UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of

the Securities Exchange Act of 1934 (Amendment No. _____)

 

 

 

 

 

Dear Stockholder:

It is a pleasure to invite you to the 2019 annual meeting of stockholders (“Annual Meeting”) of Sunstone Hotel Investors, Inc., or Sunstone, a Maryland corporation, to be held at 200 Spectrum Center Drive, 2nd floor, Irvine, CA 92618, on Friday, May 3, 2019 at 8:30 a.m. local time, for the following purposes:

Only stockholders of record of shares of Sunstone common stock, par value $0.01 per share, at the close of business on March 5, 2019 are entitled to notice of and to vote at the 2019 Annual Meeting or any adjournment or postponement of the meeting.

Whether you own a few or many shares and whether or not you plan to attend in person, it is important that your shares be voted on matters that come before the meeting. You can ensure that your shares are voted at the meeting by submitting your instructions by completing, signing, dating and returning the enclosed proxy card in the envelope provided or, if you own shares through a bank or broker that provides for voting by telephone or over the internet, by submitting your authorization to vote by telephone or over the internet in accordance with your bank’s or broker’s instructions. If your proxy card is signed and returned without specifying your choices, your shares will be voted on each proposal in accordance with our Board of Directors’ recommendations.

We would like to take this opportunity to thank you for your continued support of Sunstone. We believe that our continued refinement of our compensation and corporate governance practices, coupled with our commitment to building long‑term value make Sunstone well positioned for a promising future. We continue to focus on improvements to Sunstone’s corporate compensation and governance practices, as reflected by the following previously implemented initiatives: Proxy Access; Director Holdover Resignation Guidelines; Limitations on Stockholder Rights Plans; Right of Stockholders to Amend Company Bylaws; Restrictions on Classifying Directors; Anti-Hedging and Pledging policies; and a Pay-For-Performance structure that is aligned with our stockholders.

Again, we thank you for your continued support and look forward to a promising future.

By Order of the Board of Directors

David M. Klein
Executive Vice President—General Counsel
and Secretary

March 20, 2019

 

 

 

 

 

TABLE OF CONTENTS

TABLE OF CONTENTS (continued)

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE STOCKHOLDER MEETING TO BE HELD ON MAY 3, 2019

This proxy statement and our Annual Report are available at our Investor Relations website at http://www.sunstonehotels.com/proxy.

 

 

PROXY SUMMARY

This summary highlights information contained elsewhere in this proxy statement. It does not contain all of the information that you should consider, so please read the entire proxy statement before voting. In addition, for more complete information about our 2018 financial performance, please see our annual report on Form 10‑K for the fiscal year ended December 31, 2018, or Annual Report, available at www.sunstonehotels.com.

VOTING MATTERS

 

DIRECTOR NOMINEES

 

A - Audit Committee      C - Compensation Committee      NCG - Nominating and Corporate Governance Committee

CORPORATE GOVERNANCE HIGHLIGHTS

The Company is committed to the values of transparency, stockholder friendly corporate governance and the highest ethical standards. Our Board of Directors believes that these values provide the framework to support the Company in creating long-term stockholder value. Our detailed governance framework can be found in the governance section of our website. The following highlights selections of this framework and adopted governance policies that we believe are in the best interests of our stockholders:

OUR COMPENSATION PRACTICES

Objectives. We seek to attract, motivate and retain our Named Executive Officers, or NEOs, each an NEO, through competitive compensation arrangements that we believe, within appropriate risk parameters, provide strong financial incentives for the executive officers to maximize stockholder value. In order to achieve our objectives and mitigate compensation risks to our stockholders, we utilize the following practices:

 

 

2018 Company Highlights

Improved the quality of our portfolio focusing on Long-Term Relevant Real Estate®.

Enhanced the overall quality of the portfolio and increased the concentration of Long-Term Relevant Real Estate® through the disposition of six off-strategy hotels with prior year RevPAR that was 44% below the 2018 21 Hotel Comparable Portfolio RevPAR of $191.74 (refer to “Operating Statistics” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2018).

Acquired the land underlying the JW Marriott New Orleans and the exclusive perpetual rights to use portions of the Renaissance Washington DC building that were both previously leased, increasing their long-term relevance and earnings potential.

Completed over $150 million of capital improvements throughout the portfolio, including the development of a new 46,000 square foot state-of-the-art meeting space at the Renaissance Orlando at SeaWorld®, the complete redesign and renovation of guestrooms and bathrooms at the Marriott Boston Long Wharf and JW Marriott New Orleans and a $4 million investment into environmental and sustainability projects.

Improved an already strong balance sheet and maintained liquidity.

Ended 2018 with a consolidated debt and preferred equity to consolidated total capitalization ratio of approximately 28%, in addition to approximately $809 million of unrestricted cash on hand. We retain considerable financial flexibility, but will remain disciplined in deploying our excess capital.

Amended and extended our undrawn revolving credit facility, increasing its availability to $500 million and extending its maturity to 2023, including extensions. Additionally, amended $185 million of unsecured term loans, reducing annualized interest expense by approximately $1 million.

Returned capital to our stockholders.

Declared cash dividends of $0.69 per share of common stock payable to our stockholders, returning $157 million to our stockholders. The 2018 declared cash dividends equate to a 5.3% dividend yield (based on the Company’s closing stock price on December 31, 2018).

 

 

 

QUESTIONS AND ANSWERS ABOUT HOW TO VOTE YOUR SHARES

What matters will be voted on at the Annual Meeting?

The Annual Meeting will be held for the following purposes:

With respect to any other matter that properly comes before the meeting or any adjournment or postponement thereof, the representatives holding proxies will vote as recommended by the Board of Directors, or if no recommendation is given, in their own discretion.

Who is entitled to vote?

Stockholders of record of our common stock as of the close of business on March 5, 2019, or the record date, are entitled to vote on matters that properly come before the meeting. Shares of common stock can be voted only if the stockholder is present in person or is represented by proxy. At the close of business on the record date, there were 228,588,186 shares of common stock outstanding and entitled to vote. The holders of common stock will vote together as a single class on all matters that properly come before the meeting.

How many votes do I have?

Each share of common stock has one vote.

How do I vote?

You can ensure that your shares are voted at the meeting by completing, signing, dating and returning the enclosed proxy form in the envelope provided.

If you own your shares through a bank or broker, you may be eligible to authorize a proxy to vote your shares electronically over the internet or by telephone. A large number of banks and brokerage firms are participating in the ADP Investor Communication Services, or ADP, online program. This program provides eligible stockholders who receive a paper copy of the Annual Report and proxy statement the opportunity to authorize a proxy to vote via the internet or by telephone. If your bank or brokerage firm is participating in ADP’s online program, your voting form will provide instructions. Stockholders who authorize a proxy to vote through the internet or telephone should be aware that they may incur costs to access the internet, such as usage charges from telephone companies or internet service providers, and that these costs must be borne by the stockholder. Stockholders who authorize a proxy to vote by internet or telephone need not return a proxy card by mail. If your voting form does not reference internet or telephone information, please complete and return the paper proxy card provided by your bank or broker.

If you attend the Annual Meeting in person, you may request a ballot when you arrive. If your shares are held in the name of your bank, broker or other nominee, prior to attending the meeting you need to request a legal proxy from

your bank, broker or nominee as indicated on the back of the Voter Information form you received with your proxy material. The legal proxy must be presented to vote these shares in person at the Annual Meeting. If you have previously authorized a proxy, you may still vote in person at the Annual Meeting, which will serve as a revocation of your previous proxy.

Does Sunstone have a policy for confidential voting?

Sunstone has a confidential voting policy. All proxies and other materials, including telephone and internet proxy authorization, are kept confidential and are not disclosed to third parties. Such voting documents are available for examination by the inspector of election and certain personnel associated with processing proxy cards and tabulating the vote. We plan to appoint one inspector of election who will review and confirm the tabulation of votes at the Annual Meeting.

What if I return my proxy but do not mark it to show how I am voting?

If your proxy card is signed and returned without specifying your choices, your shares will be voted as recommended by the Board of Directors.

What are the Board of Directors’ recommendations?

The Board of Directors recommends that you vote FOR each of the nominees for director in Proposal 1; FOR Proposal 2 to ratify the Audit Committee’s appointment of Ernst & Young LLP to act as the independent registered public accounting firm for the fiscal year ending December 31, 2019; FOR Proposal 3 to approve, on a non‑binding, advisory basis, the compensation of our NEOs as set forth in this proxy statement; and AGAINST Proposal 4, the stockholder proposal described in this proxy statement.

What vote is required to approve each proposal?

