2014

Sunstone Hotel Investors Reports Operating Results for Third Quarter 2011 Announces Changes in Corporate Governance:

Robert Alter Announces Retirement,

Keith Locker Named Independent Chairman of the Board,

Douglas Pasquale and Andrew Batinovich Named as Additional Independent Directors

ALISO VIEJO, Calif., Nov. 7, 2011 /PRNewswire/ -- Sunstone Hotel Investors, Inc. (the "Company") (NYSE: SHO) today announced results for the third quarter ended September 30, 2011.

Third Quarter 2011 Operational Results (as compared to Third Quarter 2010)(1):

  • Comparable Hotel RevPAR increased 8.6% to $129.07.
  • Comparable Hotel EBITDA increased 12.2% to $56.4 million.
  • Comparable Hotel EBITDA Margins increased by 150 basis points to 27.2%.
  • Adjusted EBITDA increased by 32.9% to $52.4 million.
  • Adjusted FFO available to common stockholders increased by 67.6% to $23.7 million.
  • Adjusted FFO available to common stockholders per diluted share increased by 33.3% to $0.20.
  • Loss attributable to common stockholders was $24.0 million (vs. income available to common stockholders of $18.3 million in the third quarter 2010).
  • Loss attributable to common stockholders per diluted share was $0.20 (vs. income available to common stockholders of $0.19 in the third quarter 2010).

Ken Cruse, President and Chief Executive Officer, stated, “We are pleased to report another strong quarter.  Our portfolio’s year-over-year RevPAR growth accelerated to 8.6%, while our continued focus on operational efficiency led to 150 basis points of Comparable Hotel EBITDA Margin expansion.  As a result, our Adjusted EBITDA and Adjusted FFO per share both grew by 33% and exceeded expectations despite the turbulent economic environment.  Subsequent to quarter end, we reduced our overall indebtedness and bolstered our liquidity by refinancing our Doubletree Times Square and monetizing the Royal Palm mortgage.  With ample liquidity and limited near-term debt maturities, we remain focused on maximizing shareholder value by continuing to drive operational excellence, methodically improving our balance sheet and selectively allocating capital to our most attractive investment opportunities.”

(1)

Comparable Hotel RevPAR, Comparable Hotel EBITDA and Comparable Hotel EBITDA Margin information presented reflect the Company's Comparable 32 Hotel Portfolio, which includes all hotels held for investment by the Company as of September 30, 2011, excluding the Valley River Inn which has been classified as held for sale as of September 30, 2011 and included in discontinued operations for all periods presented due to its sale in October 2011. The Comparable 32 Hotel Portfolio also includes prior ownership results for the Doubletree Guest Suites Times Square acquired by the Company in January 2011, the JW Marriott New Orleans acquired by the Company in February 2011, and the Hilton San Diego Bayfront acquired by the Company in April 2011, for all periods presented. The Comparable 32 Hotel Portfolio for the nine months ended September 30, 2010 also includes results for the Renaissance Westchester during the period it was held in receivership prior to the Company's reacquisition of the hotel in June 2010.




SELECTED FINANCIAL DATA

($ in millions, except RevPAR and per share amounts)

(unaudited)



Three Months Ended September 30,


Nine Months Ended September 30,


2011

2010

% Change


2011

2010

% Change

Total Revenue

$  212.3

$  152.5

39.2%


$  589.6

$  447.7

31.7%

Comparable Hotel RevPAR

$  129.07

$  118.81

8.6%


$  124.21

$  115.12

7.9%









Comparable Hotel EBITDA Margin

27.2%

25.7%

150 bps


27.5%

26.0%

150 bps









Income available (loss attributable) to common stockholders

$  (24.0)

$  18.3



$  53.0

$  (12.6)


Income available (loss attributable) to common stockholders per diluted share

$  (0.20)

$  0.19



$  0.45

$  (0.13)


EBITDA

$  38.6

$  70.7



$  229.0

$  148.0


Adjusted EBITDA

$  52.4

$  39.4



$  148.5

$  114.0


FFO available to common stockholders

$  9.6

$  44.3



$  134.1

$  63.2


Adjusted FFO available to common stockholders

$  23.7

$  14.2



$  67.6

$  36.3


FFO available to common stockholders per diluted share (1)

$  0.08

$  0.45



$  1.14

$  0.65


Adjusted FFO available to common stockholders per diluted share (1)

$  0.20

$  0.15



$  0.58

$  0.37












(1)

Reflects the Series C convertible preferred stock on a "non-converted" basis. On an "as-converted" basis, FFO available to common stockholders per diluted share is $0.09 and $0.45, respectively, for the three months ended September 30, 2011 and 2010, and $1.14 and $0.67, respectively, for the nine months ended September 30, 2011 and 2010. On an "as-converted" basis, Adjusted FFO available to common stockholders per diluted share is $0.21 and $0.15, respectively, for the three months ended September 30, 2011 and 2010, and $0.59 and $0.40, respectively, for the nine months ended September 30, 2011 and 2010.



Disclosure regarding the non-GAAP financial measures in this release is included on pages 5 and 6. Reconciliations of non-GAAP financial measures to the most comparable GAAP measure for each of the periods presented are included on pages 9 through 12 of this release.  

Disposition Update

On October 26, 2011, the Company closed on the previously announced sale of the 257-room Valley River Inn located in Eugene, Oregon. The gross sales price of $16.4 million includes the assumption of the existing mortgage secured by the hotel which totaled $11.5 million on the date of the sale.

Balance Sheet/Liquidity Update

As of September 30, 2011, the Company had approximately $223.7 million of cash and cash equivalents, including restricted cash of $63.8 million, total assets of $3.2 billion, including $2.8 billion of net investments in hotel properties, total consolidated debt of $1.7 billion and stockholders' equity of $1.3 billion.

As previously announced on October 10, 2011, the Company refinanced a $270.0 million loan secured by interests in its 460-room Doubletree Guest Suites Times Square (the “Hotel”). The Hotel was refinanced with a new $180.0 million seven-year, non-recourse mortgage. The new mortgage, which bears a floating interest rate of 3-month LIBOR plus 325 basis points, requires payments of interest only for the first 24 months of the term. The Company funded the remainder of the repayment of the prior loan with approximately $90.0 million of its unrestricted cash. In addition, on October 10, 2011 the Company also announced the sale of the first mortgage note held in conjunction with its sale of the Royal Palm hotel in April 2011 for net proceeds of approximately $79.2 million. In anticipation of this sale, the Company recorded an impairment loss of $10.9 million in September 2011.  Adjusting its September 30, 2011 cash and debt balances for these two transactions and the sale of the Valley River Inn, the Company has approximately $218.5 million of cash and cash equivalents, including restricted cash of $63.8 million, and total consolidated debt of $1.6 billion.

John Arabia, Chief Financial Officer, stated, “Our adjusted unrestricted cash balance of over $150 million materially exceeds the $95 million of debt that matures through early 2015. Sunstone’s large unrestricted cash balance, our undrawn credit facility and limited near-term debt maturities not only provide the Company with significant downside protection in the event of an unanticipated decline in operating fundamentals, but also give us several years to gradually and thoughtfully reduce financial leverage in a manner that is additive to shareholder value.”  

Corporate Governance Structure Update

Today the Board of Directors announced certain changes to its corporate governance structure, effective as of November 7, 2011:

  • Robert (Bob) Alter has been named Chairman Emeritus and Founder and will no longer serve as the Company's Executive Chairman of the Board.  Mr. Alter will remain a Director until the Company's May 2012 Annual Meeting, at which time Mr. Alter will not stand for re-election to the Company's Board of Directors.
  • Lew Wolff will no longer serve as the Company's Co-Chairman of the Board.  Mr. Wolff will remain a Director.
  • Keith Locker, a member of the Board since May 2, 2006 and Chair of the Strategic Planning and Capital Markets Committee, has been named the Company’s independent Chairman of the Board.  Mr. Locker will continue to serve as Chair of the Strategic Planning and Capital Markets Committee.
  • Douglas Pasquale has been appointed to the Company’s Board of Directors. Mr. Pasquale is a Senior Advisor and Director of Ventas, Inc., and is the former Chairman, President and CEO of Nationwide Health Properties, Inc., a NYSE-listed healthcare REIT that was sold to Ventas in July 2011.  Mr. Pasquale has also held executive-level positions at various hotel and health care ownership and management companies, including Atria Senior Living Group, ARV Assisted Living, Inc., Richfield Hospitality Services and Regal Hotels International-North America.
  • Andrew Batinovich has been appointed to the Company’s Board of Directors.  Mr. Batinovich is President and CEO of Glenborough LLC, a private real estate investment and management company specializing in office properties.  Mr. Batinovich was also a co-founder of Glenborough LLC’s predecessor, Glenborough Realty Trust, a NYSE-listed REIT which was sold to an affiliate of Morgan Stanley in 2006.
  • Keith Russell, a member of the Board since the Company's initial public offering in October 2004, has succeeded Keith Locker as Chair of the Audit Committee.
  • Jamie Behar, a member of the Board since the Company's initial public offering in October 2004, has succeeded Keith Russell as Chair of the Nominating and Corporate Governance Committee.    

Mr. Alter stated, "I am excited and pleased to announce my retirement from Sunstone's Board of Directors in May after serving both as CEO and Chairman since I founded this Company 16 years ago.  Founding Sunstone Hotel Investors has been the most enjoyable and satisfying accomplishment of my long career in the hotel industry. I am very proud of the organization I have built over the years and the growth of the Company into an outstanding owner of one of the best hotel portfolios in major U.S. markets. I am pleased with the corporate direction, business plan and the new team that senior management and I have assembled to lead Sunstone for many years. I am also honored to announce important changes to Sunstone's corporate governance structure.  Keith Locker, who has served as a director for over five years, will serve the Company well as Sunstone's new independent Chairman of the Board.  Sunstone's two new independent directors, Doug Pasquale and Andy Batinovich, both having extensive industry experience, will bring new dimensions of leadership to the Board."

Mr. Cruse stated, "The entire Sunstone team thanks Bob for his exceptional support, teamwork and mentorship during his 16 years with the Company.  Through Bob's vision and leadership, Sunstone has grown into an outstanding organization, with an exceptional portfolio of hotels and a very solid business plan.  It is our privilege and honor to have had the opportunity to work with, and learn from, an industry legend like Bob."    

Capital Improvements

During the third quarter of 2011, the Company invested $17.7 million in capital improvements into its portfolio.  Year-to-date through the end of the third quarter of 2011, the Company invested $82.4 million in capital improvements into its portfolio.

2011 Outlook

The Company is providing guidance at this time but does not undertake to make updates for any developments in its business or changes in the operating environment.  Achievement of the anticipated results is subject to risks and uncertainties, including those disclosed in the Company's filings with the Securities and Exchange Commission.  The Company has provided guidance for the full year 2011.  The Company's guidance does not take into account any additional hotel acquisitions, dispositions or financings during 2011.  Prior 2011 guidance included $4.0 million of partial-year interest income from the Royal Palm mortgage, which was sold in October 2011.  EBITDA for the Royal Palm mortgage was expected to have been $1.4 million for the fourth quarter.

For the full year 2011, the Company expects:  

Metric

Prior Guidance (1)

Adjusted Prior Guidance (2)

Current Guidance

Change to Adjusted Prior Midpoint

Comparable Hotel RevPAR (3)

+6% - 8%

+6% - 8%

+6% - 8%

-

Net Loss (4)

($14) - ($3)

($17) - ($6)

($15) - ($10)

-$1.0

Adjusted EBITDA ($ millions)

$203 - $214

$201 - $212

$204 - $209

-

Adjusted FFO ($ millions)

$91 - $102

$89 - $100

$93 - $98

+$1.0

Adjusted FFO per diluted share

$0.77 - $0.87

$0.76 - $0.86

$0.79 - $0.84

+$0.005








(1)

Reflects guidance presented on 08/08/2011.

(2)

Prior guidance has been adjusted down by $1.4 million to reflect the sale of the mortgage note secured by the Royal Palm Hotel.

(3)

Includes  32 comparable hotels.

(4)

Net loss reflects loss attributable to common stockholders plus preferred stock dividends. Guidance for the full  year 2011 includes the Company's ownership results for all acquisitions and dispositions, and includes the Company's 75% ownership results for the Hilton San Diego Bayfront.



Mr. Cruse stated, "Our portfolio continues to deliver meaningful RevPAR and EBITDA gains as business transient travel remains strong.  While there is a risk that unchecked macroeconomic uncertainty may ultimately lead to moderation of business travel and group demand in certain of our hotels, we believe our aggressive approach to asset management, continued strength in group production and ramp up from our recently renovated hotels are likely to drive continued growth in 2012."  

Dividend Update

On November 4, 2011, the Company's Board of Directors declared a cash dividend of $0.50 per share payable to its Series A and Series D cumulative redeemable preferred stockholders and a cash dividend of $0.393 per share payable to its Series C cumulative convertible redeemable preferred stockholders. The dividends will be paid on or before January 15, 2012 to stockholders of record on December 31, 2011.  No dividend was declared on the Company's common stock.

Subject to certain limitations, the Company intends to make dividends on its stock in amounts equivalent to 100% of its annual taxable income, which may be reduced through the application of negative operating losses. The level of any future dividends will be determined by the Company's Board of Directors after considering taxable income projections, expected capital requirements, and risks affecting the Company's business.  Common stock dividends may be made in the form of cash or a combination of cash and stock consistent with Internal Revenue Service guidelines.

Supplemental Disclosures

Contemporaneous with this release, the Company has furnished a Form 8-K with unaudited financial information. This additional information is being provided as a supplement to information prepared in accordance with generally accepted accounting principles. The Company undertakes no obligation to update any of the information provided to conform to actual results or changes in the Company's portfolio, capital structure or future expectations.

Earnings Call

The Company will host a conference call to discuss third quarter 2011 results on November 8, 2011, at 12:00 p.m. EST (9:00 a.m. PST). A live web cast of the call will be available via the Investor Relations section of the Company's website.  Alternatively, investors may dial 1-888-549-7750 (for domestic callers) or 1-480-629-9770 (for international callers). A replay of the web cast will also be archived on the website.

About Sunstone Hotel Investors, Inc.

Sunstone Hotel Investors, Inc. ("Sunstone") is a lodging real estate investment trust ("REIT") that, as of September 30, 2011, has interests in 32 hotels comprised of 13,206 rooms, excluding one hotel classified as held for sale.  Sunstone's hotels are primarily in the upper upscale segment and are generally operated under nationally recognized brands, such as Marriott, Hilton, Fairmont, Hyatt and Starwood. For further information, please visit Sunstone's website at www.sunstonehotels.com.

This press release contains forward-looking statements within the meaning of federal securities laws and regulations. These forward-looking statements are identified by their use of terms and phrases such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "should," "will" and other similar terms and phrases, including references to assumptions and forecasts of future results. Forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from those anticipated at the time the forward-looking statements are made. These risks include, but are not limited to: volatility in the debt or equity markets affecting our ability to acquire or sell hotel assets; national and local economic and business conditions, including the likelihood of a prolonged U.S. recession; the ability to maintain sufficient liquidity and our access to capital markets; potential terrorist attacks, which would affect occupancy rates at our hotels and the demand for hotel products and services; operating risks associated with the hotel business; risks associated with the level of our indebtedness and our ability to meet covenants in our debt and equity agreements; relationships with property managers and franchisors; our ability to maintain our properties in a first-class manner, including meeting capital expenditure requirements; our ability to compete effectively in areas such as access, location, quality of accommodations and room rate structures; changes in travel patterns, taxes and government regulations, which influence or determine wages, prices, construction procedures and costs; our ability to identify, successfully compete for and complete acquisitions; the performance of hotels after they are acquired; necessary capital expenditures and our ability to fund them and complete them with minimum disruption; our ability to continue to satisfy complex rules in order for us to qualify as a REIT for federal income tax purposes; and other risks and uncertainties associated with our business described in the Company's filings with the Securities and Exchange Commission. Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that the expectations will be attained or that any deviation will not be material. All forward-looking information in this release is as of November 7, 2011, and the Company undertakes no obligation to update any forward-looking statement to conform the statement to actual results or changes in the Company's expectations.

This release should be read in conjunction with the consolidated financial statements and notes thereto included in our most recent reports on Form 10-K and Form 10-Q. Copies of these reports are available on our website at www.sunstonehotels.com and through the SEC's Electronic Data Gathering Analysis and Retrieval System ("EDGAR") at www.sec.gov.

Non-GAAP Financial Measures

We present the following non-GAAP financial measures that we believe are useful to investors as key measures of our operating performance: (1) Earnings Before Interest Expense, Taxes, Depreciation and Amortization, or EBITDA; (2) Adjusted EBITDA (as defined below); (3) Funds From Operations, or FFO; (4) Adjusted FFO (as defined below); and (5) comparable hotel EBITDA and comparable hotel EBITDA margin.

EBITDA represents net income (loss) excluding: (1) non-controlling interests; (2) interest expense; (3) provision for income taxes, including income taxes applicable to sale of assets; and (4) depreciation and amortization. In addition, we have presented Adjusted EBITDA, which excludes: (1) amortization of deferred stock compensation; (2) the impact of any gain or loss from asset sales; (3) impairment charges; and (4) other adjustments we have identified in this release. We believe EBITDA and Adjusted EBITDA are useful to investors in evaluating our operating performance because these measures help investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization) from our operating results. We also use EBITDA and Adjusted EBITDA as measures in determining the value of hotel acquisitions and dispositions. A reconciliation of net income (loss) to EBITDA and Adjusted EBITDA is set forth on page 9.  Reconciliations and the components of comparable hotel EBITDA and comparable hotel EBITDA margin are set forth on pages 11 and 12. We believe comparable hotel EBITDA and comparable hotel EBITDA margin are also useful to investors in evaluating our property-level operating performance.

We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group. The Board of Governors of NAREIT in its March 1995 White Paper (as clarified in November 1999 and April 2002) defines FFO to mean net income (loss) (computed in accordance with GAAP), excluding non-controlling interests, gains and losses from sales of property, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs), and after adjustment for unconsolidated partnerships and joint ventures. We also present Adjusted FFO, which excludes penalties, written-off deferred financing costs, impairment losses and other adjustments we have identified in this release. We believe that the presentation of FFO and Adjusted FFO provide useful information to investors regarding our operating performance because they are measures of our operations without regard to specified non-cash items such as real estate depreciation and amortization, gain or loss on sale of assets and certain other items which we believe are not indicative of the performance of our underlying hotel properties.  We believe that these items are more representative of our asset base and our acquisition and disposition activities than our ongoing operations. We also use FFO as one measure in determining our results after taking into account the impact of our capital structure.  A reconciliation of net income (loss) to FFO and Adjusted FFO is set forth on page 9.  

The revenue and expense items associated with our commercial laundry facility, BuyEfficient and other miscellaneous non-hotel items have been excluded in presenting comparable hotel EBITDA margins. Management believes the calculation of comparable hotel EBITDA results in a more accurate presentation of hotel EBITDA margins of the Company's 32 hotel comparable portfolio. See pages 11 and 12 for reconciliations of comparable hotel EBITDA to the most comparable GAAP measure. Our 32 hotel comparable portfolio includes all hotels held for investment by the Company as of September 30, 2011, excluding the Valley River Inn, which has been classified as held for sale as of September 30, 2011 and included in discontinued operations for all periods presented due to its sale in October 2011. The 32 hotel comparable portfolio also includes results for the Renaissance Westchester during the period it was held in receivership prior to the Company's reacquisition of the hotel in June 2010, as well as prior ownership results for the Doubletree Guest Suites Times Square acquired by the Company in January 2011, the JW Marriott New Orleans acquired by the Company in February 2011, and the Hilton San Diego Bayfront acquired by the Company in April 2011.

We caution investors that amounts presented in accordance with our definitions of EBITDA, Adjusted EBITDA, FFO, Adjusted FFO, comparable hotel EBITDA and comparable hotel EBITDA margin may not be comparable to similar measures disclosed by other companies, because not all companies calculate these non-GAAP measures in the same manner. EBITDA, Adjusted EBITDA, FFO, Adjusted FFO, comparable hotel EBITDA and comparable hotel EBITDA margin should not be considered as an alternative measure of our net income (loss), operating performance, cash flow or liquidity. EBITDA, Adjusted EBITDA, FFO, Adjusted FFO, comparable hotel EBITDA and comparable hotel EBITDA margin may include funds that may not be available for our discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions and other commitments and uncertainties. Although we believe that EBITDA, Adjusted EBITDA, FFO, Adjusted FFO, comparable hotel EBITDA and comparable hotel EBITDA margin can enhance an investor's understanding of our results of operations, these non-GAAP financial measures, when viewed individually, are not necessarily a better indicator of any trend as compared to GAAP measures such as net income (loss) or cash flow from operations. In addition, you should be aware that adverse economic and market conditions may harm our cash flow.

For Additional Information:

Bryan Giglia
Senior Vice President – Corporate Finance
Sunstone Hotel Investors, Inc.
(949) 382-3036

Sunstone Hotel Investors, Inc.

Consolidated Balance Sheets

(In thousands, except share data)










September 30,


December 31,



2011


2010



(unaudited)



Assets




Current assets:





Cash and cash equivalents

$          159,974


$        276,034


Restricted cash

63,767


54,954


Accounts receivable, net

25,416


17,285


Due from affiliates

6


44


Inventories

2,388


2,101


Prepaid expenses

9,611


7,808


Investment in hotel properties of discontinued operations, net

15,041


131,404


Investment in other real estate of discontinued operations, net

-


896


Other current assets of discontinued operations, net

3,249


5,128

Total current assets

279,452


495,654






Investment in hotel properties, net

2,793,900


1,902,819

Other real estate, net

11,945


11,116

Investments in unconsolidated joint ventures

-


246

Deferred financing fees, net

11,408


8,855

Interest rate cap derivative agreements

6


-

Goodwill

13,088


4,673

Other assets, net

99,757


12,743






Total assets

$       3,209,556


$     2,436,106






Liabilities and Equity




Current liabilities:





Accounts payable and accrued expenses

$            26,257


$          20,889


Accrued payroll and employee benefits

19,520


12,674


Due to Third-Party Managers

6,576


7,573


Dividends payable

7,437


5,137


Other current liabilities

31,896


16,907


Current portion of notes payable

324,279


16,196


Note payable of discontinued operations

11,557


11,773


Other current liabilities of discontinued operations, net

873


21,600

Total current liabilities

428,395


112,749






Notes payable, less current portion

1,342,022


1,115,334

Interest rate swap derivative agreement

1,572


-

Other liabilities

10,723


8,724

Total liabilities

1,782,712


1,236,807






Commitments and contingencies

-


-






Preferred stock, Series C Cumulative Convertible Redeemable Preferred





Stock, $0.01 par value, 4,102,564 shares authorized, issued and





outstanding at September 30, 2011 and December 31, 2010, liquidation





preference of $24.375 per share

100,000


100,000






Equity:




Stockholders' equity:





Preferred stock, $0.01 par value, 100,000,000 shares authorized.





    8.0% Series A Cumulative Redeemable Preferred Stock,





         7,050,000 shares issued and outstanding at September 30, 2011 and





         December 31, 2010, stated at liquidation preference of $25.00 per share

176,250


176,250


    8.0% Series D Cumulative Redeemable Preferred Stock,





         4,600,000 shares issued and outstanding at September 30, 2011 and zero issued





         and outstanding at December 31, 2010, stated at liquidation preference of





         $25.00 per share

115,000


-


Common stock, $0.01 par value, 500,000,000 shares authorized,





     117,265,090 shares issued and outstanding at September 30, 2011 and





     116,950,504 shares issued and outstanding at December 31, 2010

1,173


1,170


Additional paid in capital

1,311,918


1,313,498


Retained earnings

103,091


29,593


Cumulative dividends

(437,959)


(418,075)


Accumulated other comprehensive loss

(3,137)


(3,137)

Total stockholders' equity

1,266,336


1,099,299

Non-controlling interest in consolidated joint ventures

60,508


-

Total equity

1,326,844


1,099,299






Total liabilities and equity

$       3,209,556


$     2,436,106



Sunstone Hotel Investors, Inc.

Unaudited Consolidated Statements of Operations

(In thousands, except per share data)


















Three Months Ended September 30,


Nine Months Ended September 30,


2011


2010


2011


2010









Revenues








Room

$ 150,584


$ 105,927


$ 407,344


$ 302,033

Food and beverage

44,153


34,671


134,481


111,206

Other operating

17,597


11,877


47,821


34,415

Total revenues

212,334


152,475


589,646


447,654

Operating expenses








Room

37,894


27,033


102,782


77,378

Food and beverage

34,882


27,656


100,714


82,768

Other operating

6,871


5,734


19,059


17,113

Advertising and promotion

10,338


7,776


29,325


22,782

Repairs and maintenance

8,349


6,452


23,870


19,247

Utilities

8,441


6,593


22,518


17,750

Franchise costs

7,942


5,727


20,676


15,878

Property tax, ground lease and insurance

17,197


10,671


45,762


31,354

Property general and administrative

24,768


18,045


70,013


53,199

Corporate overhead

6,943


4,802


20,916


14,510

Depreciation and amortization

34,176


23,043


93,057


69,264

Impairment loss

10,862


-


10,862


1,943

Total operating expenses

208,663


143,532


559,554


423,186

Operating income

3,671


8,943


30,092


24,468

Equity in earnings of unconsolidated joint ventures

-


200


21


475

Interest income and other income (loss)

1,544


(280)


2,973


(10)

Interest expense

(21,792)


(16,506)


(60,729)


(53,235)

Gain on remeasurement of equity interests

-


-


69,230


-

Income (loss) from continuing operations

(16,577)


(7,643)


41,587


(28,302)

Income from discontinued operations

24


31,296


32,124


31,172

Net income (loss)

(16,553)


23,653


73,711


2,870

(Income) loss from consolidated joint venture attributable to non-controlling interest

31


-


(213)


-

Distributions to non-controlling interest

(8)


-


(22)


-

Preferred stock dividends and accretion

(7,437)


(5,141)


(19,884)


(15,515)

Undistributed income allocated to unvested restricted stock compensation

-


(232)


(638)


-

Income available (loss attributable) to common stockholders

$ (23,967)


$   18,280


$   52,954


$ (12,645)









Basic per share amounts:








       Income (loss) from continuing operations available (attributable) to common stockholders

$     (0.20)


$     (0.13)


$       0.18


$     (0.45)

       Income from discontinued operations

-


0.32


0.27


0.32

Basic income available (loss attributable) to common stockholders per common share

$     (0.20)


$       0.19


$       0.45


$     (0.13)









Diluted per share amounts:








       Income (loss) from continuing operations available (attributable) to common stockholders

$     (0.20)


$     (0.13)


$       0.18


$     (0.45)

       Income from discontinued operations

-


0.32


0.27


0.32

Diluted income available (loss attributable) to common stockholders per common share

$     (0.20)


$       0.19


$       0.45


$     (0.13)









Weighted average common shares outstanding:








      Basic

117,254


97,250


117,186


97,163

      Diluted

117,254


97,612


117,268


97,163









Dividends declared per common share

$           -


$           -


$           -


$           -



Sunstone Hotel Investors, Inc.

Reconciliation of Net Income (Loss) to Non-GAAP Financial Measures

(Unaudited and in thousands, except per share amounts)








Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA














Three Months Ended


Nine Months Ended


September 30,


September 30,


2011

2010


2011

2010







Net income (loss)

$ (16,553)

$ 23,653


$   73,711

$     2,870

Operations held for investment:






  Depreciation and amortization

34,176

23,043


93,057

69,264

  Amortization of lease intangibles

1,035

76


2,971

226

  Interest expense

19,595

15,954


55,581

48,756

  Interest expense - default rate

-

-


-

884

  Amortization of deferred financing fees

840

300


2,265

1,093

  Write-off of deferred financing fees

-

-


-

1,585

  Loan penalties and fees

-

-


-

174

  Non-cash interest related to discount on Senior Notes

270

252


792

743

  Non-cash interest related to loss on derivatives, net

1,087

-


2,091

-

Non-controlling interests:






  (Income) loss from consolidated joint venture attributable to non-controlling interest

31

-


(213)

-

  Depreciation and amortization

(1,414)

-


(2,598)

