ITEM 1.01ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
On December 21, 2020, Sunstone Hotel Investors, Inc. (the “Company”), as parent guarantor, Sunstone Hotel Partnership, LLC, as borrower and issuer (the “Operating Partnership”) and certain subsidiaries of the Operating Partnership as guarantors, amended the Operating Partnership’s term and revolving credit agreement and note purchase and guarantee agreement. The amendments and their changes to material terms of the agreements are described below.
Second Amendment to the Credit Agreement
On December 21, 2020, the Company, as parent guarantor, the Operating Partnership, as borrower, and certain subsidiaries of the Operating Partnership as guarantors, entered into a Second Amendment to Amended and Restated Credit Agreement (as so amended, the “Amended Credit Agreement”) with Wells Fargo Bank, National Association, Bank of America, N.A., JPMorgan Chase Bank, N.A., PNC Bank, National Association, U.S. Bank National Association and certain other lenders named therein. Wells Fargo Securities, LLC, BofA Securities, Inc., JPMorgan Chase Bank, N.A., PNC Capital Markets LLC and U.S. Bank National Association are joint lead arrangers, Wells Fargo Securities, LLC, BofA Securities, Inc. and JPMorgan Chase Bank, N.A. are joint bookrunners, Bank of America, N.A. and JPMorgan Chase Bank, N.A. are syndications agents and Citibank, N.A., PNC Bank, National Association and U.S. Bank National Association are documentation agents of the Amended Credit Agreement.
As previously disclosed, the Amended Credit Agreement provides for a $500 million unsecured revolving credit facility, which matures on April 14, 2023, an $85 million unsecured term loan, which matures on September 3, 2022 and a $100 million unsecured term loan that matures January 31, 2023 (collectively the “Amended Term Loans”). The Company may extend the maturity date of the unsecured revolving credit facility, exercisable two times, by six (6) months for each extension, to April 2024, upon the payment of applicable fees and satisfaction of certain customary conditions.
The Amended Credit Agreement extends the suspension of all original financial covenants, including those applicable to the Amended Term Loans, from June 30, 2021 through the required financial covenant test for the period ended March 31, 2022 (“Covenant Relief Period”). Following the Covenant Relief Period, original financial covenants will be phased-in over the following four quarters (“Ratio Adjustment Period”). The Covenant Relief Period may be terminated, at the option of the Operating Partnership, subject to meeting the original financial covenants at the end of any quarterly measurement period.
Most of the covenants under the Amended Credit Agreement remained unchanged from the first amendment to the Amended Credit Agreement completed last July 15, 2020 and during the Covenant Relief Period and, so long as the Notes (defined below) remain outstanding, the Ratio Adjustment Period, (i) the Amended Credit Agreement requires that the net cash proceeds from certain incurrences of indebtedness, equity issuances and asset dispositions will, subject to various exceptions, be applied as a mandatory prepayment of the amounts outstanding under the Amended Credit Agreement, (ii) the Amended Credit Agreement imposes an additional covenant that the Company and its subsidiaries maintain minimum liquidity of at least $180 million, (iii) the Amended Credit Agreement requires the Operating Partnership to pledge equity interests in certain unencumbered entities provided availability under the credit facility is less than $350 million or the Company retains less than $200 million of unrestricted cash, and (iv) the Amended Credit Agreement imposes additional negative covenants that will limit the ability of the Company and its subsidiaries to incur additional indebtedness, pay dividends on common stock (except to the extent required to maintain REIT status), repurchase shares, make voluntary prepayments of other indebtedness, make capital expenditures, conduct asset dispositions or transfers and make investments, in each case subject to various exceptions.
During the Covenant Relief Period and, so long as the Notes (defined below) remain outstanding, the Ratio Adjustment Period, the Company may, subject to certain conditions being met: (i) continue to pay all dividends on outstanding series of cumulative redeemable preferred stock, (ii) issue up to $200 million of additional preferred stock, (iii) fund future acquisitions with an unlimited amount of proceeds from the issuance of common equity and fund acquisitions through the sale of unencumbered assets, (iv) invest up to $250 million into acquisitions (in addition to equity funded acquisitions in (iii) above), (v) invest up to $60 million in capital improvements for the year end 2020 and $100 million for the year ended 2021 (excluding repairs related to emergencies and life safety).
Certain Covenant Relief Period conditions including, but not limited to, minimum liquidity, pledging equity interest and use of net proceeds from asset sales will remain in effect until the Company meets is original financial covenants.
Following the end of the Covenant Relief Period, the Amended Credit Agreement modifies certain financial covenants until January 1, 2023, unless the Company, subject to meeting the original financial covenants, elects to terminate the period on an earlier date, as follows:
