Sunstone Hotel Investors Reports Results For Second Quarter 2012 COMPLETES ACQUISITION OF THE 357-ROOM HILTON GARDEN INN CHICAGO DOWNTOWN/MAGNIFICENT MILE

ALISO VIEJO, Calif., Aug. 2, 2012  /PRNewswire/ -- Sunstone Hotel Investors, Inc. (the "Company") (NYSE: SHO) today announced results for the second quarter ended June 30, 2012.

Second Quarter 2012 Operational Results (as compared to Second Quarter 2011)(1):

  • Comparable Hotel RevPAR increased 7.6% to $142.82.
  • Comparable Hotel EBITDA Margin increased by 110 basis points to 32.6%.
  • Adjusted EBITDA increased by 11.7% to $71.1 million.
  • Adjusted FFO per diluted share increased by 16.7% to $0.35.
  • Income available to common stockholders was $4.1 million (vs. $31.1 million in 2011).
  • Income available to common stockholders per diluted share was $0.03 (vs. $0.27 in 2011).

Ken Cruse, President and Chief Executive Officer, stated, "Our team continued to execute on our balanced business plan during the second quarter.  Proactive asset management helped to drive strong results, including a 7.6% increase in our Comparable Hotel RevPAR, a 110-basis-point improvement in our Comparable Hotel EBITDA Margins and a 16.7% increase in our Adjusted FFO per share.  Additionally, we took several steps toward our goal of gradually delevering our balance sheet while improving the quality and scale of our portfolio.  During the quarter, we repaid one mortgage, and we announced the pending sale of a highly levered hotel as well as the equity-funded acquisitions of two high-quality, unlevered urban hotels.  We will continue to pursue high-quality acquisitions using our shares as currency when such acquisitions can be executed at attractive relative valuations." 

Mr. Cruse continued, "Looking ahead, we continue to build a solid base for future growth. On a same-store basis, our managers booked more group room nights in the second quarter 2012 than in any other second quarter over the past five years.  In spite of difficult macroeconomic conditions, lodging industry fundamentals remain highly constructive, with capital costs and supply trends at record lows, and demand for lodging approaching record highs.  Accordingly, we continue to believe the U.S. lodging industry is in the first half of a prolonged growth phase and we remain focused on delivering industry leading stockholder returns through the continued execution of our balanced business plan." 

(1)

Comparable Hotel RevPAR and Comparable Hotel EBITDA Margin information presented reflect the Company's Comparable 31 Hotel Portfolio, which includes all hotels in which the Company has interests as of June 30, 2012, excluding the Marriott Del Mar, which has been classified as held for sale and included in discontinued operations due to its probable sale within the next year, and the Hyatt Chicago Magnificent Mile, which is currently experiencing material and prolonged business interruption due to rebranding and renovation. Comparable Hotel EBITDA Margin information excludes current and prior year real estate tax credits or assessments. The Comparable 31 Hotel Portfolio also includes prior ownership results as applicable in 2011 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.


SELECTED FINANCIAL DATA

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

(unaudited)












Three Months Ended June 30,


Six Months Ended June 30,


2012

2011

% Change


2012

2011

% Change











Total Revenue

$   237.8

$   214.6

10.8%



$   438.9

$   369.9

18.6%


Comparable Hotel RevPAR

$ 142.82

$ 132.77

7.6%



$ 130.37

$ 122.30

6.6%


Comparable Hotel Occupancy

80.7%

77.9%

280 bps



77.3%

73.8%

350 bps


Comparable Hotel ADR

$ 176.98

$ 170.44

3.8%



$ 168.66

$ 165.72

1.8%












Comparable Hotel EBITDA Margin

32.6%

31.5%

110 bps



28.9%

27.7%

120 bps












Net income (loss)

$     11.9

$     38.9




$     (1.1)

$     90.3



Income available (loss attributable) to common stockholders

$       4.1

$     31.1




$   (16.9)

$     76.8



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

$     0.03

$     0.27




$   (0.14)

$     0.66



EBITDA 

$     67.4

$     92.2




$   109.1

$   190.3



Adjusted EBITDA 

$     71.1

$     63.7




$   114.3

$     96.1



FFO

$     38.7

$     49.7




$     51.6

$   124.5



Adjusted FFO

$     42.1

$     35.3




$     55.8

$     43.9



FFO per diluted share (1)

$     0.32

$     0.42




$     0.43

$     1.06



Adjusted FFO per diluted share (1)

$     0.35

$     0.30




$     0.47

$     0.37



(1)

Reflects the Series C convertible preferred stock on a "non-converted" basis. On an "as-converted" basis, FFO per diluted share is $0.32 and $0.42, respectively, for the three months ended June 30, 2012 and 2011, and $0.44 and $1.05, respectively, for the six months ended June 30, 2012 and 2011. On an "as-converted" basis, Adjusted FFO per diluted share is $0.35 and $0.30, respectively, for the three months ended June 30, 2012 and 2011, and $0.48 and $0.39, respectively, for the six months ended June 30, 2012 and 2011.

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 13 of this release. 