-

  Interest expense

(549)

-


(1,005)

-

  Amortization of deferred financing fees

(56)

-


(103)

-

  Non-cash interest related to loss on derivative

(4)

-


(32)

-

Unconsolidated joint ventures:






  Depreciation and amortization

-

13


3

40

Discontinued operations:






  Depreciation and amortization

-

2,380


1,951

6,342

  Interest expense

158

2,586


472

8,314

  Interest expense - default rate

-

2,038


-

6,392

  Amortization of deferred financing fees

3

134


9

406

  Loan penalties and fees

-

282


-

927

EBITDA

38,619

70,711


228,952

148,016







Operations held for investment:






  Amortization of deferred stock compensation

697

757


2,170

2,405

  Non-cash straightline lease expense

696

340


1,702

738

  (Gain) loss on sale of assets

(17)

383


(73)

383

  Gain on remeasurement of equity interests

-

-


(69,230)

-

  Due diligence costs - abandoned project

-

938


-

938

  Closing costs - completed acquisitions

-

-


3,372

-

  Impairment loss

10,862

-


10,862

1,943

  Lawsuit settlement costs

1,620

-


1,620

-

Non-controlling interests:






  Non-cash straightline lease expense

(114)

-


(243)

-

Unconsolidated joint ventures:






  Amortization of deferred stock compensation

-

4


2

21

Discontinued operations:






  (Gain) loss on sale of assets

52

-


(13,966)

-

  Impairment loss

-

-


1,495

-

  Gain on extinguishment of debt

-

(40,473)


(18,145)

(47,220)

  Closing costs - completed acquisitions

-

6,774


-

6,774


13,796

(31,277)


(80,434)

(34,018)







Adjusted EBITDA

$  52,415

$ 39,434


$ 148,518

$ 113,998













Reconciliation of Net Income (Loss) to FFO and Adjusted FFO













Net income (loss)

$ (16,553)

$ 23,653


$   73,711

$     2,870

Preferred stock dividends

(7,437)

(5,141)


(19,884)

(15,515)

Operations held for investment:






  Real estate depreciation and amortization

33,882

22,906


92,186

68,858

  Amortization of lease intangibles

1,035

76


2,971

226

  (Gain) loss on sale of assets

(17)

383


(73)

383

Non-controlling interests:






  (Income) loss from consolidated joint venture attributable to non-controlling interest

31

-


(213)

-

  Real estate depreciation and amortization

(1,414)

-


(2,598)

-

Discontinued operations:






  Real estate depreciation and amortization

-

2,380


1,951

6,342

  (Gain) loss on sale of assets

52

-


(13,966)

-

FFO available to common stockholders

9,579

44,257


134,085

63,164







Operations held for investment:






  Interest expense - default rate

-

-


-

884

  Write-off of deferred financing fees

-

-


-

1,585

  Loan penalties and fees

-

-


-

174

  Non-cash straightline lease expense

696

340


1,702

738

  Non-cash interest related to loss on derivatives, net

1,087

-


2,091

-

  Gain on remeasurement of equity interests

-

-


(69,230)

-

  Due diligence costs - abandoned project

-

938


-

938

  Closing costs - completed acquisitions

-

-


3,372

-

  Impairment loss

10,862

-


10,862

1,943

  Lawsuit settlement costs

1,620

-


1,620

-

Non-controlling interests:






  Non-cash straightline lease expense

(114)

-


(243)

-

  Non-cash interest related to loss on derivative

(4)

-


(32)

-

Discontinued operations:






  Interest expense - default rate

-

2,038


-

6,392

  Loan penalties and fees

-

282


-

927

  Impairment loss

-

-


1,495

-

  Gain on extinguishment of debt

-

(40,473)


(18,145)

(47,220)

  Closing costs - completed acquisitions

-

6,774


-

6,774


14,147

(30,101)


(66,508)

(26,865)







Adjusted FFO available to common stockholders

$  23,726

$ 14,156


$   67,577

$   36,299







FFO available to common stockholders per diluted share

$      0.08

$     0.45


$       1.14

$       0.65







Adjusted FFO available to common stockholders per diluted share

$      0.20

$     0.15


$       0.58

$       0.37







Basic weighted average shares outstanding

117,254

97,250


117,186

97,163

Shares associated with unvested restricted stock awards

-

362


82

372

Diluted weighted average shares outstanding (1)

117,254

97,612


117,268

97,535









(1)

Diluted weighted average shares outstanding includes the Series C convertible preferred stock on a "non-converted" basis.  On an "as-converted" basis, FFO available to common stockholders per diluted share is $0.09 and $0.45, respectively, for the three months ended September 30, 2011 and 2010, and $1.14 and $0.67, respectively, for the nine months ended September 30, 2011 and 2010. On an "as-converted" basis,  Adjusted FFO available to common stockholders per diluted share is $0.21 and $0.15, respectively, for the three months ended September 30, 2011 and 2010, and $0.59 and $0.40, respectively, for the nine months ended September 30, 2011 and 2010.



Sunstone Hotel Investors, Inc.

Reconciliation of Net Loss to Non-GAAP Financial Measures

Guidance for Full Year 2011 (1)

(Unaudited and in thousands except per share amounts)





Reconciliation of Net Loss to Adjusted EBITDA






Year Ended


December 31, 2011


Low

High




Net loss

$ (15,200)

$   (9,800)

  Depreciation and amortization

130,000

130,000

  Amortization of lease intangibles

4,000

4,000

  Interest expense

75,900

75,900

  Amortization of deferred financing fees

3,000

3,000

  Non-cash interest related to discount on Senior Notes

1,100

1,100

  Amortization of deferred stock compensation

3,000

3,000

  Non-cash straightline lease expense

2,200

2,200

Adjusted EBITDA

$ 204,000

$ 209,400







Reconciliation of Net Loss to Adjusted FFO







Net loss

$ (15,200)

$   (9,800)

  Preferred stock dividends

(27,400)

(27,400)

  Real estate depreciation and amortization

129,100

129,100

  Amortization of lease intangibles

4,000

4,000

  Non-cash straightline lease expense

2,200

2,200

Adjusted FFO available to common stockholders

$   92,700

$   98,100







Adjusted FFO available to common stockholders per diluted share

$       0.79

$       0.84




Diluted weighted average shares outstanding

117,400

117,400






(1)

Guidance for the full  year 2011 includes the Company's ownership results for all acquisitions and dispositions, and includes the Company's 75% ownership results for the Hilton San Diego Bayfront.