Election of Directors: There is no cumulative voting in the election of directors. A director shall be elected by an affirmative vote of a majority of the votes cast at a meeting of stockholders duly called and at which a quorum is present; that is, a nominee will be elected as a director only if the number of votes cast “for” such nominee exceeds the number of votes “against” or “withheld” with respect to that nominee. Any shares not voted, whether by abstention or “broker non‑vote” (i.e., shares held by a broker or nominee which are represented at the meeting, but with respect to which such broker or nominee is not instructed to vote and has not voted on a particular proposal, or otherwise), have no effect on the vote.

Ratification of Appointment of Independent Registered Public Accounting Firm: This proposal requires the affirmative vote of a majority of the votes cast at a meeting of stockholders duly called and at which a quorum is present. Any shares not voted (whether by abstention, “broker non‑vote” or otherwise) have no effect on the vote.

Advisory Vote on Executive Compensation:  This proposal requires the affirmative vote of a majority of the votes cast at a meeting of stockholders duly called and at which a quorum is present. Any shares not voted (whether by abstention, “broker non-vote” or otherwise) have no effect on the vote.

Stockholder Proposal: This proposal requires the affirmative vote of a majority of the votes cast at a meeting of stockholders duly called and at which a quorum is present. Any shares not voted (whether by abstention, “broker non‑vote” or otherwise) have no effect on the vote.

What constitutes a quorum?

The presence of the owners of at least a majority (greater than 50%) of the aggregate number of shares of common stock entitled to vote at the Annual Meeting constitutes a quorum. Presence may be in person or by proxy. You will

be considered part of the quorum if you return a signed and dated proxy card, if you authorize a proxy to vote by telephone or the internet, or if you attend the Annual Meeting.

Abstentions and “broker non‑votes” are counted as present and entitled to vote for purposes of determining a quorum. A “broker non‑vote” occurs when the broker or other entity is unable to vote on a proposal because the proposal is non‑routine and the owner does not provide instructions. Rules of the New York Stock Exchange, or NYSE, determine whether proposals presented at stockholder meetings are “routine” or “non‑routine.” If a proposal is routine, a broker or other entity holding shares for an owner in street or beneficial name may vote on the proposal without voting instructions from the owner. If a proposal is non‑routine, the broker or other entity may vote on the proposal only if the owner has provided voting instructions. The ratification of independent public accountants is generally a routine matter whereas the election of directors is not considered a routine matter. There are no rights of appraisal or similar dissenters’ rights with respect to any matter to be acted upon pursuant to this proxy statement.

What if other items come up at the Annual Meeting and I am not there to vote?

We are not now aware of any matters to be presented at the Annual Meeting other than those described in this proxy statement. When you return a signed and dated proxy card or provide your voting instructions by telephone or the internet, you give the proxy holders (the names of whom are listed on your proxy card) the discretionary authority to vote on your behalf on any other matter that is properly brought before the Annual Meeting.

Can I change my vote?

You can change your vote by revoking your proxy at any time before it is exercised in one of four ways:

Notify Sunstone’s Secretary (David M. Klein, c/o Sunstone Hotel Investors, Inc., 200 Spectrum Center Drive, 21st floor, Irvine, California 92618) in writing before the Annual Meeting that you are revoking your proxy;

Submit another proxy with a later date;

If you own shares through a bank or broker that provides for voting by telephone or the internet, submit your voting instructions again by telephone or the internet; or

Vote in person at the Annual Meeting.

What does it mean if I receive more than one proxy card?

Some of your shares are likely registered differently or are in more than one account. You should vote each of your accounts by mail, or if such service is provided by a bank or broker that holds your shares, by telephone or the internet. If you mail proxy cards, please sign, date and return each proxy card to ensure that all of your shares are voted.

If you hold your shares in registered form and wish to combine your stockholder accounts in the future, you should contact our transfer agent, American Stock Transfer and Trust Company, LLC, at 1‑800‑937‑5449. Combining accounts reduces excess printing and mailing costs, resulting in savings for Sunstone, that benefit you as a stockholder.

What if I receive only one set of proxy materials although there are multiple stockholders at my address?

If you and other residents at your mailing address own shares in “street name” (that is, through a broker or other nominee), your broker or bank may have sent you a notice that your household will receive only one Annual Report and proxy statement, or Notice Regarding the Availability of Proxy Materials, for each company in which you hold shares through that broker or bank. This practice of sending only one copy of proxy materials is known as “householding.” If you did not respond that you did not want to participate in householding, you were deemed to

have consented to the process. If the foregoing procedures apply to you, your broker has sent one copy of our Annual Report and proxy statement, or Notice Regarding the Availability of Proxy Materials, to your address. You may revoke your consent to householding at any time by contacting your broker or bank. The revocation of your consent to householding will be effective 30 days following its receipt. In any event, if you did not receive an individual copy of this proxy statement or our Annual Report, we will send a copy to you without charge if you address your written request to Sunstone Hotel Investors, Inc., 200 Spectrum Center Drive, 21st Floor, Irvine, California 92618, Attention: Secretary. If you currently receive multiple copies of the Annual Report and proxy statement, or Notice Regarding the Availability of Proxy Materials, at your address and you would like to request householding of your communications, you should contact your broker or bank.

How do I submit a stockholder proposal for inclusion in the proxy statement for next year’s annual meeting?

Stockholder proposals may be submitted for inclusion in the proxy statement for our 2020 annual meeting of stockholders, or 2020 Annual Meeting, after the Annual Meeting, but must be received no later than November 21, 2019. Proposals should be sent via registered, certified, or express mail to Sunstone Hotel Investors, Inc., 200 Spectrum Center Drive, 21st Floor, Irvine, California 92618, Attention: Secretary. See also “Stockholder Proposals for the 2020 Annual Meeting” later in this proxy statement.

What do I need to do to attend the Annual Meeting?

If you are a holder of record, you should indicate on your proxy card that you plan to attend the meeting by marking the box on the proxy card provided for that purpose.

For the safety and comfort of our stockholders, admission to the Annual Meeting will be restricted to:

Stockholders of record as of the close of business on March 5, 2019 or their duly authorized proxies;

Beneficial stockholders whose shares are held by a bank, broker or other nominee, and who present proof of beneficial ownership as of the close of business on March 5, 2019;

Representatives of the press or other news media with proper credentials;

Financial analysts with proper credentials; and

Employees and representatives of Sunstone whose job responsibilities require their presence at the meeting.

Please note that space limitations may make it necessary to limit attendance. Admission to the meeting will be on a first‑come, first‑served basis. No more than two representatives of any corporate or institutional stockholder will be admitted to the meeting.

You may obtain directions to the Annual Meeting in the Investor Relations section of our website at www.sunstonehotels.com or by calling us at 949‑330‑4000.

If you attend the meeting, you may be asked to present valid government‑issued photo identification, such as a driver’s license or passport, before being admitted. Cameras, recording devices, and other electronic devices will not be permitted, and attendees may be subject to security inspections or other security precautions.

 

PROPOSALS

Board of Directors. The business and affairs of Sunstone are managed under the direction of our Board of Directors. Our Board of Directors has responsibility for establishing broad corporate policies and for the overall performance of Sunstone, rather than for day‑to‑day operating details. Our Board of Directors currently consists of eight directors.

The proxy holders named on the proxy card intend to vote for the election of the eight nominees listed below. The Nominating and Corporate Governance Committee selected these nominees, which selection was ratified by the Board of Directors. If you do not wish your shares to be voted for particular nominees, you can vote “withhold” for the particular nominee provided on the proxy card or, if your shares are held through a bank or broker and you are authorizing a proxy to vote by telephone or the internet, follow the instructions provided when you access the telephone or internet proxy facilities.

If at the time of the meeting one or more of the nominees have become unable to serve, shares represented by proxies will be voted for the remaining nominees and for any substitute nominee or nominees designated by the Nominating and Corporate Governance Committee. If one or more nominees have become unable to serve, the Board of Directors may, in accordance with our bylaws, reduce the size of the Board of Directors or may leave a vacancy until a nominee is identified. Each of the nominees has consented to act as a director if duly elected and qualified and the Nominating and Corporate Governance Committee knows of no reason why any of the nominees will be unable to serve.

Directors elected at the Annual Meeting will hold office until the 2020 Annual Meeting and until their successors have been elected and qualified. For each nominee, there follows a brief listing of principal occupation for at least the past five years, other major affiliations and age as of March 1, 2019. Each of the nominees is currently a director of the Company.

 

Nominees for Election as Directors.

 

 

 

 

 

 

 

 

Vote required. Directors will be elected by a majority of the votes cast. Any shares not voted, whether by abstention, “broker non‑vote” or otherwise, will have no impact on the vote.

Our Corporate Governance Guidelines and Bylaws provide a majority voting standard in uncontested director elections. A director nominee will be elected to the Board only if the number of votes cast “for” such nominee’s election exceeds the number of votes cast “against” or “withheld” with respect to such nominee’s election (with abstentions and broker non-votes not counted as votes cast either for or withheld in such election). If an incumbent nominee for director fails to receive the required majority vote in a director election, he or she will tender his or her resignation as a director for consideration by the Nominating and Corporate Governance Committee, and, ultimately, the Board.