The Company's actual results for the quarter ended June 30, 2012 compare to its prior guidance as follows:

Metric

Quarter Ended June 30, 2012   Guidance (1)

Impact of Acquisition / Equity Issuances (2)

Adjusted Quarter Ended June 30, 2012 Guidance(3)

Quarter Ended June 30, 2012 Actual

Performance Relative to Adjusted Guidance Midpoint

Comparable Hotel RevPAR 

+5.5% - 7.5%

-

+5.5% - 7.5%

+7.6%

+1.1%

Net Income ($ millions)

$8 - $11

$0.6

$9 - $12

$11.9

+$1.4

Adjusted EBITDA ($ millions)

$65 - $68

$0.9

$66 - $69

$71.1

+$3.6

Adjusted FFO ($ millions)

$36 - $39

$0.9

$37 - $40

$42.1

+$3.6

Adjusted FFO per diluted share

$0.30 - $0.33

-

$0.30 - $0.33

$0.35

+$0.04

Diluted Weighted Average Shares Outstanding

117,600,000

2,200,000

119,800,000

120,257,000

+457,000

 



(1)

Reflects guidance presented on May 2, 2012.

(2)

Reflects supplemental financial data presented in transaction press releases dated June 6, 2012 and June 19, 2012.

(3)

Reflects guidance presented on May 2, 2012 adjusted for acquisition and equity issuances.

Acquisitions Update

On July 19, 2012, the Company completed the previously announced acquisition of the 357-room Hilton Garden Inn Chicago Downtown/Magnificent Mile for a gross purchase price of $91.75 million. The acquisition was funded with a portion of the proceeds received from the Company's public offering of 12.1 million shares of its common stock (including the underwriter's exercise of its overallotment option). 

On June 4, 2012, the Company completed the previously announced acquisition of the 417-room Wyndham Chicago, which the Company rebranded the Hyatt Chicago Magnificent Mile. The contractual purchase price of $88.425 million consisted of a combination of cash and 5.5 million shares of the Company's common stock initially valued at $58.425 million ($10.71/share). Based on the $9.38 closing price of the Company's common stock on the NYSE on June 4, 2012, the total purchase price of the Wyndham Chicago hotel for accounting purposes was $81.16 million, which was funded with $29.7 million of cash on hand (including $0.3 million of proration credits) and the Company's common stock valued at $51.16 million, issued directly to the seller, the Blackstone Group.

Disposition Update

On June 6, 2012, the Company announced it had entered into a purchase-and-sale agreement to sell the 284-room Marriott Del Mar for a contractual purchase price of $66.0 million ($232,000/key). The sale of the hotel is subject to the buyer's assumption of the existing $47.2 million mortgage. The Company and the buyer are working to finalize the assumption with the loan's special servicer and expect to finalize the sale and loan assumption during the third quarter of 2012.

Balance Sheet/Liquidity Update

On April 26, 2012, the Company used existing cash to repay its $32.2 million non-recourse mortgage secured by the Renaissance Long Beach, which was scheduled to mature on July 1, 2012.

On June 25, 2012, the Company completed a public offering of 12.1 million shares of its common stock (including the underwriter's exercise of its overallotment option) for total net proceeds of approximately $126.2 million. A portion of the proceeds from this offering were used to acquire the Hilton Garden Inn Chicago Downtown/Magnificent Mile. The remaining proceeds will be used for potential future acquisitions, capital investment in the Company's portfolio, including the renovation of the Hyatt Chicago Magnificent Mile, and other general corporate purposes, including working capital.

As of June 30, 2012, the Company had approximately $277.9 million of cash and cash equivalents, including restricted cash of $73.3 million. As noted above, the Company used approximately $91.75 million of its unrestricted cash to purchase the Hilton Garden Inn Chicago Downtown/Magnificent Mile on July 19, 2012.

As of June 30, 2012, the Company had total assets of approximately $3.2 billion, including $2.8 billion of net investments in hotel properties, total consolidated debt related to continuing operations of $1.5 billion and stockholders' equity of $1.4 billion.

John Arabia, Chief Financial Officer, stated, "We continue to make meaningful progress towards our stated goals of reducing leverage in a shareholder friendly manner and maintaining strong liquidity, while, at the same time, growing our portfolio's quality and scale. Since January 2011, we have improved our leverage ratio though a combination of highly equitized acquisitions and the repayment or elimination of approximately $221 million of debt, including debt secured by the Marriott Del Mar which will be eliminated upon the hotel's anticipated sale during the third quarter of 2012.  Our liquidity is strong, our near-term debt maturities are few, and we have several avenues in which to achieve our stated goals of reducing leverage and creating shareholder value."

Capital Improvements

The Company invested $26.7 million in capital improvements into its portfolio during the second quarter of 2012, and $48.5 million during the six months ended June 30, 2012.

2012 Outlook

Achievement of the Company's anticipated results is subject to risks and uncertainties, including those disclosed in the Company's filings with the Securities and Exchange Commission.  The Company's guidance includes the Company's ownership period for all 2012 acquisitions and dispositions and does not take into account the impact of any future hotel acquisitions, dispositions, re-brandings or management change transition costs, prior-year property tax assessments and/or credits, potential income tax expense if the Company elects to apply net operating loss carryforwards, debt repurchases or financings during 2012.  

For the third quarter of 2012, the Company expects:

Metric

Quarter Ended September 30, 2012 Guidance

Comparable Hotel RevPAR 

+3% - 5%

Net Income ($ millions)

$1 - $4

Adjusted EBITDA ($ millions)

$57 - $60

Adjusted FFO ($ millions)

$28 - $31

Adjusted FFO per diluted share

$0.20 - $0.23

Diluted Weighted Average Shares Outstanding

135,700,000

For the full year 2012, the Company expects: 

Metric

Prior 2012 FY Guidance (1)

Impact of Acquisitions / Dispositions / Equity Issuances (2)

Adjusted Prior 2012 FY Guidance (3)

Current 2012 FY Guidance

Change to Adjusted Guidance Midpoint

Comparable Hotel RevPAR 

+5% - 7%

-

+5% - 7%

+5% - 7%

+0%

Net Income ($ millions)

$4 - $13

$3.9

$8 - $17

$15 - $22

+$6.0

Adjusted EBITDA ($ millions)

$229 - $238

$5.5

$235 - $244

$239 - $245

+$2.5

Adjusted FFO ($ millions)

$113 - $122

$6.8

$120 - $129

$123 - $130

+$2.0

Adjusted FFO per diluted share

$0.96 - $1.04

($0.02) - ($0.03)

$0.94 - $1.01

$0.97 - $1.02

+$0.02

Diluted Weighted Average Shares Outstanding

117,800,000

10,100,000

127,900,000

127,900,000

-


(1)

Reflects guidance presented on May 2, 2012.

(2)

Reflects supplemental financial data presented in transaction press releases dated June 6, 2012 and June 19, 2012.

(3)

Reflects guidance presented on May 2, 2012 adjusted for acquisitions, dispositions, and equity issuances.

 Third-quarter and full-year 2012 guidance is also based on the following assumptions:

  • Full-year capital investment of $85 to $100 million, including the $25 million renovation of the Renaissance Washington DC.
  • Hotel revenue renovation disruption of $3 to $5 million, primarily in the third and fourth quarters.
  • Third-quarter RevPAR guidance assumes that hotel revenue renovation disruption will negatively impact third-quarter RevPAR growth by 100 to 150 basis points.
  • Full-year comparable Hotel EBITDA Margins to increase by 75 to 125 basis points.
  • Full-year corporate overhead expense (excluding stock amortization and one-time expenses related to future acquisition closing costs) of $19 to $20 million.
  • Full-year interest expense of approximately $83 to $85 million, including $4 million in amortization of deferred financing fees.
  • Full-year preferred dividends (Series A, C and D) of approximately $30 million.

Dividend Update

On August 2, 2012, 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 October 15, 2012 to stockholders of record on September 30, 2012.  No dividend was declared on the Company's common stock, as the Company intends to deploy excess cash flow from operations toward internal renovation investments and gradual deleveraging.

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 net operating loss carryforwards. The level of any future dividends will be determined by the Company's Board of Directors after considering taxable income projections, expected capital requirements, risks affecting the Company's business and in context of the Company's leverage-reduction initiatives.  As a result, 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 second quarter results on August 3, 2012, at 12:00 p.m. EDT (9:00 a.m. PDT). A live web cast of the call will be available via the Investor Relations section of the Company's website.  Alternatively, investors may dial 1-800-762-8779 (for domestic callers) or 1-480-629-9645 (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 August 2, 2012, has interests in 33 hotels held for investment comprised of 13,698 rooms.  Sunstone's hotels are primarily in the upper upscale segment and are generally operated under nationally recognized brands, such as Marriott, Hilton, Hyatt, Fairmont and Sheraton. For further information, please visit Sunstone's website at www.sunstonehotels.com.

Sunstone's mission is to create meaningful value for our stockholders by becoming the premier hotel owner.  Our values include transparency, trust, ethical conduct, communication and discipline.  We seek to employ a balanced, cycle-appropriate corporate strategy that encompasses the following:

  • Proactive portfolio management;
  • Intensive asset management;
  • Disciplined external growth; and
  • Measured balance sheet improvement.

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 August 2, 2012, 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: Earnings Before Interest Expense, Taxes, Depreciation and Amortization, or EBITDA; Adjusted EBITDA (as defined below); Funds From Operations, or FFO; Adjusted FFO (as defined below); and comparable and pro forma hotel EBITDA and comparable and pro forma hotel EBITDA margin.

EBITDA represents net income (loss) excluding: non-controlling interests; interest expense; provision for income taxes, including income taxes applicable to sale of assets; and depreciation and amortization. In addition, we have presented Adjusted EBITDA, which excludes: amortization of deferred stock compensation; the impact of any gain or loss from asset sales; impairment charges; and any 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.  A reconciliation and the components of comparable and pro forma hotel EBITDA and comparable and pro forma hotel EBITDA margin are set forth on pages 12 and 13. We believe comparable and pro forma hotel EBITDA and comparable and pro forma 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 real estate-related impairment losses, and after adjustment for unconsolidated partnerships and joint ventures. We also present Adjusted FFO, which excludes penalties, written-off deferred financing costs, non-real estate-related impairment losses and any 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 and pro forma hotel EBITDA margins. Management believes the calculation of comparable and pro forma hotel EBITDA results in a more accurate presentation of hotel EBITDA margins of the Company's 31 comparable hotels and 33 pro forma hotels. See pages 12 and 13 for a reconciliation of comparable and pro forma hotel EBITDA to the most comparable GAAP measure. Our 31 comparable hotels include all hotels in which the Company has interests as of June 30, 2012, excluding the Marriott Del Mar, which has been classified as held for sale and included in discontinued operations due to its probable sale within the next year, and the Hyatt Chicago Magnificent Mile, which is currently experiencing material and prolonged business interruption due to rebranding and renovation, plus prior ownership results as applicable in 2011 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. Our 33 pro forma hotels include the 31 comparable hotels, plus the Company's ownership as applicable and prior ownership for the Hyatt Chicago Magnificent Mile acquired by the Company in June 2012 and the Hilton Garden Inn Chicago Downtown/Magnificent Mile acquired by the Company in July 2012.

We caution investors that amounts presented in accordance with our definitions of EBITDA, Adjusted EBITDA, FFO, Adjusted FFO, comparable and pro forma hotel EBITDA and comparable and pro forma 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 and pro forma hotel EBITDA and comparable and pro forma 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 and pro forma hotel EBITDA and comparable and pro forma 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 and pro forma hotel EBITDA and comparable and pro forma 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)













June 30,


December 31,



2012


2011



(unaudited)



Assets




Current assets:





Cash and cash equivalents

$      204,549


$         150,533


Restricted cash

73,306


66,230


Accounts receivable, net

36,259


32,127


Inventories

2,666


2,608


Prepaid expenses

9,382


10,189


Investment in hotel property of discontinued operations, net

39,122


38,958


Other current assets of discontinued operations, net

2,861


2,223

Total current assets

368,145


302,868






Investment in hotel properties, net

2,810,409


2,738,868

Other real estate, net

12,057


11,859

Deferred financing fees, net

12,622


14,594

Goodwill

13,088


13,088

Other assets, net

20,083


19,963






Total assets

$   3,236,404


$      3,101,240






Liabilities and Equity




Current liabilities:





Accounts payable and accrued expenses

$        25,509


$           26,800


Accrued payroll and employee benefits

18,662


20,863


Due to Third-Party Managers

9,252


9,227


Dividends payable

7,437


7,437


Other current liabilities

37,474


28,177


Current portion of notes payable

78,912


53,325


Note payable of discontinued operations

47,159


47,460


Other current liabilities of discontinued operations

224


342

Total current liabilities

224,629


193,631






Notes payable, less current portion

1,396,980


1,469,692

Capital lease obligations, less current portion

15,636


-

Other liabilities

13,810


12,623

Total liabilities

1,651,055


1,675,946






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 June 30, 2012 and December 31, 2011, 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 June 30, 2012 and December 31, 2011,





          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 June 30, 2012 and December 31, 2011,





          stated at liquidation preference of $25.00 per share

115,000


115,000


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





      135,229,303 shares issued and outstanding at June 30, 2012 and





      117,265,090 shares issued and outstanding at December 31, 2011

1,352


1,173


Additional paid in capital

1,491,639


1,312,566


Retained earnings

108,600


110,580


Cumulative dividends

(460,270)


(445,396)


Accumulated other comprehensive loss

(4,799)


(4,916)

Total stockholders' equity

1,427,772


1,265,257

Non-controlling interest in consolidated joint ventures

57,577


60,037

Total equity

1,485,349


1,325,294






Total liabilities and equity

$   3,236,404


$      3,101,240






 

 

Sunstone Hotel Investors, Inc.

Unaudited Consolidated Statements of Operations

(In thousands, except per share data)




























 Three Months Ended June 30, 


 Six Months Ended June 30, 






2012


2011


2012


2011













 Revenues 












 Room 





$   164,398


$   148,140


$   298,536


$   252,451

 Food and beverage 





56,202


49,786


106,534


87,820

 Other operating 





17,240


16,648


33,803


29,654

 Total revenues 





237,840


214,574


438,873


369,925

 Operating expenses 












 Room 





38,958


35,296


75,806


63,809

 Food and beverage 





37,169


35,136


72,908


63,855

 Other operating 





6,618


6,101


13,412


11,943

 Advertising and promotion 





11,135


10,190


22,043


18,589

 Repairs and maintenance 





8,642


8,080


17,090


15,171

 Utilities 





6,845


7,089


13,998


13,797

 Franchise costs 





8,320


7,396


14,967


12,558

 Property tax, ground lease and insurance 





18,338


14,316


34,851


28,092

 Property general and administrative 





26,565


24,515


51,256


44,031

 Corporate overhead 





7,686


6,305


12,983


13,958

 Depreciation and amortization 





34,793


32,287


69,079


58,155

 Total operating expenses 





205,069


186,711


398,393


343,958

 Operating income 





32,771


27,863


40,480


25,967

 Equity in earnings of unconsolidated joint ventures





-


-


-


21

 Interest and other income 





74


1,319


137


1,427

 Interest expense 





(20,873)


(20,462)


(41,691)


(37,560)

 Loss on extinguishment of debt 





-


-


(191)


-

 Gain on remeasurement of equity interests 





-


-


-


69,230

 Income (loss) from continuing operations 





11,972


8,720


(1,265)


59,085

 Income (loss) from discontinued operations 





(117)


30,209


152


31,179

 Net income (loss) 





11,855


38,929


(1,113)


90,264

 Income from consolidated joint venture attributable to non-controlling interest 





(307)


(244)


(867)


(244)

 Distributions to non-controlling interest 





(8)


(7)


(16)


(14)

 Preferred stock dividends 





(7,437)


(7,310)


(14,874)


(12,447)

 Undistributed income allocated to unvested restricted stock compensation 





(47)


(291)


-


(717)

 Income available (loss attributable) to common stockholders 





$       4,056


$     31,077


$   (16,870)


$     76,842













Basic per share amounts:












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



$         0.03


$         0.01


$       (0.14)


$         0.39

        Income from discontinued operations





-


0.26


-


0.27

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




$         0.03


$         0.27


$       (0.14)


$         0.66













Diluted per share amounts:












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



$         0.03


$         0.01


$       (0.14)


$         0.39

        Income from discontinued operations





-


0.26


0.00


0.27

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




$         0.03


$         0.27


$       (0.14)


$         0.66













Weighted average common shares outstanding:












       Basic





120,029


117,227


118,728


117,151

       Diluted





120,029


117,227


118,728


117,151

 

 

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


Six Months Ended


June 30,


June 30,


2012

2011


2012

2011







Net income (loss)

$   11,855

$   38,929


$     (1,113)

$   90,264

Operations held for investment:






   Depreciation and amortization

34,793

32,287


69,079

58,155

   Amortization of lease intangibles

1,028

992


2,056

1,922

   Interest expense

19,230

18,432


38,743

34,616

   Amortization of deferred financing fees

959

809


1,922

1,418

   Write-off of deferred financing fees

3

-


3

-

   Non-cash interest related to discount on Senior Notes

258

261


524

522

   Non-cash interest related to loss on derivatives

423

960


499

1,004

Non-controlling interests:






   Income from consolidated joint venture attributable

   to non-controlling interest

(307)

(244)


(867)

(244)

   Depreciation and amortization

(1,420)

(1,184)


(2,839)

(1,184)

   Interest expense

(567)

(456)


(1,137)

(456)

   Amortization of deferred financing fees

(56)

(47)


(112)

(47)

   Non-cash interest related to loss on derivative

-

(28)


(1)

(28)

Unconsolidated joint ventures:






   Depreciation and amortization

-

-


-

3

Discontinued operations:






   Depreciation and amortization

495

630


965

2,677

   Amortization of lease intangibles

7

7


14

14

   Interest expense

680

845


1,361

1,684

   Amortization of deferred financing fees

3

6


7

13

EBITDA

67,384

92,199


109,104

190,333







Operations held for investment:






   Amortization of deferred stock compensation

896

929


1,842

1,473

   Non-cash straightline lease expense

693

766


1,389

1,006

   Capital lease obligation interest - cash ground rent

(117)

-


(117)

-

   Gain on sale of assets

-

(56)


(11)

(56)

   Loss on extinguishment of debt

-

-


191

-

   Gain on remeasurement of equity interests

-

-


-

(69,230)

   Lawsuit settlement costs

255

-


110

-

   Closing costs - completed acquisitions

1,339

633


1,375

3,372

   Prior year property tax assessments

1,061

-


1,061

-

Non-controlling interests:






   Non-cash straightline lease expense

(113)

(129)


(226)

(129)

   Prior year property tax assessments

(265)

-


(265)

-

Unconsolidated joint ventures:






   Amortization of deferred stock compensation

-

-


-

2

Discontinued operations:






   Gain on sale of assets

-

(14,018)


(177)

(14,018)

   Impairment loss

-

1,495


-

1,495

   Gain on extinguishment of debt

-

(18,145)


-

(18,145)


3,749

(28,525)


5,172

(94,230)







Adjusted EBITDA

$   71,133

$   63,674


$   114,276

$   96,103













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













Net income (loss)

$   11,855

$   38,929


$     (1,113)

$   90,264

Preferred stock dividends

(7,437)

(7,310)


(14,874)

(12,447)

Operations held for investment:






   Real estate depreciation and amortization

34,494

31,987


68,473

57,578

   Amortization of lease intangibles

1,028

992


2,056

1,922

   Gain on sale of assets

-

(56)


(11)

(56)

Non-controlling interests:






   Income from consolidated joint venture attributable to non-controlling interest

(307)

(244)


(867)

(244)

   Real estate depreciation and amortization

(1,420)

(1,184)


(2,839)

(1,184)

Discontinued operations:






   Real estate depreciation and amortization

495

630


965

2,677

   Amortization of lease intangibles

7

7


14

14

   Gain on sale of assets

-

(14,018)


(177)

(14,018)

FFO

38,715

49,733


51,627

124,506







Operations held for investment:






   Non-cash straightline lease expense

693

766


1,389

1,006

   Write-off of deferred financing fees

3

-


3

-

   Non-cash interest related to loss on derivatives

423

960


499

1,004

   Loss on extinguishment of debt

-

-


191

-

   Gain on remeasurement of equity interests

-

-


-

(69,230)

   Lawsuit settlement costs

255

-


110

-

   Closing costs - completed acquisitions

1,339

633


1,375

3,372

   Prior year property tax assessments

1,061

-


1,061

-

Non-controlling interests:






   Non-cash straightline lease expense

(113)

(129)


(226)

(129)

   Non-cash interest related to loss on derivative

-

(28)


(1)

(28)

   Prior year property tax assessments

(265)

-


(265)

-

Discontinued operations:






   Impairment loss

-

1,495


-

1,495

   Gain on extinguishment of debt

-

(18,145)


-

(18,145)


3,396

(14,448)


4,136

(80,655)







Adjusted FFO

$   42,111

$   35,285


$     55,763

$   43,851







FFO per diluted share

$       0.32

$       0.42


$         0.43

$       1.06







Adjusted FFO per diluted share

$       0.35

$       0.30


$         0.47

$       0.37







Basic weighted average shares outstanding

120,029

117,227


118,728

117,151

Shares associated with unvested restricted stock awards

228

87


191

116

Diluted weighted average shares outstanding (1)

120,257

117,314


118,919

117,267







(1)

Diluted weighted average shares outstanding includes the Series C convertible preferred stock on a "non-converted" basis. On an "as-converted" basis, FFO per diluted share is $0.32 and $0.42, respectively, for the three months ended June 30, 2012 and 2011, and $0.44 and $1.05, respectively, for the six months ended June 30, 2012 and 2011. On an "as-converted" basis, Adjusted FFO per diluted share is $0.35 and $0.30, respectively, for the three months ended June 30, 2012 and 2011, and $0.48 and $0.39, respectively, for the six months ended June 30, 2012 and 2011.

 

Sunstone Hotel Investors, Inc.

