avatar Sunstone Hotel Investors, Inc. Finance, Insurance, And Real Estate

Pages

  • Page 1

    Annual Report 2009 the i in team The team is the driving force behind any successful organization. The team is an alliance of contributors - each working to achieve a common goal. This recognizes the individuals that are the Sunstone team.


  • Page 2


  • Page 3


  • Page 4

    As a team we increased our liquidity and reduced leverage… ~Finance and Treasury ~ Finance directs the Company’s capital markets initiatives including debt, equity, investor relations and corporate planning. Treasury maximizes the return on liquid investments, oversees risk management and manages daily cash flow. from left to right: Derek Weaver, Lindsay Monge, Bryan Giglia Sunstone Hotel Investors


  • Page 5

    while maintaining an impressive compliance record. ~ Accounting and Tax ~ Accounting provides accurate and timely reporting of all financial data as well as compliance with GAAP, SOX and the SEC . Tax manages taxation on more than 200 legal entities and minimizes tax obligations through real estate appeals and compliance. from left to right: Reenie Dunahee, Kristen Hoover, Julie Crist, Olivier Kolpin, Laurie Hess, Denise Hertle, Alan Giroir the i in team 1


  • Page 6

    We continue to invest wisely in our hotels... ~ Design and Construction ~ Design and Construction creates value through high quality renovations that are completed on time and on budget. The work of Design and Construction directly impacts guest experience at our hotels. from left to right: Jane Fox, George Hensen, Guy Lindsey, Heidi Torr, Mark Zerilla, Lyn Burton 2 Sunstone Hotel Investors


  • Page 7

    and we strive to improve operational efficiency. ~ Asset Management and Corporate Transactions ~ Asset Management focuses on managing the vital relationships with our hotel brands and strategic partners. Corporate Transactions specializes in underwriting hotel assets and loan acquisitions. Together, they focus on finding operating efficiencies and transactions that will create stockholder value. from left to right: Michelle Hyjek, Michael Harvey, Brian Nudd, Evan Pohaski, not pictured : Bob Combie the i in team 3


  • Page 8

    We ensure professionalism and integrity in all we do. ~ Legal ~ Legal provides guidance and ensures compliance and proper documentation of all facets of Sunstone’s business, including securities, property transactions, corporate compliance and contract matters. from left to right: Jenny Kessler, Lynnae Stoehr, David Sloan, Shirley Swanson 4 Sunstone Hotel Investors


  • Page 9

    We are Sunstone Hotel Investors, Inc. We are individuals who work together to outperform. We are the i in Team. the i in team 5