In the event any incumbent nominee for director does not receive the requisite majority vote, our Corporate Governance Guidelines and Bylaws provide that our Nominating and Corporate Governance Committee will evaluate the circumstances of the failed election, and will make a recommendation regarding how to act upon the tendered resignation to the full Board, taking into consideration the best interests of the Company and its stockholders. After considering the recommendation of the Nominating and Corporate Governance Committee, the full Board will then act upon the resignation, and will publicly disclose its decision regarding the tendered resignation and its rationale within 90 days of the certification of the election results. If the Board accepts the resignation, the nominee will no longer serve on the Board. If the Board rejects the resignation, the nominee will continue to serve until his or her successor has been duly elected and qualified or until his or her earlier disqualification, death, resignation or removal. Notwithstanding the foregoing, the Board shall be required to accept any resignation tendered by a nominee who is already serving as a director if such nominee shall have received more votes “against” or “withheld” than “for” his or her election at each of two consecutive annual meetings of stockholders for the uncontested election of directors at which a quorum was present.

 

 

The Audit Committee has selected and appointed the firm of Ernst & Young LLP to act as our independent registered public accounting firm for the year ending December 31, 2019. Ernst & Young LLP has audited the financial statements for us since our initial public offering on October 26, 2004.

Although stockholder ratification of the appointment of our independent auditor is not required by our bylaws or otherwise, we are submitting the selection of Ernst & Young LLP to our stockholders for ratification as a matter of good corporate governance practice. Even if the selection is ratified, the Audit Committee in its discretion may select a different independent registered public accounting firm at any time if it determines that such a change would be in the best interests of the Company. If our stockholders do not ratify the Audit Committee’s selection, the Audit Committee will take that fact into consideration, together with such other factors it deems relevant, in determining its next selection of our independent registered public accounting firm.

In selecting Ernst & Young LLP as the Company’s independent registered accounting firm, the Audit Committee considered many factors, including the quality of its ongoing discussions with Ernst & Young LLP’s representatives, the experience and professional qualifications of Ernst & Young LLP, and Ernst & Young LLP’s programs and processes for maintaining its independence. Furthermore, in accordance with Securities and Exchange Commission rules and Ernst & Young LLP’s policies, lead engagement partners are subject to rotation requirements to limit the number of consecutive years the lead partner may provide services. For lead audit partners, the maximum number of consecutive years of service in that capacity is five years. We select the Company’s lead audit partner pursuant to this rotation policy following meetings between the Chairman of the Audit Committee and candidates for that role, as well as discussions by the full Audit Committee, members of the Board of Directors and management.

Representatives of Ernst & Young LLP are expected to be present at the Annual Meeting. These representatives will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.

You can find more information about our relationship with Ernst & Young LLP on page 69 of this proxy statement.

Vote required. Ratification of the appointment of Ernst & Young LLP requires a majority of the votes cast. Any shares not voted, whether by abstention, “broker non‑vote” or otherwise, have no impact on the vote.

 

 

Section 14A of the Securities Exchange Act of 1934, as enacted as part of the Dodd‑Frank Wall Street Reform and Consumer Protection Act in July 2010, or the Dodd‑Frank Act, requires us to submit to our stockholders a non‑binding advisory vote to approve the compensation of the NEOs listed in the Summary Compensation Table of this proxy statement, commonly referred to as a “say‑on‑pay” vote.

The Board of Directors has approved the submission of the following resolution to the Company’s stockholders for approval at the Annual Meeting:

“Resolved, that the stockholders hereby approve, on an advisory basis, the compensation of the Company’s Named Executive Officers as disclosed in the Company’s 2019 proxy statement pursuant to the disclosure rules of the Securities and Exchange Commission (which disclosure includes the Compensation Discussion and Analysis, the Summary Compensation Table and the other executive compensation tables and related discussion).”

As described more fully in the “Compensation Discussion and Analysis” beginning on page 40 of this proxy statement, the Company’s executive compensation program is designed to attract, motivate and retain talented executives through competitive compensation arrangements that, within appropriate risk parameters, provide strong financial incentives for the executive officers, including the NEOs, to maximize stockholder value. The compensation program is designed to achieve these objectives through a combination of the following types of compensation: base salary, annual cash incentive bonus awards and equity incentive awards. Base salary is intended to provide a baseline level of compensation for our NEOs. The remaining types of compensation, which in the aggregate represent the majority of our NEOs’ target total compensation opportunities, tie compensation directly to the achievement of corporate and individual objectives. Highlights of the Company’s executive compensation program include the following:

We pay for performance. Our executive compensation program is weighed towards performance based at-risk, rather than fixed, compensation. Specifically, the at-risk portion of our executive compensation program is designed to reward performance relative to financial, stockholder return, and other metrics that we believe best align management with stockholder interests. Forty percent of our average NEOs’ total target compensation for 2018 was subject to the achievement of absolute and relative total stockholder return goals.

We have short-term employment agreements with our executives. Each of our executive officers, including the CEO, have one-year employment agreements. Our Compensation Committee believes that short-term employment contracts best aligns obligations of the executive with interests of our stockholders.

We require our CEO and other executives to have a meaningful ownership interest in the Company. Our executive officer stock ownership policy requires that on or before January 1 of the year following the fourth anniversary of the CEO or other executive officer’s appointment to such position (i) the CEO will own and retain shares of the Company’s common stock having a value equal to at least six times his or her annual base salary, (ii) each Executive Vice President will own and retain shares of the Company’s common stock having a value equal to at least three times his or her annual base salary, and (iii) each Senior Vice President will own and retain shares of the Company’s common stock having a value equal to at least two times his or her annual base salary. Our Compensation Committee believes that requiring the CEO and other executive officers to maintain a meaningful ownership interest in the Company aligns the interests of the CEO and other executive officers with those of our stockholders.

We solicit independent compensation advice. Our Compensation Committee retains FPL, an independent compensation consultant, for purposes of advising and consulting with respect to the compensation of our NEOs.

The Compensation Committee and the Board believe that these policies are effective at incentivizing the achievement of the Company’s strong financial performance.

At the 2017 annual meeting, the Company’s stockholders voted in favor of holding annual say-on-pay votes, and following the 2017 stockholder vote, our Board of Directors accepted the stockholders’ advisory vote and resolved to continue to hold annual advisory say-on-pay votes.

Vote required. The affirmative vote of a majority of the votes cast will be required to approve, on a non‑binding, advisory basis, the compensation of our NEOs as disclosed in this proxy statement.

The stockholder vote on executive compensation is an advisory vote only, and it is not binding on the Company, the Board of Directors or the Compensation Committee. Although the vote is non‑binding, the Compensation Committee and the Board of Directors value the opinions of the stockholders and will consider the outcome of the vote when making future compensation decisions.

The Company has been advised that a stockholder, UNITE HERE, of 275 Seventh Avenue, 11th Floor, New York, NY 10001, or the Union, owner of 488 shares of our common stock, intends to present the following stockholder proposal at the Annual Meeting.  If the stockholder is present at the Annual Meeting and properly submits the proposal for a vote, then the stockholder proposal will be voted on at the Annual Meeting.  In accordance with federal securities laws, the stockholder proposal is presented below as submitted by the stockholder and is quoted verbatim.  The Company disclaims all responsibility for the content of the proposal and the supporting statement, including any sources and information referenced in the supporting statement.

Stockholder Proposal

RESOLVED, the shareholders of Sunstone Hotel Investors, Inc. (the “Company”) recommend that the Board of Directors take all steps necessary to prepare an annual report for shareholders on sexual harassment complaints at hotels owned by the Company. The report shall be prepared at reasonable cost and omit private and proprietary information, and shall be made available on the Company’s website no later than the annual meeting of shareholders, starting in 2020.

Supporting Statement

Sexual harassment is both pervasive and illegal. Nearly half of working women in the United States say they have experienced sexual harassment in the workplace, according to a 2017 NBC/Wall Street Journal Poll. In a June 2016 report, the Equal Employment Opportunity Commission reported on thousands of charges alleging harassment on the basis of sex. In the last decade, more than 25% of sexual harassment charges came from industries with large numbers of service-sector workers. Sexual harassment charges can expose employers, hotel operators and owners to significant risks, including when there are complaints made against management and against guests.

For investors, there is a lack of information about the extent of the sexual harassment problem in the hospitality industry. Neither hotel owners nor operators report on costs or incidence of sexual harassment. Settlement agreements frequently contain non-disclosure clauses, and in some cases, complainants leave their jobs as complaints are resolved, all of which reinforces a lack of accurate information about this risk. While there have been a few high profile cases of harassment and assault involving hotels over the last decade, investors have little information about how companies are mitigating risks.

