%, as compared to the nine months ended September 30, 2025 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 $1.8 million, or 1.2%, in the third quarter of 2026 as compared to the third quarter of 2025 as follows:
For the nine months ended September 30, 2026, hotel operating expenses increased $20.5 million, or 4.5%, as compared to the nine months ended September 30, 2025 as follows:
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Table of Contents
Other property-level expenses. Other property-level expenses increased $0.9 million, or 3.4%, in the third quarter of 2026 as compared to the third quarter of 2025 as follows:
For the nine months ended September 30, 2026, other property-level expenses increased $7.4 million, or 8.4%, as compared to the nine months ended September 30, 2025 as follows:
Corporate overhead expense. Corporate overhead expense decreased $0.6 million, or 8.0%, in the third quarter of 2026 as compared to the third quarter of 2025, due to decreased payroll and related expenses resulting from the restructuring of our executive team in the second quarter of 2026, as well as lower professional and due diligence fees.
For the nine months ended September 30, 2026, corporate overhead expense decreased $2.2 million, or 9.1%, as compared to the nine months ended September 30, 2025, primarily due to lower payroll and related expenses resulting from the restructuring of our executive team in the first quarter of 2025, as well as lower professional and due diligence fees. These lower expenses were partially offset by higher payroll and related expenses resulting from the restructuring of our executive team in the second quarter of 2026, as well as higher corporate governance expenses.
Depreciation and amortization expense. Depreciation and amortization expense decreased $3.6 million, or 10.7%, in the third quarter of 2026 as compared to the third quarter of 2025 as follows:
For the nine months ended September 30, 2026, depreciation and amortization expense decreased $1.6 million, or 1.6%, as compared to the nine months ended September 30, 2025 as follows:
Impairment and other losses. Impairment and other losses were zero and $1.6 million for the three and nine months ended September 30, 2026, respectively, and zero for both the three and nine months ended September 30, 2025. In June 2026, we recorded a $1.6 million loss at Wailea Beach Resort related to the write-off of storm-damaged assets.
Interest and other income. Interest and other income totaled $2.6 million and $3.2 million in the third quarters of 2026 and 2025, respectively, and $7.9 million and $7.0 million in the nine months ended September 30, 2026 and 2025, respectively.
During the third quarters of 2026 and 2025, we recognized interest income of $2.5 million and $1.4 million, respectively. Interest income increased in the third quarter of 2026 as compared to the third quarter of 2025 due to increases in our cash balances following our disposition of Hyatt Regency San Francisco in July 2026. In addition, during the third quarter of 2026, we recognized property insurance recoveries of $0.1 million. During the third quarter of 2025, we recognized a $1.0 million settlement for certain construction-related claims at Hilton Key West Resort & Marina, $0.7 million in net property insurance recoveries related to 2025 water damage at The Westin Washington, DC Downtown, and other miscellaneous income of $0.1 million.
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During the nine months ended September 30, 2026 and 2025, we recognized interest income of $5.1 million and $4.2 million, respectively. Interest income increased in the nine months ended September 30, 2026 as compared to the nine months ended September 30, 2025 due to increases in our cash balances following our disposition of Hyatt Regency San Francisco in July 2026. During the nine months ended September 30, 2026, we recognized property insurance recoveries of $2.7 million, primarily related to storm-related damage claims at Wailea Beach Resort, and other miscellaneous income of $0.1 million. During the nine months ended September 30, 2025, we recognized a $1.9 million settlement for certain construction-related claims at Hilton Key West Resort & Marina, $0.8 million in net property insurance recoveries related to 2023 fire damage at Hilton San Diego Bayfront and 2025 water damage at The Westin Washington, DC Downtown, and other miscellaneous income of $0.1 million.
Interest expense. We incurred interest expense as follows (in thousands):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2026 |
|
|
2025 |
|
|
2026 |
|
|
2025 |
|
||||
Interest expense on debt |
|
$ |
12,683 |
|
|
$ |
12,927 |
|
|
$ |
37,745 |
|
|
$ |
37,209 |
|
Noncash interest on derivatives, net |
|
|
(2,995 |
) |
|
|
(495 |
) |
|
|
(7,080 |
) |
|
|
668 |
|
Amortization of deferred financing costs |
|
|
1,041 |
|
|
|
980 |
|
|
|
3,123 |
|
|
|
2,782 |
|
Capitalized interest |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,401 |
) |
Total interest expense |
|
$ |
10,729 |
|
|
$ |
13,412 |
|
|
$ |
33,788 |
|
|
$ |
39,258 |
|
Interest expense decreased $2.7 million, or 20.0%, in the third quarter of 2026 as compared to the same period in 2025, and decreased $5.5 million, or 13.9%, in the nine months ended September 30, 2026 as compared to the same period in 2025.