Sunstone Hotel Investors, Inc.

Comparable Hotel EBITDA Margins

(Unaudited and in thousands except hotels and rooms)
















Three Months Ended

September 30, 2011


Three Months Ended September 30, 2010


Actual (1)


Actual (2)


Acquired Hotels (3)


Comparable (4)

Number of Hotels

32


29


3


32

Number of Rooms

13,206


11,062


2,144


13,206









Hotel EBITDA Margin (5)

27.2%


24.4%


30.0%


25.7%









Hotel Revenues








    Room revenue

$                      150,584


$     105,927


$                       32,540


$                138,467

    Food and beverage revenue

44,153


34,671


9,230


43,901

    Other operating revenue

12,755


8,691


4,161


12,852

Total Hotel Revenues

207,492


149,289


45,931


195,220









Hotel Expenses








    Room expense

38,097


27,373


8,131


35,504

    Food and beverage expense

34,921


27,709


6,853


34,562

    Other hotel expense

54,662


40,116


12,663


52,779

    General and administrative expense

23,446


17,617


4,527


22,144

Total Hotel Expenses

151,126


112,815


32,174


144,989









Hotel EBITDA

56,366


36,474


13,757


50,231









Non-hotel operating income

1,017


877


-


877

Amortization of lease intangibles

(1,035)


(76)


(1,007)


(1,083)

Non-cash straightline lease expense

(696)


(340)


(492)


(832)

Management company transition costs

-


(147)


-


(147)

Corporate overhead

(6,943)


(4,802)


-


(4,802)

Depreciation and amortization

(34,176)


(23,043)


(7,262)


(30,305)

Impairment loss

(10,862)


-


-


-

Operating Income

3,671


8,943


4,996


13,939









Equity in earnings of unconsolidated joint ventures

-


200


-


200

Interest income and other income (loss)

1,544


(280)


-


(280)

Interest expense

(21,792)


(16,506)


(3,962)


(20,468)

Income from discontinued operations

24


31,296


-


31,296

Net Income (Loss)

$                       (16,553)


$       23,653


$                         1,034


$                  24,687











(1)

Actual represents the Company's ownership results for the 32 hotels held for investment as of September 30, 2011. Excludes the Valley River Inn which has been classified as held for sale as of September 30, 2011 and included in discontinued operations for the three months ended September 30, 2011 due to its sale in October 2011.

(2)

Actual represents the Company's ownership results for the 29 hotels held for investment as of September 30, 2010. Excludes the Royal Palm Miami Beach, which was sold in April 2011, the Valley River Inn, which has been classified as held for sale as of September 30, 2011 and included in discontinued operations for the three months ended September 30, 2010 due to its sale in October 2011, and eight hotels included in the Mass Mutual portfolio, which have been reclassified as discontinued operations for the three months ended September 30, 2010 due to their deed back to the lender in November 2010. Room count as of September 30, 2010 has been adjusted by 6 additional rooms which were added to the Courtyard by Marriott Los Angeles Airport during the second quarter of 2011.

(3)

Acquired Hotels represents prior ownership results for the Doubletree Guest Suites Times Square acquired by the Company on January 14, 2011, the JW Marriott New Orleans acquired by the Company on February 15, 2011, and the Hilton San Diego Bayfront acquired by the Company on April 15, 2011.

(4)

Comparable represents the Company's ownership results for the 29 hotels held for investment as of September 30, 2010, plus the Doubletree Guest Suites Times Square acquired by the Company on January 14, 2011, the JW Marriott New Orleans acquired by the Company on February 15, 2011, and the Hilton San Diego Bayfront acquired by the Company on April 15, 2011.

(5)

Hotel EBITDA Margin is calculated as Hotel EBITDA divided by total hotel revenues.



Sunstone Hotel Investors, Inc.

Comparable Hotel EBITDA Margins

(Unaudited and in thousands except hotels and rooms)






























Nine Months Ended September 30, 2011


Nine Months Ended September 30, 2010


Actual (1)


Acquired Hotels (2)


Comparable (3)


Actual (4)


Reacquired Hotel (5)


Acquired Hotels (2)


Comparable (6)

Number of Hotels

32




32


29




3


32

Number of Rooms

13,206




13,206


11,062




2,144


13,206















Hotel EBITDA Margin (7)

27.2%


32.3%


27.5%


24.8%


10.9%


30.9%


26.0%

Hotel EBITDA Margin adjusted for prior year property tax assessment (8)

27.1%




27.4%


24.8%






26.0%

Hotel EBITDA Margin adjusted for hotels undergoing renovation (9)

27.6%




27.9%


24.8%






26.0%















Hotel Revenues














    Room revenue

$               407,344


$                            24,150


$                         431,494


$              302,033


$                                 4,931


$                              93,232


$                    400,196

    Food and beverage revenue

134,481


11,753


146,234


111,206


3,114


29,057


143,377

    Other operating revenue

34,167


2,873


37,040


25,121


240


11,840


37,201

Total Hotel Revenues

575,992


38,776


614,768


438,360


8,285


134,129


580,774















Hotel Expenses














    Room expense

103,426


5,926


109,352


78,443


1,417


22,009


101,869

    Food and beverage expense

100,852


7,589


108,441


82,877


2,355


20,141


105,373

    Other hotel expense

148,809


9,120


157,929


116,016


2,403


37,172


155,591

    General and administrative expense

66,383


3,597


69,980


52,165


1,203


13,312


66,680

Total Hotel Expenses

419,470


26,232


445,702


329,501


7,378


92,634


429,513















Hotel EBITDA

156,522


12,544


169,066


108,859


907


41,495


151,261

Prior year property tax assessment

(600)