The Council of Institutional Investors has recently made recommendations for Boards to address the risks of sexual harassment cases, including: 1) “Ensure all payouts to settle harassment cases are reported to the board.” 2) “Review with the legal team when information on incidents of sexual harassment should be reported to shareholders and how much information should be shared.”

Since hotel owners like Sunstone may pay the costs of complaints in hotel operating expenses, we urge the Company to request information from their hotel operating contractors detailing the incidence and costs of sexual harassment, and to provide that information to shareholders. Disclosure of such information will assist the Company in managing its risk.

We urge shareholders to vote FOR this proposal, recommending that the Company provide comprehensive disclosures to shareholders about sexual harassment in its hotels.

Vote required. The affirmative vote of a majority of the votes cast will be required to approve the stockholder proposal as disclosed in this proxy statement.  Any shares not voted, whether by abstention, “broker non‑vote” or otherwise, have no impact on the vote.

Statement in Opposition from the Company

First and foremost, the Company opposes any form of harassment and is fully committed to the reduction, prevention, and elimination of incidents of sexual harassment.

The Board has carefully considered the proposal from the Union and concluded that its adoption is unnecessary and not in the best interest of our stockholders. While the Company strongly supports the goals of the proposal, the Board does not believe that the prescriptive approach outlined in the stockholder proposal is an effective way to address incidents of sexual harassment, nor would it result in an efficient or effective allocation of Company resources. Additionally, the Company has proactively adopted and remains committed to supporting policies, procedures and initiatives designed to reduce and prevent incidents of sexual harassment. Accordingly, the Board unanimously recommends a vote AGAINST this proposal for the following reasons:

Sexual harassment is a serious issue and the Company has and will continue to support our operators in adopting programs and policies designed to prevent sexual harassment, and encourage reporting on any incidents that may occur.

The Company has been and continues to be committed to the safety of our operator’s employees at our properties, guests at our properties, and our employees at our corporate headquarters. The Company has taken many steps to proactively address and prevent sexual harassment, and is actively engaged with operators to help prevent and reduce incidents of sexual harassment.

For example, the Company, in cooperation with our operators, is funding the purchase of panic buttons for use by our operator’s employees at many of our properties. Panic buttons provide hotel personnel with the ability to immediately alert help in potentially dangerous situations, which ensures a greater level of safety and security for hotel employees and guests.

The Company fully supports and encourages all of our operators to adopt and abide by the principles of the American Hotel & Lodging Association’s 5-Star Promise. The 5-Star Promise was first introduced in September 2018 and is part of an industry-wide commitment to advance hotel safety, security and hospitality. The 5-Star Promise includes the following five important components: (i) build on the lodging industry’s longstanding commitment to hospitality and a people culture by continuing to provide industry-wide training and materials on safety and security, and retain expert guidance to work with the industry on diversity and safety matters, (ii) ensure mandatory anti-sexual harassment policies are in place in multiple languages, (iii) provide ongoing training and education for employees on identifying and reporting sexual harassment, (iv) provide U.S. hotel employees with employee safety devices to help them feel safe on the job, and (v) broaden vital partnerships with wide-ranging national organizations that target sexual violence and assault and trafficking and promote workplace safety. 

This pledge elevates the industry standard for the safety of those employed at hotels, and is specifically targeted against sexual harassment. The pledge is in addition to those human rights and labor policies and practices that the Company already has in place, which are designed to ensure that the Company and its operators abide by law, respect individual rights, and do not tolerate sexual harassment at our properties. The Company has dedicated a significant amount of resources to assist operators with sexual harassment awareness, training and avoidance programs, and will continue to engage with our operators to provide any resources needed to further assist them in ensuring the safety of hotel employees and guests.

Unite Here’s Proposal is misdirected because the Company is not suited or situated to implement the demands of the Proposal.

The U.S. tax code classifies the Company as a lodging real estate investment trust (“REIT”) and imposes strict limitations on the type of activities that a REIT may undertake. As such, the Company is not permitted to operate or directly manage its hotels, and instead, must engage an eligible independent contractor to do so. The Company’s

hotel operators retain the sole right and responsibility for hiring, training and supervising hotel employees and ensuring their safety, along with the safety of hotel guests. The Company must not jeopardize its tax status by overstepping management boundaries. In turn, the rights and responsibilities related to employees is a specifically negotiated aspect of the owner-operator relationship and integral in assuring that the owner does not run afoul of certain provisions of the U.S. tax code related to lodging REITs.

As a lodging REIT, the Company does not have access to the information required to complete the requested report on sexual harassment complaints. Operators are not required to provide the Company with information on individual complaints by hotel guests or employees, nor does the Company have a contractual right to access such information. Under limited scenarios, the Company has the right to receive notice from operators when matters or claims exceed certain financial thresholds, but many sexual harassment complaints are unlikely to exceed those thresholds, and thus the Company is typically not made aware of such complaints. The Company is committed to working with and encouraging our operators to provide more robust reporting disclosures; however, the Company does not have the ability or the right to obtain the information that would be required to produce an accurate disclosure report. While we continue to encourage and support our operators to address and prevent sexual harassment, we cannot compel operators to take any actions or measures, or interfere with their day-to-day management or supervision. In addition, publishing data on settlements related to sexual harassment claims, as requested by the Proposal, may have the unintended consequence of encouraging false and frivolous claims that will require the Company to expend unnecessary time and resources to address.

In sum, issuing a report in the manner requested by the Proposal will: (i) likely not provide substantive information to stockholders, (ii) risk incomplete or inaccurate information, and (iii) require time and resources better spent on the Company’s current initiatives as outlined above.

Implementing the Proposal serves to further the interest of the Union and not the interests of our stockholders.

The Union is a large labor union that continuously seeks to unionize hotel workers in order to increase membership and create additional revenue for the Union. The Union, which owns 488 shares (or 0.000021%) of Company stock, submitted the Proposal to advance its own organizing agenda (i.e. increase membership and organizing campaigns) at the expense of the Company’s time and resources.

The Union has a notorious history of submitting self-interested proposals to lodging REITs and hotel operators. Since 2005, the Union has submitted at least 52 stockholder proposals to 20 other lodging REITs and operators, often aimed at furthering its organizing agenda of increasing membership, rather than advancing stockholder interests or value. At least nine other lodging REITs and operators, all owning or operating properties where the Union has engaged in organizing campaigns, have received the same proposal as the one submitted to the Company this year.

The Union also utilizes pressure and intimidation tactics to pursue objectives that are different from, and in many cases adverse to, those of other stockholders. For example, in a previous lawsuit initiated by the Union against a public company for violation of federal securities law, a federal district court found that the Union’s lawsuit was “part of [the Union’s] campaign to harass a corporation and gain leverage in a unionization struggle” and with “no genuine belief in the merits of its claims.”1 Consistent with this campaign of harassment, the Union has orchestrated, and continues to orchestrate, nationwide strikes and boycotts of hotels where it is attempting to organize, and actively requests that individuals and organizations not do business with boycotted hotels. The Union has even led disruptions at hotels owned by publicly traded REITs where Union was a stockholder, causing direct economic harm to the REITs and their stockholders.

The Union’s organizing initiatives have caused inconvenience to guests at our properties and direct economic harm to the Company and our stockholders. In 2018, the Union led a highly publicized large-scale organizing effort on a nationwide basis which included disruptive tactics such as strikes, demonstrations with drums and other noisemaking devices, picket lines, and other nuisance activities. This type of disruptive and self-interested activity results in guest dissatisfaction and causes direct economic harm to our Company. In addition, Union contracts

1 UNITE HERE v. Cintas Corp., No. 06 Civ. 7061(DCL), 2006 WL 2859279, at *10 (S.D.N.Y. Oct. 11, 2006).

severely limit job and employer flexibility, which result in substantially higher operating costs at unionized hotels. Higher costs offset cash flows and profits, which lead to decreased share prices and erosion of stockholder value.

While the Company acknowledges and supports (both monetarily and through public statements) the importance of prevention and awareness regarding sexual harassment, approving this Proposal will encourage the Union to continue to abuse and manipulate the stockholder proposal process in order to further its own agenda. In turn, the Company is forced to expend time, resources and energy that should be directed toward increasing stockholder value and engaging with its operators in the advancement of programs and policies designed to reduce and ultimately eliminate sexual harassment in the workplace.

The Board of Directors recommends that our stockholders vote AGAINST the Stockholder Proposal.

 

 

 

COMPANY INFORMATION

CORPORATE GOVERNANCE

In light of applicable legal requirements, such as the Sarbanes‑Oxley Act of 2002 and related rules promulgated by both the New York Stock Exchange (“NYSE”) and the Securities and Exchange Commission (“SEC”), we provide the following discussion to inform you of our efforts to assure that we employ best practices in our corporate governance. A copy of our Corporate Governance Guidelines is available in the Investor Relations section of our website at www.sunstonehotels.com. In addition, a printed copy of the Corporate Governance Guidelines will be provided without charge upon request to Sunstone Hotel Investors, Inc., 200 Spectrum Center Drive, 21st Floor, Irvine, California 92618, Attention: Secretary.