Reconciliation of Net Income to Non-GAAP Financial Measures

Guidance for Third Quarter 2012

(Unaudited and in thousands except per share amounts)



Reconciliation of Net Income to Adjusted EBITDA








Quarter Ended


September 30, 2012


Low

High




Net income

$      850

$   4,050

   Depreciation and amortization

35,000

35,000

   Amortization of lease intangibles

1,000

1,000

   Interest expense

20,000

20,000

   Amortization of deferred financing fees

1,000

1,000

   Non-controlling interests

(2,500)

(2,700)

   Non-cash interest related to discount on Senior Notes

300

300

   Amortization of deferred stock compensation

900

900

   Capital lease obligation interest - cash ground rent

(300)

(300)

   Non-cash straightline lease expense

750

750

Adjusted EBITDA

$ 57,000

$ 60,000







Reconciliation of Net Income to Adjusted FFO







Net income

$      850

$   4,050

   Preferred stock dividends

(7,500)

(7,500)

   Real estate depreciation and amortization

34,500

34,500

   Non-controlling interests

(2,000)

(2,200)

   Amortization of lease intangibles

1,000

1,000

   Non-cash straightline lease expense

750

750

Adjusted FFO

$ 27,600

$ 30,600







Adjusted FFO per diluted share

$     0.20

$     0.23




Diluted weighted average shares outstanding

135,700

135,700




 

 

Sunstone Hotel Investors, Inc.

Reconciliation of Net Income to Non-GAAP Financial Measures

Guidance for Full Year 2012

(Unaudited and in thousands except per share amounts)







Reconciliation of Net Income to Adjusted EBITDA








Year Ended


December 31, 2012


Low

High




Net income

$   14,850

$   21,650

   Depreciation and amortization

140,000

140,000

   Amortization of lease intangibles

4,000

4,000

   Interest expense

79,000

79,000

   Amortization of deferred financing fees

4,000

4,000

   Non-controlling interests

(9,500)

(10,300)

   Non-cash interest related to discount on Senior Notes

1,100

1,100

   Amortization of deferred stock compensation

3,500

3,500

   Capital lease obligation interest - cash ground rent

(950)

(950)

   Non-cash straightline lease expense

3,000

3,000

Adjusted EBITDA

$ 239,000

$ 245,000







Reconciliation of Net Income to Adjusted FFO







Net income

$   14,850

$   21,650

   Preferred stock dividends

(30,000)

(30,000)

   Real estate depreciation and amortization

138,800

138,800

   Non-controlling interests

(7,200)

(7,600)

   Amortization of lease intangibles

4,000

4,000

   Non-cash straightline lease expense

3,000

3,000

Adjusted FFO

$ 123,450

$ 129,850







Adjusted FFO per diluted share

$       0.97

$       1.02




Diluted weighted average shares outstanding

127,900

127,900

 

 

Sunstone Hotel Investors, Inc.

Comparable and Pro Forma Hotel EBITDA and Margins

(Unaudited and in thousands except hotels and rooms)
























































Three Months Ended June 30, 2012


Three Months Ended June 30, 2011



Actual (1)


Non-Comparable Hotel (2)


Comparable (3)


2012 Acquisitions (4)


Pro Forma (5)


Actual (6)


Prior Ownership Adjustments (7)


Comparable(3)


2012 Acquisitions (4)


Pro Forma (5)

Number of Hotels

32


(1)


31


2


33


31




31


2


33

Number of Rooms

13,341


(417)


12,924


774


13,698


12,924




12,924


774


13,698






















Hotel EBITDA Margin (8)

32.6%


39.3%


32.5%


36.2%


32.7%


32.0%


30.7%


31.9%


35.2%


32.1%

Hotel EBITDA Margin adjusted for prior year property tax credits and assessment (9)

32.6%




32.6%




32.8%


31.5%




31.5%




31.7%






















Hotel Revenues




















     Room revenue

$     164,398


$                                             (2,009)


$                  162,389


$                                      10,911


$              173,300


$     148,140


$                                                   2,510


 

$                 150,650


$                                      10,318


$              160,968

     Food and beverage revenue

56,202


(511)


55,691


1,675


57,366


49,786


1,272


51,058


2,019


53,077

     Other operating revenue

12,293


(137)


12,156


603


12,759


11,956


282


12,238


630


12,868

Total Hotel Revenues

232,893


(2,657)


230,236


13,189


243,425


209,882


4,064


213,946


12,967


226,913






















Hotel Expenses




















     Room expense

39,142


(363)


38,779


2,316


41,095


35,503


582


36,085


2,164


38,249

     Food and beverage expense

37,204


(237)


36,967


925


37,892


35,185


873


36,058


954


37,012

     Other hotel expense

55,695


(845)


54,850


4,055


58,905


48,852


1,034


49,886


4,209


54,095

     General and administrative expense

24,931


(168)


24,763


1,117


25,880


23,269


329


23,598


1,080


24,678

Total Hotel Expenses

156,972


(1,613)


155,359


8,413


163,772


142,809


2,818


145,627


8,407


154,034






















Hotel EBITDA

75,921


(1,044)


74,877


4,776


79,653


67,073


1,246


68,319


4,560


72,879

Prior year property tax assessments and (credits), net

89


-


89


-


89


(915)


-


(915)


-


(915)

Hotel EBITDA adjusted for prior year property tax assessments and (credits), net

76,010


(1,044)


74,966


4,776


79,742


66,158


1,246


67,404


4,560


71,964






















Non-hotel operating income

1,148


-


1,148


-


1,148


1,140


-


1,140


-


1,140

Amortization of lease intangibles

(1,028)


-


(1,028)


-


(1,028)


(992)


-


(992)


-


(992)

Non-cash straightline lease expense

(693)


-


(693)


-


(693)


(766)


70


(696)


-


(696)

