Sunstone Hotel Investors, Inc. (SHO)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Overview

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Sunstone Hotel Investors, Inc. (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.

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We own hotels in convention, urban, and resort destinations that benefit from significant barriers to entry by competitors and diverse economic drivers. As of June 30, 2026, we owned 14 hotels, one of which, Hyatt Regency San Francisco, was classified as held for sale because it was under contract for sale and met all held-for-sale criteria. The hotel sale subsequently closed in July 2026. All of our hotels are operated under nationally recognized brands, including Oceans Edge Resort & Marina, which was rebranded as Hilton Key West Resort & Marina on July 1, 2026. Excluding Hyatt Regency San Francisco, our hotels average 475 rooms in size.

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Maui Storms

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During the first quarter of 2026, the Hawaiian Islands experienced multiple severe storms that impacted our Wailea Beach Resort. The resort remained open during and following the storms that occurred in March but sustained wind and water damage in some of the 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.

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We incurred storm-related repair and restoration costs, net of insurance proceeds, of $0.6 million, which were recorded in repairs and maintenance expense in the consolidated statements of operations for the three and six months ended June 30, 2026. In the second quarter of 2026, we recognized a $1.6 million loss at Wailea Beach Resort related to the write-off of storm-damaged assets, which was recorded in impairment and other losses in the consolidated statements of operations. During the second quarter of 2026, we also recognized $2.4 million in property insurance claim recoveries at Wailea Beach Resort, which were recorded in interest and other income in the consolidated statements of operations. Additionally, we recognized $1.2 million in business interruption insurance proceeds due to storm-related lost profits at the resort which were recorded in other operating revenue in the consolidated statements of operations.

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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.

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Operating Activities

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

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Expenses. Our expenses consist of the following:

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

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Operating Performance Indicators. The following performance indicators are commonly used in the hotel industry:

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

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The following discussion should be read together with the consolidated financial statements and related notes included elsewhere in this report. This discussion focuses on our financial condition and results of operations for the year ended December 31, 2025 as compared to the year ended December 31, 2024. A discussion and analysis of the year ended December 31, 2024 as compared to the year ended December 31, 2023 is included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 21, 2025, under the caption “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Overview

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Sunstone Hotel Investors, Inc. is a Maryland corporation. We operate as a self-managed and self-administered real estate investment trust (“REIT”). A REIT is a corporation that directly or indirectly owns real estate assets and has elected to be taxable as a real estate investment trust for federal income tax purposes. To qualify for taxation as a REIT, the REIT must meet certain requirements, including regarding the composition of its assets and the sources of its income. REITs generally are not subject to federal income taxes at the corporate level as long as they pay stockholder dividends equivalent to 100% of their taxable income. REITs are required to distribute to stockholders at least 90% of their REIT taxable income. We own, directly or indirectly, 100% of the interests of Sunstone Hotel Partnership, LLC, (the “Operating Partnership”), which is the entity that directly or indirectly owns our hotels. We also own 100% of the interests of our taxable REIT subsidiary, Sunstone Hotel TRS Lessee, Inc. (the “TRS Lessee”), which, directly or indirectly, leases all of our hotels from the Operating Partnership, and engages independent third parties to manage our hotels.

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We own hotels in convention, urban, and resort destinations that benefit from significant barriers to entry by competitors and diverse economic drivers. As of December 31, 2025, we owned 14 hotels. All of our hotels are operated under nationally recognized brands, except the Oceans Edge Resort & Marina, which operates independently.

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The following tables summarize our total portfolio and room data from January 1, 2024 through December 31, 2025:

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2025 Summary

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Demand. Excluding The Confidante Miami Beach and Renaissance Long Beach (the “Two Renovation Hotels”) due to their significant renovations as they transitioned to Andaz Miami Beach and Marriott Long Beach Downtown, respectively, occupancy at the 11 hotels we owned during the entirety of 2024 and 2025 (the “Comparable Portfolio”) improved as follows:

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During 2025, we saw continued strength in group demand, primarily at Hyatt Regency San Francisco, Wailea Beach Resort, The Bidwell Marriott Portland, Montage Healdsburg, and Hilton San Diego Bayfront. In addition, we saw strong corporate demand at The Bidwell Marriott Portland, The Westin Washington, DC Downtown, Marriott Boston Long Wharf, and Hyatt Regency San Francisco driven in part by airline crew contracts. These positive impacts were partially offset by the slower recovery of leisure demand in Maui and by displacement associated with the completion of a rooms renovation at the Wailea Beach Resort, both of which negatively affected transient demand, as well as by lower leisure demand at Oceans Edge Resort & Marina. In addition, Hilton San Diego Bayfront, Marriott Boston Long Wharf, and The Westin Washington, DC Downtown were negatively impacted by a reduction in government-related travel, including organizations whose conferences are partially funded by the government and the effect of the government shut down in the fourth quarter of 2025.

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Disposition. In June 2025, we sold the Hilton New Orleans St. Charles, located in Louisiana for a gross sale price of $47.0 million and recorded a loss of $8.8 million.

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Significant Renovations. During 2025, our significant renovations primarily consisted of the completion of the Andaz Miami Beach transformation, resulting in the resort reopening in May 2025, a rooms renovation at Wailea Beach Resort, and renovations of the meeting spaces at Hyatt Regency San Antonio Riverwalk and Hilton San Diego Bayfront.

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Debt Transactions. In April 2025, we exercised our option to extend the maturity date of the previous Term Loan 3 from May 2025 to May 2026.

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In September 2025, we entered into the Third Amended and Restated Credit Agreement (the “Amended Credit Agreement”), which expanded our unsecured debt borrowing capacity and extended the maturity of our term loans. The Amended Credit Agreement continues to provide for a $500.0 million revolving credit facility and increases the aggregate amount of our term loan facilities from $675.0 million (on four existing term loans) to $850.0 million (on three new term loans). Inclusive of extension options, the revolving credit facility and new term loan facilities under the Amended Credit Agreement mature at various points in 2030 and 2031, respectively, but are freely prepayable at any time. The revolving credit facility and the new term loan facilities bear interest pursuant to a leverage-based pricing grid ranging from 1.40% to 2.25% and 1.35% to 2.20%, respectively, over the applicable term SOFR. In connection with the new term loan facilities, we entered into a series of interest rate swaps to lower our borrowing cost and better manage interest rate risk.

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For more details on our debt transactions, see disclosures under the Debt caption included in “Liquidity and Capital Resources” below.

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Capital Transactions. During 2025, we repurchased the following shares under our stock repurchase program:

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As of December 31, 2025, approximately $323.9 million of authorized capacity remained under our stock repurchase program.

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Operating Activities

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

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Expenses. Our expenses consist of the following:

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