The decreases in interest expense during the third quarter of 2026 and the nine months ended September 30, 2026 as compared to the same periods in 2025 were primarily due to noncash changes of $2.5 million and $7.7 million, respectively, in the fair market value of our derivatives. Additionally, interest expense during the third quarter of 2026 decreased by $0.2 million, as compared to the same period in 2025, primarily due to lower average interest rates on our term loans. These decreases in interest expense were partially offset by a reduction in capitalized interest of $1.4 million during the nine months ended September 30, 2026, as compared to the same period in 2025. Capitalized interest in the first half of 2025 was related to the extensive renovation work at Andaz Miami Beach, and there was no corresponding capitalization of interest during the nine months ended September 30, 2026.
The decreases in total interest expense during the third quarter of 2026 and the nine months ended September 30, 2026 as compared to the same periods in 2025 were partially offset by a $0.5 million increase in interest expense on our debt during the nine months ended September 30, 2026, primarily due to higher average debt balances, partially offset by lower average interest rates on our term loans. In addition, interest expense during the third quarter and the nine months ended September 30, 2026 increased by $0.1 million and $0.3 million, respectively, as compared to the same periods in 2025, due to higher amortization of deferred financing costs related to costs associated with the execution of the Third Amended and Restated Credit Agreement entered into in September 2025.
Our weighted average interest rate per annum, including our variable rate debt obligations and excluding capitalized interest, was approximately 5.1% and 5.2% at September 30, 2026 and 2025, respectively. Approximately 50.3% and 70.4% of our outstanding debt had fixed interest rates or had been swapped to fixed interest rates at September 30, 2026 and 2025, respectively. Including the effect of our interest rate derivative swaps entered into in October 2026 on Term Loan 2, 68.6% of our outstanding debt has fixed interest rates or has been swapped to fixed interest rates.
Gain (loss) on sale of assets. Gain on sale of assets totaled $31.5 million for both the third quarter and the nine months ended September 30, 2026, zero for the third quarter of 2025 and a loss of $8.8 million for the nine months ended September 30, 2025. In the third quarter and nine months ended September 30, 2026, we recognized a $31.5 million gain on our sale of Hyatt Regency San Francisco. In the nine months ended September 30, 2025, we recognized an $8.8 million loss on our sale of Hilton New Orleans St. Charles.
Loss on extinguishment of debt. Loss on extinguishment of debt totaled zero for both the third quarter and the nine months ended September 30, 2026, and a loss of $0.2 million for both the third quarter and the nine months ended September 30, 2025. In the third quarter and nine months ended September 30, 2025, we recorded a loss of $0.2 million related to the write-off of unamortized deferred financing costs associated with the execution of the Third Amended and Restated Credit Agreement entered into in September 2025.
Income tax 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.
For the third quarter and the nine months ended September 30, 2026, we recognized net current income tax provisions of $0.3 million and $0.6 million, respectively, resulting from current state and federal income tax expenses, net of any refunds.
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In the third quarter and the nine months ended September 30, 2025, we recognized net current income tax provisions of $0.1 million and $0.3 million, respectively, resulting from current state and federal income tax expenses, net of any refunds.