Capital lease obligation interest - cash ground rent

117


(117)


-


351


351


-


-


-


351


351

Management company transition costs

(215)


143


(72)


(143)


(215)


-


-


-


-


-

Prior year property tax (assessments) and credits, net

(89)


-


(89)


-


(89)


915


-


915


-


915

Corporate overhead

(7,686)


-


(7,686)


-


(7,686)


(6,305)


-


(6,305)


-


(6,305)

Depreciation and amortization 

(34,793)


587


(34,206)


(3,059)


(37,265)


(32,287)


(917)


(33,204)


(3,059)


(36,263)

Operating Income

32,771


(431)


32,340


1,925


34,265


27,863


399


28,262


1,852


30,114






















Interest and other income

74


-


74


-


74


1,319


-


1,319


-


1,319

Interest expense 

(20,873)


117


(20,756)


(351)


(21,107)


(20,462)


(312)


(20,774)


(351)


(21,125)

Income (loss) from discontinued operations

(117)


-


(117)


-


(117)


30,209


-


30,209


-


30,209

Net Income

$       11,855


$                                                (314)


$                    11,541


$                                        1,574


$                13,115


$       38,929


$                                                        87


$                   39,016


$                                        1,501


$                40,517























(1)

Actual represents the Company's ownership results for the 32 hotels held for investment as of June 30, 2012. Excludes the Marriott Del Mar which has been classified as held for sale as of June 30, 2012 due to its probable sale within the next year.

(2)

Non-Comparable Hotel represents the Company's ownership results for the Hyatt Chicago Magnificent Mile, which is currently experiencing material and prolonged business interruption due to rebranding and renovation.

(3)

Comparable represents the Company's ownership results and prior ownership results as applicable for the 31 hotels held for investment as of June 30, 2012, excluding the Hyatt Chicago Magnificent Mile, which is currently experiencing material and prolonged business interruption due to rebranding and renovation.

(4)

2012 Acquisitions represents the Company's ownership results as applicable and prior ownership results for Hyatt Chicago Magnificent Mile acquired by the Company on June 4, 2012, and the Hilton Garden Inn Chicago Downtown/Magnificent Mile acquired by the Company on July 19, 2012, along with the Company's pro forma adjustments for depreciation expense.

(5)

Pro Forma represents the Company's ownership results, prior ownership results and pro forma adjustments as applicable for the 32 hotels held for investment as of June 30, 2012, plus the  Hilton Garden Inn Chicago Downtown/Magnificent Mile acquired by the Company on July 19, 2012.

(6)

Actual represents the Company's ownership results for the 31 hotels held for investment as of June 30, 2011. Excludes the Royal Palm Miami Beach which was sold in April 2011, the Valley River Inn which was sold in October 2011, and the Marriott Del Mar which has been classified as held for sale as of June 30, 2012 due to its probable sale within the next year.

(7)

Prior Ownership Adjustments represent prior ownership results for the Hilton San Diego Bayfront acquired on April 15, 2011, along with the Company's pro forma non-cash straightline lease expense, depreciation expense and interest expense. Excludes prior ownership adjustments for the Hyatt Chicago Magnificent Mile acquired on June 4, 2012, which has been classified as non-comparable as the hotel is currently experiencing material and prolonged business interruption due to rebranding and renovation.

(8)

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

(9)

Hotel EBITDA Margin for the three months ended June 30, 2012 includes additional expense of $0.1 million due to a prior year property tax assessment net of credits received. Hotel EBITDA Margin for the three months ended June 30, 2011 includes the additional benefit of $0.9 million due to prior year property tax credits. Without this expense and benefit, Comparable Hotel EBITDA margin for the three months ended June 30, 2012 and 2011 would have been 32.6% and 31.5%, respectively, and Pro Forma Hotel EBITDA margin for the three months ended June 30, 2012 and 2011 would have been 32.8% and 31.7%, respectively.

 

 

Sunstone Hotel Investors, Inc.

Comparable and Pro Forma Hotel EBITDA and Margins

(Unaudited and in thousands except hotels and rooms)
























































Six Months Ended June 30, 2012


Six Months Ended June 30, 2011



Actual (1)


Non-comparable Hotel (2)


Comparable (3)


2012 Acquisitions (4)


Pro Forma (5)


Actual(6)


Prior Ownership Adjustments (7)


Comparable (3)


2012 Acquisitions (4)


Pro Forma (5)

Number of Hotels

32


(1)


31


2


33


31




31


2


33

Number of Rooms

13,341


(417)


12,924


774


13,698


12,924




12,924


774


13,698






















Hotel EBITDA Margin(8)

29.0%


39.3%


28.9%


22.6%


28.6%


27.4%


32.3%


27.9%


21.1%


27.6%

Hotel EBITDA Margin adjusted for prior year property tax credits, net(9)

28.9%




28.9%




28.6%


27.2%




27.7%




27.4%






















Hotel Revenues




















     Room revenue

$    298,536


$                                            (2,009)


$                296,527


$                                      16,408


$              312,935


$    252,451


$                                                 24,150


$                276,601


$                                      14,936


$              291,537

     Food and beverage revenue

106,534


(511)


106,023


2,601


108,624


87,820


11,753


99,573


2,949


102,522

     Other operating revenue

24,150


(137)


24,013


1,134


25,147


20,842


2,873


23,715


1,114


24,829

Total Hotel Revenues

429,220


(2,657)


426,563


20,143


446,706


361,113


38,776


399,889


18,999


418,888






















Hotel Expenses




















     Room expense

76,146


(363)