  • Page 10

    To Our Stockholders 2009 was a transformational year for Sunstone. At our hotels and our corporate office we created new, more efficient operating models designed to outperform. We improved the quality of our portfolio by divesting of non-core hotels. We also recalibrated our balance sheet by eliminating significant near-term debt maturities and meaningfully increasing our equity base. As a result of these initiatives and improving market conditions, we generated total stockholder returns in excess of 55% in 2009. In spite of the turbulent conditions, we reflect back on the year with a sense of accomplishment, and more importantly we look ahead with confidence and optimism. Asset Management We implemented numerous efficiency measures in 2009. During the year we made significant reductions in management overhead, replaced a number of non-profitable full service restaurants with streamlined food and beverage concepts and meaningfully improved the energy efficiency of our hotels. These programs generated impressive margin retention - for every $1.00 reduction in revenue during 2009, we eliminated $0.50 in operating expenses. Portfolio Management After divesting of 14 non-core hotels, our portfolio now consists of 29 high-quality hotels located in some of the top, high barrier-to-entry markets in the U.S., such as Boston, Chicago, New York and Washington, D.C. We have now shifted our focus from defense to offense. The Company is well positioned to take advantage of market opportunities to acquire high-quality hotels at attractive pricing. Our approach to analyzing recent acquisition opportunities has been, and will remain, disciplined and measured, as we believe the best opportunities will be realized by those who exhibit sound judgment. Finance We executed on a comprehensive, well-timed finance plan designed to improve our credit profile, reduce our outstanding indebtedness, enhance our corporate liquidity and improve our financial flexibility. As a result, we finished the year with nearly $400 million of cash and cash equivalents, including restricted cash of $39 million and we now have less than $200 million of debt maturities through 2014. Key finance initiatives during 2009 included: Repurchase of Exchangeable Senior Notes. At the outset of 2009, we had $250 million of exchangeable senior notes. During the year, we repurchased $187.5 million of these notes at an average discount to par of 38%, resulting in a yield to put of more than 20% and nearly $70 million of economic gains. Re-Equitized Balance Sheet. We effectively recalibrated our balance sheet by issuing over $260 million of common equity during 2009. We used a portion of the equity proceeds to fund our exchangeable senior notes repurchase and to pre fund all expected cash needs through 2014. We intend to use the majority of the proceeds, however, to fund hotel acquisitions. Secured Debt Restructuring Program. During 2009, as a result of meaningful and unanticipated changes in market fundamentals, we concluded that the intrinsic value of 15 of our hotels no longer exceeded the $471 million principal amount of their respective mortgages, and that cash flows of these hotels would no longer support debt service. Accordingly, we conducted an exhaustive process with each of our lenders aimed at achieving negotiated resolutions to these deficits. As a result of our secured debt restructuring program, we eliminated amortization for up to 30 months on the $105 million mortgage loan secured by the Renaissance Baltimore, we elected to deed-back 11 hotels to the lenders and we reached an agreement in principle for the release of three additional hotels. In total, we eliminated $366 million of non-recourse mortgage debt through our secured debt restructuring program. Turbulent environments bring about opportunities and foster innovation. We now own a high-quality, portfolio of well located, well branded and well capitalized upper upscale hotels. Going forward, we believe the asset management, portfolio management and finance initiatives we executed on during 2009 will provide us with both a foundation for our investing activities in 2010 and a platform for future growth. We look ahead with optimism. The economic and credit turmoil of 2008 and 2009 has driven fundamental changes in the lodging real estate industry. In contrast to the first half of this decade when secured debt was abundant and inexpensive, we believe that going forward capital will be available primarily to real estate owners who demonstrate both sound investment discipline and a strategic approach to capital management. 6 Sunstone Hotel Investors


  • Page 11

    Lodging industry fundamentals are strengthening. Demand trends are recovering and we expect supply trends to be favorable for a number of years. The combination of these two factors could lead to a strong and sustained period of growth. Our mission remains to provide lodging real estate investors with exceptional performance and low risk. Simply put, Sunstone exists to outperform. We truly appreciate your continued support of Sunstone. We are proud of our accomplishments in 2009, and we look forward to achieving greater successes in 2010 and beyond. Thank you. The Sunstone Team Arthur L. Buser Jr Kenneth E. Cruse Marc A. Hoffman Chief Executive Officer Chief Financial Officer Chief Operating Officer the i in team 7


  • Page 12

    Total Cash Average Rooms per Hotel in millions 398m in hundreds 378 347 339 322 289 213m 108m 86m 64m 05 06 07 08 09 05 06 07 08 09 Hotel Operating Expenses Debt Maturity Schedule Per Occupied Room as of 12/31/09 $150.60 $142.89 81.0m 65.8m (1) 34.0m 2008 2009 2010 2011 2012 2013 2014 (1) Assumes the $62.5 million exchangeable senior notes maturing in 2027 are redeemed upon the first put date. In spite of the challenges of 2009, we are proud of our accomplishments. We believe that acquiring quality hotels in 2010 will create long-term value. 8 Sunstone Hotel Investors