Preferred stock dividends, net of gain on repurchases. Preferred stock dividends, net of gain on repurchases were incurred as follows (in thousands):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||
|
|
2026 |
|
|
|
2025 |
|
|
2026 |
|
|
|
2025 |
|
||||
Series G preferred stock |
|
$ |
1,242 |
|
|
|
$ |
1,076 |
|
|
$ |
3,395 |
|
|
|
$ |
2,567 |
|
Series H preferred stock |
|
|
786 |
|
(1) |
|
|
1,761 |
|
|
|
2,122 |
|
(1) |
|
|
5,283 |
|
Series I preferred stock |
|
|
168 |
|
(1) |
|
|
1,425 |
|
|
|
(673 |
) |
(1) |
|
|
4,275 |
|
Total preferred stock dividends |
|
$ |
2,196 |
|
|
|
$ |
4,262 |
|
|
$ |
4,844 |
|
|
|
$ |
12,125 |
|
The dividend rate on the Series G preferred stock increased to the greater of the rate equal to Montage Healdsburg’s annual net operating income yield on our total investment in the resort or 4.5%, 6.5%, and 7.5% beginning in July 2024, July 2025, and July 2026, respectively. Accordingly, the dividend rate was 4.5% for the first and second quarters of 2025, 6.5% for the third and fourth quarters of 2025 and the first and second quarters of 2026, and 7.5% for the third quarter of 2026. Beginning in the third quarter of 2027, the annual dividend rate will increase to the greater of 8.5% or the rate equal to Montage Healdsburg’s annual net operating income yield on our 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 we do. 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 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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Table of Contents
The following table reconciles our unaudited net income to EBITDAre and Adjusted EBITDAre for the three and nine months ended September 30, 2026 and 2025 (in thousands):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2026 |
|
|
2025 |
|
|
2026 |
|
|
2025 |
|
||||
Net income |
|
$ |
40,889 |
|
|
$ |
1,322 |
|
|
$ |
85,471 |
|
|
$ |
17,351 |
|
Depreciation and amortization |
|
|
30,287 |
|
|
|
33,928 |
|
|
|
98,724 |
|
|
|
100,328 |
|
Interest expense |
|
|
10,729 |
|
|
|
13,412 |
|
|
|
33,788 |
|
|
|
39,258 |
|
Income tax provision, net |
|
|
296 |
|
|
|
137 |
|
|
|
605 |
|
|
|
272 |
|
(Gain) loss on sale of assets |
|
|
(31,489 |
) |
|
|
— |
|
|
|
(31,489 |
) |
|
|
8,751 |
|
Impairment and other losses |
|
|
— |
|
|
|
— |
|
|
|
1,639 |
|
|
|
— |
|
EBITDAre |
|
|
50,712 |
|
|
|
48,799 |
|
|
|
188,738 |
|
|
|
165,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amortization of deferred stock compensation |
|
|
2,015 |
|
|
|
1,905 |
|
|
|
7,461 |
|
|
|
6,741 |
|
Amortization of right-of-use assets and obligations |
|
|
(233 |
) |
|
|
(158 |
) |
|
|
(675 |
) |
|
|
(458 |
) |
Loss on extinguishment of debt |
|
|
— |
|
|
|
180 |
|
|
|
— |
|
|
|
180 |
|
(Gain) loss on property damage, net |
|
|
1,144 |
|
|
|
(674 |
) |
|
|
601 |
|
|
|
(773 |
) |
Property-level pre-opening and management transition costs |
|
|
841 |
|
|
|
— |
|
|
|
959 |
|
|
|
6,471 |
|
Property-level legal settlement costs |
|
|
— |
|
|
|
— |
|
|
|
935 |
|
|
|
— |
|
Management transition costs |
|
|
— |
|
|
|
— |
|
|
|
907 |
|
|
|
1,869 |
|
Adjustments to EBITDAre, net |
|
|
3,767 |
|
|
|
1,253 |
|
|
|
10,188 |
|
|
|
14,030 |
|
Adjusted EBITDAre |
|
$ |
54,479 |
|
|
$ |
50,052 |
|
|
$ |
198,926 |
|
|
$ |
179,990 |
|
Adjusted EBITDAre increased $4.4 million, or 8.8%, in the third quarter of 2026 as compared to the third quarter of 2025, and increased $18.9 million, or 10.5%, in the nine months ended September 30, 2026 as compared to the nine months ended September 30, 2025, primarily due to the following:
33
Table of Contents
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:
34
Table of Contents
The following table reconciles our unaudited net income to FFO attributable to common stockholders and Adjusted FFO attributable to common stockholders for the three and nine months ended September 30, 2026 and 2025 (in thousands):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2026 |
|
|
2025 |
|
|
2026 |
|
|
2025 |
|
||||
Net income |
|
$ |
40,889 |
|
|
$ |
1,322 |
|
|
$ |
85,471 |
|
|
$ |
17,351 |
|
Preferred stock dividends, net of gain on repurchases |
|
|
(2,196 |
) |
|
|
(4,262 |
) |
|
|
(4,844 |
) |
|
|
(12,125 |
) |
Real estate depreciation and amortization |
|
|
29,946 |
|
|
|
33,581 |
|
|
|
97,696 |
|
|
|
99,278 |
|