We have also established conflict of interest and other policies to serve the long‑term interests of our stockholders and further align the interests of our directors and management with our stockholders.

CONFLICT OF INTEREST POLICY

We have adopted a policy which provides that the approval of our Nominating and Corporate Governance Committee is required for any transaction involving the Company and any of our directors, officers or employees, or any entity in which any of our directors, officers or employees is employed or has an interest of more than 5%.

CODE OF BUSINESS CONDUCT AND ETHICS

We have adopted a Code of Business Conduct and Ethics, which requires, among other things, that directors, officers and employees act with integrity. The Code of Business Conduct and Ethics also prohibits our directors, officers and employees from taking (or directing to a third party) a business opportunity that is originated through the use of corporate property, information or position, unless we have already been offered the opportunity and turned it down, in which case our Nominating and Corporate Governance Committee must in any event approve the director, officer or employee interest therein. More generally, our directors, officers and employees are prohibited from using corporate property, information or position for personal gain. The Code of Business Conduct and Ethics is posted in the Investor Relations section of our website at www.sunstonehotels.com. In addition, a copy of the Code of Business Conduct and Ethics will be provided without charge upon request to Sunstone Hotel Investors, Inc., 200 Spectrum Center Drive, 21st Floor, Irvine, California 92618, Attention: Secretary.

PLEDGING AND HEDGING POLICIES

We have established pledging and hedging policies applicable to our directors, officers and other employees (collectively referred to in this section only as “insiders” and individually as an “insider”).

Margin Accounts and Pledges. Securities held in a margin account or pledged as collateral for a loan may be sold without the insider’s consent by the broker if the insider fails to meet a margin call or by the lender in foreclosure if the insider defaults on the loan. Because a margin or foreclosure sale may occur at a time when the insider is aware of material nonpublic information or otherwise is not permitted to trade in Company securities, insiders are prohibited from holding Company securities in a margin account or pledging Company securities as collateral for a loan.

Hedging Transactions. Certain forms of hedging or monetization transactions, such as zero‑cost collars and forward sale contracts, involve the establishment of a short position in the Company’s securities and limit or eliminate an insider’s ability to profit from an increase in the value of the Company’s securities. Such transactions are complex and involve many aspects of the federal securities laws, including filing and disclosure requirements. Therefore, the Company prohibits insiders from any hedging transactions.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE PRACTICES

In addition to our strong corporate governance policies highlighted above in the Corporate Governance Highlights section, we have numerous existing and planned ESG initiatives across our portfolio.

All of our hotels currently participate in some form of ESG practice. We are committed to expanding our ESG practices and programs both in our company and at our hotels over the next several years. Currently, our environmental programs cover such areas as energy conservation, water conservation, waste reduction and recycling. Sunstone’s comprehensive environmental efficiency program is aimed at not only making our hotels more energy efficient and environmentally‑friendly, but also at enhancing the profitability of our hotels, while minimizing risks including the physical, regulatory, and market risks associated with climate change. Our environmental efficiency program includes, but is not limited to, retro‑fitting lighting systems with new LED fixtures, guestroom “smart” thermostats that adjust room conditions based on whether the room is occupied or not, central plant efficiency upgrades, laundry outsourcing, low‑flow toilet systems and energy co‑generation facilities. We also invest in renewable energy and continue to evaluate and select renewable energy projects at our hotels. Additionally, a majority of our hotels participate in the Clean the World program.  Through the Clean the World Program, unused soap and bottled hygiene products such as shampoo are collected from our hotels and then sterilized, recycled and re-manufactured into new toiletries, which are distributed to vulnerable/at risk communities both locally and around the world.

We continue to seek new ESG innovations and practices to implement across our portfolio. We are currently working to set our energy, water, waste, and carbon baseline for our entire portfolio, which we have been tracking since 2015. We will continue to engage with our key stakeholders, including suppliers and operators to support and expand our environmental and social programs. While ESG programs are nascent in lodging real estate, we will continue to align with the various hotel brands and operators of our portfolio as they advance ESG programs and practices. Together we are committed to seeking low-carbon solutions, reducing the environmental footprint of our hotels, and delivering value for positive community impact through our assets.

Additionally, we remain committed to the safety of our operators’ employees at our properties, guests at our hotels, and our employees at our corporate headquarters. We respect and uphold fundamental human rights, comply with all applicable human rights and labor rights laws, and take steps to proactively address and prevent sexual harassment. We expect our operators and vendors to adhere to similar safety and human rights commitments. We also fully support and encourage our operators to adopt and abide by the principles of the American Hotel & Lodging Association’s 5-Star Promise.

INDEPENDENCE OF DIRECTORS AND COMMITTEES

The Board of Directors has determined that a majority of the current Board of Directors is independent as defined under the NYSE’s rules and that a majority of the Board of Directors will be independent if the slate of directors up for election in Proposal 1 of this proxy statement are elected. Directors who serve on the Compensation Committee and the Nominating and Corporate Governance Committee are also subject to these independence requirements. Directors who serve on the Audit Committee are subject to these and additional independence requirements.

To be considered independent under the NYSE’s rules, the Board of Directors must determine that a director does not have a material relationship with Sunstone and/or its consolidated subsidiaries (either directly or as a partner, stockholder, or officer of an organization that has a relationship with any of those entities).

The Board of Directors undertakes on a quarterly basis a review of the independence of the directors nominated for election at the upcoming annual meeting. During this review, the Board of Directors considers the transactions and relationships between each director or any member of his or her immediate family and Sunstone and its subsidiaries and affiliates as reported under “Certain Relationships and Related Party Transactions” below. The Board of Directors also examines transactions and relationships between directors or their affiliates and members of senior management or their affiliates. The purpose of this review is to determine whether any such relationships or transactions are inconsistent with a determination that such director is independent.

As a result of this review, the Board of Directors affirmatively determined that each member of the Board of Directors, other than Mr. Arabia, is independent of Sunstone and its management under the independence standards of the NYSE.

THE BOARD OF DIRECTORS LEADERSHIP STRUCTURE

From May 1, 2015 to present, Mr. Pasquale has served as our Chairman of the Board. From January 17, 2015 to present, Mr. Arabia has served as President, CEO and a director. Assuming that the nominees listed in Proposal 1 are elected as directors at the Annual Meeting, we expect Mr. Pasquale will continue to serve as our Chairman of the Board and Mr. Arabia as our President and CEO and a director.

Since October 26, 2004, the roles of chairman and CEO have been held separately. Although the Board of Directors does not have a formal policy as to whether the chairman should be an independent director, an affiliated director, or a member of management, in the event the chairman is or becomes an affiliated director or a member of Company management, or if the independent directors were to determine that it is in the best interests of the Company, the independent directors will appoint from among themselves an independent co‑chairman or lead independent director (consistent with our bylaws and our corporate governance guidelines).

The role of the Chairman of the Board is to coordinate the activities of the independent directors, coordinate with the CEO and corporate secretary to set the agenda for Board of Directors’ meetings, chair executive sessions of the independent directors, provide leadership to the Board of Directors and uphold high corporate governance and ethical standards, communicate effectively with management on a regular basis, provide support and advice to the CEO, facilitate communication between and among the independent directors and management, take a lead role in the Board of Director’s self‑assessment and evaluation processes, and perform the other duties either specified in the corporate governance guidelines or assigned from time to time by the Board of Directors.

Furthermore, our Board of Directors currently has seven independent members and one non‑independent member, Mr. Arabia. Assuming that the nominees listed in Proposal 1 are elected as directors at the Annual Meeting, our Board of Directors will continue to have seven independent members and one non‑independent member. A number of the members of our Board of Directors are currently serving or have served as members of senior management of other public companies and have served as directors of other public companies. We currently have three Board of Directors committees comprised solely of independent directors.

Our Board of Directors believes its leadership structure is appropriate as it effectively allocates authority, responsibility and oversight between management and the independent members of our Board of Directors. It accomplishes this by giving primary responsibility for the operational leadership and strategic direction of the Company to our CEO, while enabling our Chairman of the Board to facilitate our Board of Directors’ independent oversight of management, promote communication between management and our Board of Directors, and support our Board of Director’s consideration of key governance matters.

RISK OVERSIGHT

Our Audit Committee is primarily responsible for overseeing the Company’s risk management processes on behalf of the full Board of Directors. The Audit Committee receives reports from management at least quarterly regarding the Company’s assessment of risks. Once a year, management provides its quarterly risk assessment to the entire Board of Directors. In addition, the Audit Committee reports regularly to the full Board of Directors, which also considers the Company’s risk profile. The Audit Committee and the full Board of Directors focus on the most significant risks facing the Company and the Company’s general risk management strategy, and also ensure that risks undertaken by the Company are consistent with the Board of Directors’ appetite for risk. While the Board of Directors oversees the Company’s risk management, Company management is responsible for the day‑to‑day risk management processes. We, together with the Board of Directors, believe this division of responsibilities is the most effective approach for addressing the risks facing the Company.