-


(600)


-


-


-


-

Hotel EBITDA adjusted for prior year property tax assessment

155,922


12,544


168,466


108,859


907


41,495


151,261















Total Hotel Revenues of hotels undergoing renovation

(24,325)


-


(24,325)


-


-


-


-

Total Hotel Expenses of hotels undergoing renovation

20,862


-


20,862


-


-


-


-

EBITDA of hotels undergoing renovation

(3,463)


-


(3,463)


-


-


-


-

Hotel EBITDA adjusted for hotels undergoing renovation

152,459


12,544


165,003


108,859


907


41,495


151,261















Non-hotel operating income

3,160


-


3,160


2,522


-


-


2,522

Amortization of lease intangibles

(2,971)


(140)


(3,111)


(226)


-


(3,021)


(3,247)

Non-cash straightline lease expense

(1,702)


-


(1,702)


(738)


-


(1,474)


(2,212)

Management company transition costs

(82)


-


(82)


(232)


-


-


(232)

Prior year property tax assessment

600


-


600


-


-


-


-

EBITDA of hotels undergoing renovation

3,463


-


3,463


-


-


-


-

Corporate overhead

(20,916)


-


(20,916)


(14,510)


-


-


(14,510)

Depreciation and amortization

(93,057)


(6,308)


(99,365)


(69,264)


(561)


(21,785)


(91,610)

Impairment loss

(10,862)


-


(10,862)


(1,943)


-


-


(1,943)

Operating Income

30,092


6,096


36,188


24,468


346


15,215


40,029















Equity in earnings of unconsolidated joint ventures

21


-


21


475


-


-


475

Interest income and other income (loss)

2,973


-


2,973


(10)


-


-


(10)

Interest expense

(60,729)


(3,008)


(63,737)


(53,235)


-


(11,771)


(65,006)

Gain on remeasurement of equity interests

69,230


-


69,230


-


-


-


-

Income from discontinued operations

32,124


-


32,124


31,172


-


-


31,172

Net Income

$                 73,711


$                              3,088


$                           76,799


$                  2,870


$                                    346


$                                3,444


$                        6,660

















(1)

Actual represents the Company's ownership results for the 32 hotels held for investment as of September 30, 2011. Excludes the Royal Palm Miami Beach which was sold in April 2011, and the Valley River Inn which has been classified as held for sale as of September 30, 2011 and included in discontinued operations for the nine months ended September 30, 2011 due to its sale in October 2011.

(2)

Acquired Hotels represents prior ownership results for the Doubletree Guest Suites Times Square acquired by the Company on January 14, 2011, the JW Marriott New Orleans acquired by the Company on February 15, 2011, and the Hilton San Diego Bayfront acquired by the Company on April 15, 2011.

(3)

Comparable represents the Company's ownership results and prior ownership results for the 32 comparable hotels held for investment as of September 30, 2011.

(4)

Actual represents the Company's ownership results for the 29 hotels held for investment as of September 30, 2010. Excludes Royal Palm Miami Beach which was sold in April 2011, and the Valley River Inn which has been classified as held for sale as of September 30, 2011 and included in discontinued operations for the nine months ended September 30, 2010 due to its sale in October 2011, as well as the Marriott Ontario Airport which was sold by the receiver in August 2010, and eight hotels included in the Mass Mutual portfolio deeded back to the lender in November 2010, which have been reclassified as discontinued operations for the nine months ended September 30, 2010. Room count as of September 30, 2010 has been adjusted by 6 additional rooms which were added to the Courtyard by Marriott Los Angeles during the second quarter of 2011.

(5)

Reacquired Hotel represents operating results for the Renaissance Westchester while it was held in receivership prior to the Company's reacquisition of the hotel on June 14, 2010.

(6)

Comparable represents the Company's ownership results for the 29 hotels held for investment as of September 30, 2011, plus the Renaissance Westchester during the period it was held in receivership prior to the Company's reacquisition of the hotel on June 14, 2010, the Doubletree Guest Suites Times Square acquired by the Company on January 14, 2011, the JW Marriott New Orleans acquired by the Company on February 15, 2011, and the Hilton San Diego Bayfront acquired by the Company on April 15, 2011.

(7)

Hotel EBITDA Margin is calculated as Hotel EBITDA divided by total hotel revenues.

(8)

Hotel EBITDA Margin for the nine months ended September 30, 2011 includes the additional benefit of $0.9 million due to prior year property tax refunds, net of appeal fees, less additional expense of $0.3 million due to a prior year property tax assessment. Without this net benefit, Comparable Hotel EBITDA Margin for the nine months ended September 30, 2011 would have been 27.4%, or 140 basis points higher than the nine months ended September 30, 2010.

(9)

Hotel EBITDA Margin for the nine months ended September 30, 2011 is impacted by nine hotels which were under renovation during 2011: Courtyard by Marriott Los Angeles; Doubletree Guest Suites Minneapolis; Embassy Suites Chicago; Kahler Inn & Suites; Marriott Houston; Marriott Quincy; Marriott Rochester; Marriott Tysons Corner; and Sheraton Cerritos. Without the impact of this renovation displacement, Comparable Hotel EBITDA Margin would have been 27.9%, or 190 basis points higher than the nine months ended September 30, 2010.



SOURCE Sunstone Hotel Investors, Inc.



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