(Gain) loss on sale of assets |
|
|
(31,489 |
) |
|
|
— |
|
|
|
(31,489 |
) |
|
|
8,751 |
|
Impairment and other losses |
|
|
— |
|
|
|
— |
|
|
|
1,639 |
|
|
|
— |
|
FFO attributable to common stockholders |
|
|
37,150 |
|
|
|
30,641 |
|
|
|
148,473 |
|
|
|
113,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amortization of deferred stock compensation |
|
|
2,015 |
|
|
|
1,905 |
|
|
|
7,461 |
|
|
|
6,741 |
|
Real estate amortization of right-of-use assets and obligations |
|
|
(200 |
) |
|
|
(130 |
) |
|
|
(586 |
) |
|
|
(390 |
) |
Amortization of contract intangibles, net |
|
|
312 |
|
|
|
315 |
|
|
|
941 |
|
|
|
944 |
|
Noncash interest on derivatives, net |
|
|
(2,995 |
) |
|
|
(495 |
) |
|
|
(7,080 |
) |
|
|
668 |
|
Loss on extinguishment of debt |
|
|
— |
|
|
|
180 |
|
|
|
— |
|
|
|
180 |
|
(Gain) loss on property damage, net |
|
|
1,144 |
|
|
|
(674 |
) |
|
|
601 |
|
|
|
(773 |
) |
Property-level pre-opening and management transition costs |
|
|
841 |
|
|
|
— |
|
|
|
959 |
|
|
|
6,471 |
|
Property-level legal settlement costs |
|
|
— |
|
|
|
— |
|
|
|
935 |
|
|
|
— |
|
Management transition costs |
|
|
— |
|
|
|
— |
|
|
|
907 |
|
|
|
1,869 |
|
Gain on preferred stock repurchases, net |
|
|
(1,452 |
) |
|
|
— |
|
|
|
(6,637 |
) |
|
|
— |
|
Income tax related to hotel disposition |
|
|
361 |
|
|
|
— |
|
|
|
361 |
|
|
|
— |
|
Adjustments to FFO attributable to common stockholders, net |
|
|
26 |
|
|
|
1,101 |
|
|
|
(2,138 |
) |
|
|
15,710 |
|
Adjusted FFO attributable to common stockholders |
|
$ |
37,176 |
|
|
$ |
31,742 |
|
|
$ |
146,335 |
|
|
$ |
128,965 |
|
Adjusted FFO attributable to common stockholders increased $5.4 million, or 17.1%, and increased $17.4 million, or 13.5%, in the third quarter and the nine months ended September 30, 2026, respectively, as compared to the same periods in 2025 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 hotel dispositions, our term loans, our credit facility, key money, and property insurance. Our primary uses of cash were for capital expenditures for hotels and other assets, the acquisition of land adjacent to one of our hotels, operating expenses, repurchases of our preferred and common stock, repayments of our credit facility, term loans, and senior notes, payments of deferred financing costs, 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.
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 $161.2 million in the nine months ended September 30, 2026, as compared to $145.1 million in the nine months ended September 30, 2025. The net increase in cash provided by operating activities during the nine months ended September 30, 2026, as compared to the same period in 2025 was primarily due to additional operating cash provided by the increase in travel demand benefiting our hotels, decreased corporate-level expenses, and the continued post-renovation ramp-up of Andaz Miami Beach. These increases were partially offset by our sale of Hyatt Regency San Francisco and Hilton New Orleans St. Charles.
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Table of Contents
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 provided by or used in investing activities during the nine months ended September 30, 2026, as compared to the nine months ended September 30, 2025, was as follows (in thousands):
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2026 |
|
|
2025 |
|
||
Proceeds from sale of hotel property |
|
$ |
270,811 |
|
|
$ |
46,348 |
|
Acquisition of hotel property and other assets |
|
|
— |
|
|
|
(1,269 |
) |
Acquisition-related key money proceeds |
|
|
4,000 |
|
|
|
4,000 |
|
Proceeds from property insurance |
|
|
2,585 |
|
|
|
875 |
|
Renovations and additions to hotel properties and other assets |
|
|
(76,570 |
) |
|
|
(73,694 |
) |
Net cash provided by (used in) investing activities |
|
$ |
200,826 |
|
|
$ |
(23,740 |
) |
During the nine months ended September 30, 2026, we received $270.8 million of proceeds from the sale of Hyatt Regency San Francisco, $4.0 million in key money received from the manager of one of our hotels pursuant to the hotel’s management agreement, and $2.6 million in property insurance proceeds received. These cash inflows were partially offset by our investment of $76.6 million for renovations and additions to our portfolio and other assets.
During the nine months ended September 30, 2025, we invested $73.7 million for renovations and additions to our portfolio and other assets, and we purchased land adjacent to the Hilton Key West Resort & Marina for $1.3 million. These cash outflows were partially offset by $46.3 million of proceeds received from the sale of Hilton New Orleans St. Charles, $4.0 million in key money received from the manager of one of our hotels pursuant to the hotel’s management agreement, and $0.9 million in property insurance proceeds received.
Financing activities. Our net cash provided by or used in financing activities fluctuates primarily as a result of our dividends and distributions paid, the issuance and repurchase of common stock, the issuance and repayment of debt, including draws on our credit facility and term loans, and the issuance, repurchase, and redemption of other forms of capital, including preferred equity. Net cash used in financing activities during the nine months ended September 30, 2026, as compared to the nine months ended September 30, 2025, was as follows (in thousands):
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2026 |
|
|
2025 |
|
||
Repurchases of common stock |
|
$ |
(143,711 |
) |
|
$ |
(100,727 |
) |
Repurchases of common stock for employee tax obligations |
|
|
(3,742 |
) |
|
|
(4,278 |
) |
Repurchases of preferred stock |
|
|
(43,041 |
) |
|
|
— |
|
Proceeds from credit facility |
|
|
25,000 |
|
|
|
50,000 |
|
Payments on credit facility |
|
|
(25,000 |
) |
|
|
(50,000 |
) |
Payments of deferred financing costs |
|
|
— |
|
|
|
(17,981 |
) |
Proceeds from term loans |
|
|
90,000 |
|
|
|
149,600 |
|
Payments on term loans |
|
|
— |
|
|
|
(64,600 |
) |
Payments on senior notes |
|
|
(65,000 |
) |
|
|
— |
|
Payment of securities registration costs |
|
|
(249 |
) |
|
|
— |
|
Dividends and distributions paid |
|
|
(64,100 |
) |
|
|
(66,115 |
) |
Net cash used in financing activities |
|
$ |
(229,843 |
) |
|
$ |
(104,101 |
) |
During the nine months ended September 30, 2026, we paid $143.7 million to repurchase 13,748,527 shares of our common stock and $43.0 million to repurchase 901,319 shares and 1,154,230 shares of our Series H preferred stock and Series I preferred stock, respectively. We also paid $3.7 million to repurchase common stock to satisfy the tax obligations in connection with the vesting of restricted common stock issued to employees, $0.2 million in costs associated with our automatic shelf registration statement, and $64.1 million in dividends and distributions to our preferred and common stockholders. In January 2026, we drew down the $90.0 million available under the Term Loan 1 delayed draw and used a portion of the proceeds to repay the $65.0 million Series A Senior Notes at their scheduled maturity in January 2026. Additionally, in April 2026, we drew down $25.0 million on our credit facility and repaid the full amount in July 2026.
During the nine months ended September 30, 2025, we paid $100.7 million to repurchase 11,381,731 shares of our 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 $66.1 million in dividends and distributions to our preferred and common stockholders. In September 2025, we entered into the Third Amended and Restated Credit Agreement and received $149.6 million from additional borrowing on
36
Table of Contents
our term loans and repaid $64.6 million to lenders as a result of modifications to their commitment levels under the Third Amended and Restated Credit Agreement. We used a portion of the proceeds received to repay the $50.0 million we drew down on our credit facility in April 2025 and July 2025. During the first nine months of 2025, we also paid $18.0 million in deferred financing costs related to the extension of the maturity of our previous Term Loan 3 and the execution of the Third Amended and Restated Credit Agreement.
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 been 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 and preferred stock, distributions on our common stock, dividends on our preferred stock, and acquisitions of hotels or interests in hotels.
While inflation moderated and remained relatively stable in 2025, inflation increased during the first half of 2026 before moderating in June, remaining relatively stable in July and August, and increasing in September, reflecting continued volatility in energy prices and broader economic conditions. The uncertainty surrounding certain international economic and political relationships, including political disputes and unfavorable perceptions of travel to the U.S., the economic impact arising from geopolitical instability in key energy‑producing regions, including volatility in transportation fuel costs and increases in air and ground travel costs, decreases in airline capacity, government shutdowns, and the imposition of tariffs affecting commodity costs, has had, or has the potential to have, 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, liability insurance, utilities, and borrowing costs, and such pressures may persist. The imposition of 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.