75,783


4,184


79,967


64,250


5,926


70,176


3,722


73,898

     Food and beverage expense

72,974


(237)


72,737


1,598


74,335


63,954


7,589


71,543


1,638


73,181

     Other hotel expense

107,889


(845)


107,044


7,843


114,887


92,238


9,120


101,358


7,826


109,184

     General and administrative expense

47,850


(168)


47,682


1,970


49,652


41,723


3,597


45,320


1,800


47,120

Total Hotel Expenses

304,859


(1,613)


303,246


15,595


318,841


262,165


26,232


288,397


14,986


303,383






















Hotel EBITDA

124,361


(1,044)


123,317


4,548


127,865


98,948


12,544


111,492


4,013


115,505

Prior year property tax credits, net

(250)


-


(250)


-


(250)


(600)


-


(600)


-


(600)

Hotel EBITDA adjusted for prior year property tax credits, net

124,111


(1,044)


123,067


4,548


127,615


98,348


12,544


110,892


4,013


114,905






















Non-hotel operating income

2,118


-


2,118


-


2,118


2,142


-


2,142


-


2,142

Amortization of lease intangibles

(2,056)


-


(2,056)


-


(2,056)


(1,922)


(140)


(2,062)


-


(2,062)

Non-cash straightline lease expense

(1,389)


-


(1,389)


-


(1,389)


(1,006)


(386)


(1,392)


-


(1,392)

Capital lease obligation interest - cash ground rent

117


(117)


-


702


702


-


-


-


702


702

Management company transition costs

(609)


143


(466)


(143)


(609)


(82)


-


(82)


-


(82)

Prior year property tax credits, net

250


-


250


-


250


600


-


600


-


600

Corporate overhead

(12,983)


-


(12,983)


-


(12,983)


(13,958)


-


(13,958)


-


(13,958)

Depreciation and amortization 

(69,079)


587


(68,492)


(6,118)


(74,610)


(58,155)


(6,308)


(64,463)


(6,118)


(70,581)

Operating Income

40,480


(431)


40,049


(1,011)


39,038


25,967


5,710


31,677


(1,403)


30,274






















Equity in earnings of unconsolidated joint ventures

-


-


-


-


-


21


-


21


-


21

Interest and other income

137


-


137


-


137


1,427


-


1,427


-


1,427

Interest expense 

(41,691)


117


(41,574)


(702)


(42,276)


(37,560)


(3,008)


(40,568)


(702)


(41,270)

Loss on extinguishment of debt

(191)


-


(191)


-


(191)


-


-


-


-


-

Gain on remeasurement of equity interests

-


-


-


-


-


69,230


-


69,230


-


69,230

Income from discontinued operations

152


-


152


-


152


31,179


-


31,179


-


31,179

Net Income (Loss)

$      (1,113)


$                                               (314)


$                   (1,427)


$                                       (1,713)


$                (3,140)


$      90,264


$                                                   2,702


$                  92,966


$                                       (2,105)


$                90,861























(1)

Actual represents the Company's ownership results for the 32 hotels held for investment as of June 30, 2012. Excludes the Marriott Del Mar which has been classified as held for sale as of June 30, 2012 due to its probable sale within the next year.

(2)

Non-Comparable Hotel represents the Company's ownership results for the Hyatt Chicago Magnificent Mile, which is currently experiencing material and prolonged business interruption due to rebranding and renovation.

(3)

Comparable represents the Company's ownership results and prior ownership results as applicable for the 31 hotels held for investment as of June 30, 2012, excluding the Hyatt Chicago Magnificent Mile, which is currently experiencing material and prolonged business interruption due to rebranding and renovation.

(4)

2012 Acquisitions represents the Company's ownership results as applicable and prior ownership results for Hyatt Chicago Magnificent Mile acquired by the Company on June 4, 2012, and the Hilton Garden Inn Chicago Downtown/Magnificent Mile acquired by the Company on July 19, 2012, along with the Company's pro forma adjustments for depreciation expense.

(5)

Pro Forma represents the Company's ownership results, prior ownership results and pro forma adjustments as applicable for the 32 hotels held for investment as of June 30, 2012, plus the  Hilton Garden Inn Chicago Downtown/Magnificent Mile acquired by the Company on July 19, 2012.

(6)

Actual represents the Company's ownership results for the 31 hotels held for investment as of June 30, 2011. Excludes the Royal Palm Miami Beach which was sold in April 2011, the Valley River Inn which was sold in October 2011, and the Marriott Del Mar which has been classified as held for sale as of June 30, 2012 due to its probable sale within the next year.

(7)

Prior Ownership Adjustments represent 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, along with the Company's pro forma non-cash amortization of lease intangibles, non-cash straightline lease expense, depreciation expense and interest expense. Excludes prior ownership adjustments for the Hyatt Chicago Magnificent Mile acquired on June 4, 2012, which has been classified as non-comparable as the hotel is currently experiencing material and prolonged business interruption due to rebranding and renovation.

(8)

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

(9)

Hotel EBITDA Margin for the six months ended June 30, 2012 includes additional net benefit of $0.3 million due to prior year property tax credits net of assessments received. Hotel EBITDA Margin for the six months ended June 30, 2011 includes the additional net benefit of $0.6 million due to prior year property tax credits net of assessments received. Without this additional net benefit, Comparable Hotel EBITDA margin for the six months ended June 30, 2012 and 2011 would have been 28.9% and 27.7%, respectively, and Pro Forma Hotel EBITDA margin for the six months ended June 30, 2012 and 2011 would have been 28.6% and 27.4%, respectively.

SOURCE Sunstone Hotel Investors, Inc.



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