Our Compensation Committee oversees risk management as it relates to our compensation plans, policies and procedures and has met with management to review and confirm that our compensation programs do not create incentives to our employees to take excessive or inappropriate risks that could have a material adverse effect on the Company. We believe that features of our programs, including the mix of long‑ and short‑term incentives and equity grants, as well as our internal financial and legal controls, appropriately mitigate the risk of employees taking actions that may benefit the employee in the short term, but ultimately harm the Company.

Our Board of Directors oversees the corporate culture of the Company and assesses its effectiveness on advancing the Company’s strategy. To assess culture and any potential risks, among other actions, the independent members of the Board of Directors meet in confidential executive session with the Company’s head of Human Resources at least once a year. Additionally, the Board of Directors has direct access to all Company employees and is able to communicate with individuals as needed. The Audit Committee also conducts confidential executive sessions with our External Auditors and Internal Audit.

DIRECTOR ATTENDANCE AT MEETINGS 

Each of our directors is expected to attend each annual meeting of stockholders and all meetings of the Board of Directors. The Board of Directors held five meetings and acted by written consent on one occasion in 2018. During that period, all directors attended 100% of the aggregate of the meetings of the Board of Directors and all committees of the Board of Directors on which they served during the periods in which they served. In addition, all of our directors attended our annual meeting of stockholders in 2018.

STOCKHOLDER COMMUNICATION WITH THE BOARD OF DIRECTORS AND NON‑EMPLOYEE DIRECTORS

Stockholders may communicate any matters they wish to raise with the directors by writing to the Board of Directors, Sunstone Hotel Investors, Inc., 200 Spectrum Center Drive, 21st Floor, Irvine, California 92618, Attention: Secretary. Stockholders should provide proof of stock ownership with their correspondence. All communications from verified stockholders will be received and processed by the Secretary and then directed to the appropriate member(s) of the Board of Directors.

In addition, any interested party who wishes to communicate directly with our non‑employee directors may contact our Chairman of the Board at the mailing address of the Company’s executive offices at 200 Spectrum Center Drive, 21st Floor, Irvine, California 92618, Attention: Secretary. All communications will be received and processed on a confidential basis by the Secretary and then directed to the appropriate non‑employee director(s).

COMMITTEES OF THE BOARD OF DIRECTORS

Our Board of Directors complements its oversight responsibilities through the following three standing committees, each of which is briefly described below: the Compensation Committee, the Audit Committee and the Nominating and Corporate Governance Committee. Each of our committees has a charter, current copies of which may be viewed in the Investor Relations section of our website at www.sunstonehotels.com. In addition, printed copies of our committee charters will be provided without charge upon request to Sunstone Hotel Investors, Inc., 200 Spectrum Center Drive, 21st Floor, Irvine, California 92618, Attention: Secretary.

Compensation Committee

The current members of our Compensation Committee are:

 

Audit Committee

The current members of our Audit Committee are:

 

Nominating and Corporate Governance Committee

The current members of our Nominating and Corporate Governance Committee are:

Additionally, in reviewing the qualifications of particular candidates, the Nominating and Corporate Governance Committee may choose to recommend individuals who can contribute an important, special or unique skill, expertise or perspective to the Board of Directors. The Nominating and Corporate Governance Committee recommends, among other things, whether the existing Board of Directors contains the appropriate size, structure and composition, whether some or all of the incumbent directors should be recommended to the Board of Directors for re‑nomination, and whether the Board of Directors should be enlarged to include additional directors.

The Nominating and Corporate Governance Committee will consider as potential director nominees candidates recommended by various sources, including any member of the Board of Directors or senior management. The Nominating and Corporate Governance Committee may also retain a third‑party search firm to identify candidates. The Nominating and Corporate Governance Committee also considers recommendations for nominees that are timely submitted by stockholders and only if such recommendations are delivered in the same manner prescribed by the advance notice provisions contained in Article II, Section 2.11 of our bylaws for stockholder proposals. See “Stockholder Proposals for the 2020 Annual Meeting.” In addition to satisfying the timing, ownership and other requirements specified in Article II, Section 2.11 of the bylaws, a stockholder’s notice must set forth as to each

person whom the stockholder proposes to recommend that the committee nominate for election to the Board of Directors all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, pursuant to Regulation 14A under the Exchange Act and our bylaws (including such person’s written consent to being named in the proxy statement as a nominee and to serve as a director if elected). Properly communicated stockholder recommendations will be considered in the same manner as recommendations received from other sources.

The Nominating and Corporate Governance Committee held four meetings during 2018.

Current Committee Membership. The table below summarizes the current membership information for the committees of the Board of Directors:

C = Chair M = Member

F = Audit Committee Financial Expert

The Board of Directors, at the recommendation of the Nominating and Corporate Governance Committee, periodically reviews and modifies committee appointments.

Executive Sessions of Independent Directors.  Each member of the Board of Directors, other than Mr. Arabia, is currently an independent, non‑employee director. The independent, non‑employee directors held executive sessions at least once each quarter in 2018 and held other meetings relating to corporate governance during the year. Following the Annual Meeting, we expect that our non‑employee directors will continue to be members of the Board of Directors, and that Mr. Pasquale will continue to preside over executive sessions of the non‑employee directors.

 

 

STOCK OWNERSHIP

STOCK OWNERSHIP REQUIREMENTS

The Compensation Committee has established a stock ownership policy for our NEOs. The Compensation Committee believes that requiring the NEOs to maintain a meaningful ownership interest in the Company aligns the interests of the NEOs with those of our stockholders (i.e., the NEO will experience the same downside risk and upside potential as our stockholders experience). The policy provides that, on or before January 1 of the year following the fourth anniversary of the CEO’s appointment to such position, the CEO will own and retain shares of the Company’s common stock having a value equal to at least six times his or her annual base salary rate in effect on the December 31 immediately preceding the applicable January 1 determination date (described below). The policy further provides that, on or before January 1 of the year following the fourth anniversary of the other NEOs appointment to such position, each NEO will own and retain shares of the Company’s common stock having a value equal to at least: (i) three times for Executive Vice Presidents, and (ii) two times for Senior Vice Presidents, his or her annual base salary rate in effect on the December 31 immediately preceding the applicable January 1 determination date (described below).

The Nominating and Corporate Governance Committee has implemented stock ownership requirements for Company directors. Under these guidelines, each existing director, on or before January 1 of the year following the third anniversary of such director’s election to the Board of Directors, is required to hold stock valued at no less than three times the amount of the annual cash retainer paid to such director

To determine compliance with the stock ownership guidelines, (a) we include, in addition to shares the individual director or NEO owns outright, awarded but unvested restricted shares of Company stock and (b) we calculate the value of each individual’s stock holdings based on the average closing price on the NYSE of the Company’s common stock for the year ended immediately prior to the applicable January 1 determination date.

As of January 1, 2019, each of our NEOs and each member of the Company's Board of Directors met or exceeded the stock ownership requirements.

 

SECURITY OWNERSHIP BY DIRECTORS, EXECUTIVE OFFICERS AND FIVE PERCENT STOCKHOLDERS

The following table sets forth information regarding the beneficial ownership of our common stock as of March 5, 2019 with respect to (a) each director and director nominee, (b) each NEO, (c) all of our directors and executive officers as a group and (d) each person known by us to be the beneficial owner of greater than a 5% interest in our common stock. Unless otherwise indicated, all shares of common stock are owned directly and the indicated person has sole voting and investment power. Percentage ownership is based on 228,588,186 shares of common stock outstanding as of March 5, 2019.

Unless otherwise indicated, the address of each person is 200 Spectrum Center Drive, 21st Floor, Irvine, California 92618.

*Represents less than 0.1% of the number of shares of our common stock and membership units in Sunstone Hotel Partnership, LLC.

 

 

COMPENSATION DISCUSSION AND ANALYSIS

EXECUTIVE SUMMARY

Overview. This Compensation Discussion and Analysis explains our compensation philosophy and policies that applied in 2018 to our executive officers, specifically our NEOs listed in the Summary Compensation Table below. It explains the structure and rationale associated with each material element of the compensation program for the NEOs, describes the actual compensation paid to our NEOs for 2018, and provides important context for the more detailed disclosure relating to our NEOs in the compensation tables following this Compensation Discussion and Analysis.

Mr. Arabia currently serves as our President and CEO and is a member of our Board of Directors. In accordance with the rules of the SEC, each of Messrs. Arabia, Giglia, Hoffman, Springer and Klein are NEOs for 2018.