Cash Balance. As of September 30, 2026, our unrestricted cash balance was $236.5 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 September 30, 2026, we had $955.0 million of unsecured corporate-level debt, $317.9 million of cash and cash equivalents, including restricted cash, and total assets of $2.9 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 2026, we drew down the $90.0 million available under the Term Loan 1 delayed draw and used the proceeds to repay the $65.0 million Series A Senior Notes at their scheduled maturity in January 2026, and for general corporate purposes. In addition, in April 2026, we drew down $25.0 million on our credit facility and repaid the full amount in July 2026.
As of September 30, 2026, 50.3% of our outstanding debt had fixed interest rates or had been swapped to fixed interest rates, including our $275.0 million Term Loan 1, $100.0 million of our Term Loan 2, and our $105.0 million Series B Senior Notes.
Our floating rate debt as of September 30, 2026 included $175.0 million of the $275.0 million total outstanding under our Term Loan 2 and our $300.0 million Term Loan 3.
In October 2026, we entered into two separate interest rate swap agreements on portions of our Term Loan 2 balance. The first interest rate swap agreement has a notional amount of $75.0 million, became effective on October 6, 2026, expires on January 24, 2029, and effectively fixes the SOFR component of the interest rate on $75.0 million of Term Loan 2 borrowings at 4.59%. The second interest rate swap agreement has a notional amount of $100.0 million, became effective on October 22, 2026, expires on January 24, 2030, and effectively fixes the SOFR component of the interest rate on $100.0 million of Term Loan 2 borrowings at 4.49%. Including the effect of our interest rate derivative swaps entered into in October 2026 on Term Loan 2, 68.6% of our outstanding debt has fixed interest rates or has been swapped to fixed interest rates.
37
Table of Contents
Contractual Obligations. The following table summarizes our payment obligations and commitments as of September 30, 2026 (in thousands):
|
|
Payment due by period |
|
|||||||||||||||||
|
|
|
|
|
Less Than |
|
|
1 to 3 |
|
|
3 to 5 |
|
|
More than |
|
|||||
|
|
Total |
|
|
1 year |
|
|
years |
|
|
years |
|
|
5 years |
|
|||||
Debt (1) |
|
$ |
955,000 |
|
|
$ |
— |
|
|
$ |
105,000 |
|
|
$ |
850,000 |
|
|
$ |
— |
|
Interest obligations on debt (1) (2) |
|
|
209,593 |
|
|
|
47,735 |
|
|
|
96,176 |
|
|
|
65,682 |
|
|
|
— |
|
Operating lease obligations, including |
|
|
7,101 |
|
|
|
2,669 |
|
|
|
3,254 |
|
|
|
236 |
|
|
|
942 |
|
Construction commitments |
|
|
32,772 |
|
|
|
32,772 |
|
|
— |
|
|
— |
|
|
— |
|
|||
Total |
|
$ |
1,204,466 |
|
|
$ |
83,176 |
|
|
$ |
204,430 |
|
|
$ |
915,918 |
|
|
$ |
942 |
|
We may in the future seek to obtain mortgages on one or more of our 13 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 September 30, 2026. 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.
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 $76.6 million and $73.7 million in our portfolio and other assets during the nine months ended September 30, 2026 and 2025, respectively. As of September 30, 2026, we have contractual construction commitments totaling $32.8 million for ongoing renovations. If we renovate additional hotels in the future, our capital expenditures will likely increase.
For our hotels that are operated under management or franchise agreements, we are generally 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 1.0% and 5.5% of the respective hotel’s applicable annual revenue. As of September 30, 2026, our balance sheet includes restricted cash of $81.2 million, which was held in FF&E reserve accounts for future capital expenditures. These reserve funds are 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 and our expenses may not decrease if revenue decreases.
38
Table of Contents
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, the economic impact arising from geopolitical instability in key energy‑producing regions, any flu or disease-related outbreak 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 commercial or leisure travel.
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 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. The impairment assessment includes subjective assumptions such as determining the discount rate, terminal capitalization rate, the estimated growth of revenues and expenses, revenue per available room and margins, specific market and economic conditions, the estimated holding period, as well as the probability assigned to each future cash flow scenario.