The Board of Directors and our Compensation Committee consider it our responsibility to structure our compensation program in a way that is highly aligned with the interests of our stockholders. Although the advisory stockholder vote on executive compensation is non‑binding, the Compensation Committee has considered and will continue to consider the outcome of the vote when making future compensation decisions for NEOs. At our 2018 annual meeting of stockholders, approximately 94.6% of votes cast were in favor of our “say-on-pay” proposal. Though the members of the Compensation Committee believe that the stockholder vote on our 2018 “say‑on‑pay” proposal endorses the Company’s compensation program, the Compensation Committee endeavors to continuously improve the Company’s compensation program to more closely align compensation with the interests of our stockholders. Following the 2017 advisory vote on the frequency of say-on-pay votes, our Board of Directors resolved to continue to hold annual say-on-pay votes.  Following the say-on-pay vote at the Annual Meeting, the next say-on-pay vote will be held in 2020. The next advisory vote on frequency of say-on-pay votes will occur no later than 2023.

In addition, the Compensation Committee seeks to attract, motivate and retain Sunstone’s executive officers through competitive compensation arrangements that the Compensation Committee believes, within appropriate risk parameters, provide strong financial incentives for the executive officers to maximize stockholder value.

Our executive compensation program is weighted towards variable, rather than fixed, compensation. Specifically, all at-risk portions of our executive compensation program, including annual cash bonuses, are designed to reward performance relative to financial and other metrics that we believe will result in favorable total stockholder returns, both in terms of absolute appreciation in the value of our shares, and in terms of relative performance as compared to our peers, taking into consideration our competitive position within the real estate industry and each executive’s contributions to the Company. The Compensation Committee has also designed the compensation program to reward our executive officers at levels that the Compensation Committee believes to be competitive for companies in its industry, including in part, a review of executive officer compensation levels at certain companies in a peer group, as identified below. We have not adopted any formal policies or guidelines for allocating compensation between long‑term and short-term compensation, between cash and noncash compensation, or among different forms of cash and noncash compensation.

 

Company Highlights – 2018 Financial and Operating Highlights.  In 2018, our 21 hotel portfolio, performed well, exceeding our initial projections despite the Company’s disposition of assets; which, in the short-term, may decrease our earnings per share as we build additional liquidity and capacity in our balance sheet. Our 2018 comparable hotel RevPAR increased approximately 2.8%, driven by a 3.1% increase in average daily rate, but partially offset by a 30 basis point decrease in occupancy (refer to “Operating Statistics” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2018). Additionally, comparable hotel revenue benefited as other sources of revenue continued to grow, specifically, food and beverage increases at our Wailea Beach Resort and our Boston Park Plaza hotel, which are continuing to benefit from their complete 2016 repositionings.

We improved the quality of our portfolio by focusing on Long-Term Relevant Real Estate®:

Hotel Dispositions. We enhanced the overall quality of the portfolio and increased the concentration of Long-Term Relevant Real Estate® through the disposition of six off-strategy hotels with prior year RevPAR that was 44% below the 2018 21 Hotel Comparable Portfolio RevPAR of $191.74 (refer to “Operating Statistics” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2018).

Hotel Acquisitions. We acquired the land underlying the JW Marriott New Orleans and the exclusive perpetual rights to use portions of the Renaissance Washington DC building which were both previously leased, increasing their long-term relevance and earnings potential. 

Capital Investment. We completed over $150 million of capital improvements throughout the portfolio, including the development of a new 46,000 square foot state-of-the-art meeting space at the Renaissance Orlando at SeaWorld®, the complete redesign and renovation of new guestrooms and bathrooms at the Marriott Boston Long Wharf and JW Marriott New Orleans and a $4 million investment into environmental and sustainability projects.

We improved an already strong balance sheet and maintained liquidity:

Maintained a Strong Balance Sheet with Significant Capacity. We ended 2018 with a consolidated debt and preferred equity to consolidated total capitalization ratio of approximately 28%, in addition to approximately $809 million of unrestricted cash on hand. We retain considerable financial flexibility, but will remain disciplined in deploying our excess capital. 

Extended our Debt Maturities. We amended and extended our undrawn revolving credit facility, increasing its availability to $500 million and extending its maturity to 2023, including extensions. Additionally, we amended $185 million of unsecured term loans, reducing annualized interest expense by approximately $1 million. We have no debt maturing until November 2020.

We returned capital to our stockholders:

Dividends. We declared cash dividends of $0.69 per share of common stock payable to our stockholders, returning $157 million to our stockholders. The 2018 declared cash dividends equate to a 5.3% dividend yield (based on the Company’s closing stock price on December 31, 2018).

COMPENSATION HIGHLIGHTS

The charts below illustrate the balance of the elements of target total compensation(1) during 2018 for Mr. Arabia, our CEO, and the average of the other NEOs.

As the charts above indicate, total target compensation for our CEO and other NEOs included performance based at-risk cash and equity incentives of 75% and 69%, respectively, which aligns their performance with the interests of our stockholders. Additionally, approximately 43% and 40%, respectively, of the target compensation for our CEO and other NEOs is directly tied to stockholder returns.

 

2018 COMPENSATION DECISIONS

The Compensation Committee assists the Board of Directors in determining the compensation of our executive officers. It evaluates and recommends to the Board of Directors appropriate policies and decisions relative to executive officer salary, benefits, bonus, incentive compensation, severance, equity-based and other compensation plans.

As described in more detail below, compensation for fiscal year 2018 for each of our NEOs was determined by the Compensation Committee based upon a review of the Company’s performance (including the Company’s stockholder returns), the individual performance of each NEO, total compensation paid by the Company to each NEO in prior years, and, in certain instances, taking into account certain peer group information.

Management’s Involvement in Compensation Decisions. The Compensation Committee exercises independent discretion and judgment in making compensation decisions after evaluating the Company’s performance, the executive’s past performance (including the extent to which the executive has met or exceeded specified targets or affected the Company’s performance), and the executive’s long‑term potential to enhance stockholder value. In connection with the executive compensation determination process, the Compensation Committee seeks input from the Company’s CEO regarding the compensation of the NEOs other than the CEO. In addition, from time to time, the Compensation Committee will direct management to work with its consultant(s) in providing proposals, program design and compensation recommendations. The CEO does not provide recommendations for changes in his or her own compensation. Any proposed changes to CEO compensation are recommended to the Board of Directors by the Compensation Committee, and final deliberations and all votes regarding CEO compensation are made in executive sessions of the Board of Directors, without the CEO present. Only Compensation Committee members vote on recommendations to the full Board of Directors regarding changes in executive compensation.

Annual Base Salary. The Compensation Committee reviews base salaries annually, but base salaries are not automatically increased pursuant to pre‑determined formulas (or otherwise) and may not be increased if, among other things, the Compensation Committee believes that other elements of compensation are more appropriate in light of the Company’s stated objectives or that increases are not appropriate for other reasons. Each executive officer’s base salary serves as the base amount for determining annual cash and equity incentive award opportunities, which are calculated as percentages of such executive’s base salary.

The base salary of each of our executive officers is based on the review of the Compensation Committee described above and the following:

an assessment of the scope of the executive officer’s responsibilities and leadership;

the executive officer’s expertise and experience within the industry;

the Company’s overall financial and business performance; and

the executive officer’s contributions to the Company.

The foregoing determination is not formulaic and is not based on specific Company or individual performance targets objectives, but rather, is subjective and made in light of our compensation philosophy and objectives described above. The following table includes the base salary determinations for each of our NEOs.

Annual Cash Incentive Bonuses and Annual Equity Incentive Awards.  We use annual cash incentive bonus and annual equity incentive awards to further motivate executive officers by establishing relationships between the bonuses and awards, on the one hand, and the performance of the Company, including total stockholder returns, and the executive officer on the other. We believe that tying our executive officers’ cash bonus and long-term equity compensation to the quantitative metrics, including total stockholder returns (discussed below), aligns the interests of the Company’s NEOs with those of our stockholders and provides a strong financial incentive to maximize stockholder value.

The annual cash incentive bonus and equity incentive awards are intended to compensate our executive officers for achieving our annual financial goals at both the corporate and hotel asset levels, for achieving both absolute and relative total stockholder returns, and for implementing long-term plans and strategies and achieving individual goals. The annual cash incentive bonus and annual equity incentive award programs are based on performance and responsibility level rather than on the basis of seniority, tenure or other entitlement. Each year, the Compensation Committee establishes performance-based criteria, both corporate and individual, for each NEO, and the level of achievement of those criteria determines the size of the annual bonuses and equity awards made to the NEO in the next calendar year. This performance-based program is intended to encourage our executive officers, including our NEOs, to continually improve their capabilities to enhance performance and deliver positive business results.

The annual equity incentive awards are also intended to encourage ownership, foster retention through post‑grant vesting schedules and align the executive officers’ interests with the long‑term interests of our stockholders. Historically, we have used restricted stock awards, the size of which is determined based on achievement of pre-established performance goals, including a meaningful portion tied to both absolute and relative total stockholder returns, which generally vest over a three-year period following grant. We use restricted stock for these awards in order to confer the full value of the equity because these awards are granted in respect of prior attainment of performance objectives, but we subject these awards to three-year vesting to provide retention and integrity incentives (subject to accelerated vesting in certain circumstances, as discussed below in the table “—Potential Payments Upon Termination or Change in Control”). Because the awards are only granted if certain performance criteria are met, we generally do not utilize additional performance-based criteria in connection with the vesting of these awards.

As described further below, the Compensation Committee sets the annual cash incentive bonus and equity incentive award levels for each NEO based on the achievement of objective corporate performance criteria as well as subjective individual performance criteria. The award thresholds are set at levels intended to provide the executives with a significant incentive to enhance stockholder value. Accordingly, as discussed below, the target annual incentive cash bonus and target annual equity incentive award for each executive officer are set at levels that represent a significant percentage of such officer’s overall compensation arrangements.

Criteria and Metrics for 2018 Incentive Compensation.  In the first quarter of 2018, the Compensation Committee established quantitative and qualitative performance measures for both the annual cash incentive bonuses and the annual equity incentive awards for our NEOs. Each NEO’s potential for the annual cash incentive bonus and the

annual equity incentive award opportunity was based on the achievement of both the Ten Goals (discussed below) and each NEO’s individual goal weighted as follows:

The relative weighting of the Ten Goals and individual goals established by the Compensation Committee for each of our NEOs reflects its analysis of the appropriate amount of emphasis to place on both objective corporate and subjective individual goals, and not any pre‑determined formula or methodology. The Compensation Committee may, at its discretion, adjust criteria to account for significant intra‑year transactions and circumstances.

The Compensation Committee determined that the amounts of the bonuses and awards to each NEO would, either in part or in whole, be based on the achievement of the following ten goals (collectively, the “Ten Goals”), each weighted as described (with the ranges representing variation in weighting among our NEOs as opposed to a range for each NEO), as well as individual performance:

For each of the Company’s Ten Goals, the Compensation Committee established four achievement levels—“Threshold,” “Target,” “High” and “Superior,” and for each achievement level, a corresponding multiple of base salary for each NEO. For each of the components, the amount granted or paid to the applicable NEO was the product of (a) his base salary, (b) the weighting for that component, (c) the multiple corresponding to the level of achievement and (d) the Compensation Committee’s subjective assessment as to whether the NEO’s performance warranted an increase or decrease.

Each of the Ten Goals is further discussed below.

Goals 1, 2 and 3 – Relative Total Stockholder Return. RSR was measured in one, three and five year periods ending on the last trading day in 2018. We calculated RSR as the increase (or decrease) in the price of the Company’s common stock on the NYSE as of the last trading day in 2018 over the price of the Company’s common stock on the NYSE as of the last trading day in 2017, 2015 and 2013, as applicable, plus dividends paid and reinvested on the Company’s common stock during the applicable period, relative to an equally‑weighted total stockholder return index consisting of DiamondRock Hospitality Company, Host Hotels & Resorts, Inc., Pebblebrook Hotel Trust and RLJ Lodging Trust, all of which have asset quality and leverage levels most comparable to that of the Company. In 2018, the Compensation Committee added Pebblebrook Hotel Trust and RLJ Lodging Trust to the Company’s peer index due to several factors including, but not limited to, size, geography, portfolio characteristics, management reputation, balance sheet and investor base. LaSalle Hotel Properties was removed from the index following the completed merger with Pebblebrook Hotel Trust. The Compensation Committee determined that for fiscal year 2018, the range for each of the RSR components should be as follows:

Goals 4, 5 and 6 – Absolute Total Stockholder Return. TSR was measured in one, three and five year periods ending on the last trading day in 2018. We calculated TSR as the increase (or decrease) in the price of the Company’s common stock on the NYSE as of the last trading day in 2018 over the price of the Company’s common stock on the NYSE as of the last trading day in 2017, 2015 and 2013, as applicable, plus dividends paid and reinvested on the Company’s common stock during the applicable period.

Goal 7 – Adjusted Funds From Operations Attributable to Common Stockholders Per Share. The primary objective of the adjusted funds from operations (“AFFO”), per share component was to measure management’s ability to oversee the financial performance of the Company. The Company’s AFFO targets for 2018 were lower than the 2017 targets, which is consistent with the Company’s strategy of selling non Long-Term Relevant Real Estate® and building cash and liquidity in the short-term in order to redeploy those proceeds in the future and drive long-term stockholder value.

 

The Compensation Committee determined that for fiscal year 2018, the range for the AFFO, per share component should be as follows:

Goal 8 – Debt to Undepreciated Book Value. The primary objective of this component was to measure the Company’s leverage levels against its long-term credit objectives of maintaining adequate financial flexibility and balance sheet capacity. The debt to asset value was calculated as the ratio of the Company’s total debt to the Company’s reported undepreciated book asset value for fiscal year ended 2018. This component was calculated by dividing the Company’s indebtedness by the Company’s reported 2018 undepreciated book asset value for all hotels owned as of December 31, 2018.

The Compensation Committee determined that for fiscal year 2018, the range for the leverage ratio component should be as follows:

Goal 9 – Return on Assets. The primary objective of the return on assets component was to measure the financial performance of the Company’s gross investment in hotels, joint ventures and related businesses owned for the entire subject year. Any intra‑year acquisitions or dispositions are excluded from the calculation. Return on assets is calculated as In Place Adjusted Hotel EBITDA/In Place Assets, where:

In Place Adjusted Hotel EBITDA is equal to the sum of all corporate earnings before interest, taxes, depreciation and amortization, or EBITDA, from hotels owned for the entire subject year, joint venture interests and other related businesses, and excludes corporate overhead, non-recurring charges and interest income, but includes any performance guaranty payments; and

In Place Assets is equal to the gross investment in hotel properties, joint ventures and other related businesses (in service and before depreciation) as of December 31 of the preceding year and owned for the entire subject year.

The Compensation Committee determined that for fiscal year 2018, the range for the return on assets component should be as follows:

Goal 10 – RevPAR Growth. The primary objective of this component was to measure the Company’s reported property-level revenue growth per available room, or RevPAR, in 2018 as compared to 2017.

Individual Performance. The primary objective of this component was to drive individual performance and to ensure accountability with respect to individual performance throughout the calendar year. Each of the NEOs had individualized goals for 2018 as follows:

Mr. Arabia was responsible for achievement of certain corporate, financial, strategic and operational objectives, including overall execution of the Company’s business plan.

Mr. Giglia’s goals included maintaining the Company’s leverage levels, extending maturities and directing the accounting and tax functions.

Mr. Hoffman’s goals consisted of continuing to execute on plans to maximize the long‑term value of each Company hotel property through oversight of hotel operations and by facilitating the execution of value‑enhancing renovations.

Mr. Springer’s goals generally included implementing the Company’s portfolio management objectives, including enhancing the Company’s portfolio quality through acquisitions and dispositions.

Mr. Klein’s goals generally included advising senior management on, and managing the process for, all transactions, overseeing legal proceedings, advising on labor matters, and assessing and advising on the Company’s corporate governance and risk management policies.

Additionally, each NEO’s individual performance was determined in part based on the NEO’s contribution towards advancing the Company’s strategy of owning a portfolio of Long-Term Relevant Real Estate®, as well as the preparation for and implementation of ESG initiatives in 2019.

The Compensation Committee set values for each of the above individual goals. Each NEO’s individual performance is calculated by multiplying the fraction of points received out of the total possible points (100), multiplied by their respective superior multiplier value.

2018 Awards. To determine the actual incentive awards payable to each NEO, in February 2019, the Compensation Committee reviewed and assessed the performance of the Company and each NEO in comparison to the subjective and objective performance measures established in 2018 and described above. No bonus was awarded with respect to any component if performance for such component was below Threshold. Results were interpolated between the levels of Threshold, Target, High and Superior.

Cash Incentive Bonuses. The following table summarizes all of the components of the cash incentive bonus with respect to fiscal year 2018 for each NEO (dollar values rounded to the nearest whole dollar). For Mr. Arabia, the cash bonus reflects the product of base salary multiplied by the weighting of each goal and the interpolated achieved goal multiplier (threshold – 100%; target – 150%; high – 225%; superior (maximum) – 275%). For Messrs. Giglia, Hoffman & Springer, the cash bonus reflects the product of base salary multiplied by the weighting of each goal and the interpolated achieved goal multiplier (threshold – 75%; target – 100%; high – 150%; superior (maximum) – 175%). For Mr. Klein, the cash bonus reflects the product of base salary multiplied by the weighting of each goal and the interpolated achieved goal multiplier (threshold – 60%; target – 85%; high – 95%; superior (maximum) – 110%).