39
Table of Contents
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 September 30, 2026, 50.3% 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. Including the effect of the Company’s interest rate derivative swaps on Term Loan 2 entered into in October 2026, 68.6% of our outstanding debt has fixed interest rates or has been swapped to fixed interest rates. 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, by approximately $1.5 million based on the amount of variable rate debt outstanding at September 30, 2026, including the effect of the interest rate derivative swaps entered into in October 2026 on portions of Term Loan 2.
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 were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
40
Table of Contents
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2025, filed with the Securities and Exchange Commission on February 27, 2026.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth information regarding our repurchases of shares of common stock pursuant to the Stock Repurchase Program during the quarter ended September 30, 2026:
Period |
|
Total Number |
|
|
Average Price |
|
|
Total Number of |
|
|
Maximum Number (or |
|
||||
July 1, 2026 — July 31, 2026 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
437,450,699 |
|
August 1, 2026 — August 31, 2026 |
|
|
5,213,796 |
|
|
$ |
10.97 |
|
|
|
5,213,796 |
|
|
$ |
377,906,858 |
|
September 1, 2026 — September 30, 2026 |
|
|
4,154,638 |
|
|
$ |
11.02 |
|
|
|
4,154,638 |
|
|
$ |
321,116,987 |
|
Total |
|
|
9,368,434 |
|
|
$ |
10.99 |
|
|
|
9,368,434 |
|
|
$ |
321,116,987 |
|
The following table sets forth information regarding our repurchases of shares of Series H preferred stock pursuant to the Stock Repurchase Program during the quarter ended September 30, 2026:
Period |
|
Total Number |
|
|
Average Price |
|
|
Total Number of |
|
|
Maximum Number (or |
|
||||
July 1, 2026 — July 31, 2026 |
|
|
15,288 |
|
|
$ |
21.72 |
|
|
|
15,288 |
|
|
$ |
437,450,699 |
|
August 1, 2026 — August 31, 2026 |
|
|
69,984 |
|
|
$ |
22.24 |
|
|
|
69,984 |
|
|
$ |
377,906,858 |
|
September 1, 2026 — September 30, 2026 |
|
|
244,847 |
|
|
$ |
22.35 |
|
|
|
244,847 |
|
|
$ |
321,116,987 |
|
Total |
|
|
330,119 |
|
|
$ |
22.30 |
|
|
|
330,119 |
|
|
$ |
321,116,987 |
|
41
Table of Contents
The following table sets forth information regarding our repurchases of shares of Series I preferred stock pursuant to the Stock Repurchase Program during the quarter ended September 30, 2026:
Period |
|
Total Number |
|
|
Average Price |
|
|
Total Number of |
|
|
Maximum Number (or |
|
||||
July 1, 2026 — July 31, 2026 |
|
|
53,088 |
|
|
$ |
21.44 |
|
|
|
53,088 |
|
|
$ |
437,450,699 |
|
August 1, 2026 — August 31, 2026 |
|
|
36,196 |
|
|
$ |
21.59 |
|
|
|
36,196 |
|
|
$ |
377,906,858 |
|
September 1, 2026 — September 30, 2026 |
|
|
255,155 |
|
|
$ |
21.75 |
|
|
|
255,155 |
|
|
$ |
321,116,987 |
|
Total |
|
|
344,439 |
|
|
$ |
21.69 |
|
|
|
344,439 |
|
|
$ |
321,116,987 |
|
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
42
Table of Contents
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 Company 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 |
|
Equity Distribution Agreement, dated as of August 10, 2026 (incorporated by reference to Exhibit 1.1 to Form 8-K, filed by the Company on August 11, 2026). |
|
|
|
10.2 |
|
Form of Master Forward Confirmation (incorporated by reference to Exhibit 1.2 (included in Exhibit 1.1) to Form 8-K, filed by the Company on August 11, 2026). |
|
|
|
10.3 |
|
First Amendment to Third Amended and Restated Credit Agreement, dated as of August 7, 2026 (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on August 11, 2026). |
|
|
|
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 With Embedded Linkbase Documents. * |
|
|
|
104 |
|
Cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2026 formatted in Inline XBRL (included in Exhibit 101). |
* Filed herewith.
43
Table of Contents
SIGNATURES
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.
|
Sunstone Hotel Investors, Inc. |
|
|
|
|
Date: November 6, 2026 |
By: |
/s/ Aaron R. Reyes |
|
|
Aaron R. Reyes |
44