  • Page 13

    Region Distribution Brand Distribution 9 California 17 Marriott 8 East 6 Hilton 7 Midwest 3 Independent 5 Other West 1 Fairmont 1 Hyatt 1 Starwood California Massachusetts Oregon Courtyard by Marriott Los Angeles Marriott Quincy - Boston Marriott Portland Embassy Suites La Jolla Marriott Long Wharf - Boston Valley River Inn Eugene Fairmont Newport Beach Hilton Del Mar - San Diego Maryland Pennsylvania Hyatt Regency Newport Beach Renaissance Harborplace - Baltimore Marriott Philadelphia Marriott Del Mar - San Diego Michigan Texas Renaissance Los Angeles Airport Marriott Troy Hilton Houston-North Renaissance Long Beach Marriott Houston Sheraton Cerritos Minnesota Doubletree Guest Suites Minneapolis Utah District of Columbia Kahler Grand Rochester Marriott Park City Renaissance Washington D.C. Kahler Inn & Suites Florida Marriott Rochester Virginia Renaissance Orlando at SeaWorld ® Residence Inn by Marriott Rochester Marriott Tysons Corner Illinois New York Embassy Suites Chicago Hilton Times Square the i in team 9


  • Page 14

    Table of Contents ___ 11 - Selected Financial Data ___ 12 - Management’s Discussion and Analysis of Financial Condition and Results of Operations ___ 33 - Report of Independent Registered Public Accounting Firm ___ 34 - Consolidated Balance Sheets ___ 35 - Consolidated Statements of Operations ___ 36 - Consolidated Statements of Stockholders’ Equity ___ 37 - Consolidated Statements of Cash Flows ___ 38 - Notes to Consolidated Financial Statements ___ 61 - Report of Independent Registered Public Accounting Firm ___ 62 - Stock Information ___ 63 - Corporate Information 10 Sunstone Hotel Investors


  • Page 15

    Selected Financial Data ––– The following table sets forth selected financial information for the Company that has been derived from the consolidated financial statements and notes. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this annual report. Year Ended Year Ended Year Ended Year Ended Year Ended December 31, December 31, December 31, December 31, December 31, 2009 2008 2007 2006 2005 ($ in thousands) Operating Data Revenues: Room $ 408,150 $ 504,104 $ 492,240 $ 380,839 $ 234,796 Food and beverage 161,963 201,952 199,831 156,117 105,208 Other operating 53,744 59,140 53,686 42,284 33,898 Revenues of operations held for non-sale disposition 93,966 116,298 120,353 110,578 91,155 Total revenues 717,823 881,494 866,110 689,818 465,057 Operating expenses: Room 98,382 110,444 106,589 84,218 51,850 Food and beverage 118,629 145,576 144,518 111,204 74,428 Other operating 26,916 29,823 29,755 26,545 21,718 Advertising and promotion 35,693 39,219 37,932 30,280 22,700 Repairs and maintenance 27,360 29,579 27,769 23,372 15,559 Utilities 24,895 28,731 25,840 21,858 14,803 Franchise costs 20,656 24,658 23,770 19,051 9,620 Property tax, ground lease and insurance 43,352 44,993 43,791 39,858 23,113 Property general and administrative 72,823 86,797 86,055 69,395 44,199 Corporate overhead 25,242 21,511 27,849 18,640 14,384 Depreciation and amortization 93,795 93,759 89,925 65,238 41,810 Operating expenses of operations held for non-sale disposition 87,007 96,548 96,433 88,896 73,104 Property and goodwill impairment losses 30,852 57 — — — Property and goodwill impairment losses of operations held for non-sale disposition 100,143 — — — — Total operating expenses 805,745 751,695 740,226 598,555 407,288 Operating income (loss) (87,922) 129,799 125,884 91,263 57,769 Equity in net earnings (losses) of unconsolidated joint ventures (27,801) (1,445) (3,588) 140 — Interest and other income 1,388 3,639 8,880 4,074 3,060 Interest and other income of operations held for non-sale disposition 9 69 103 49 7 Interest expense (76,539) (83,176) (77,463) (54,702) (36,948) Interest expense of operations held for non-sale disposition (15,036) (13,016) (10,750) (9,230) (6,100) Gain (loss) on extinguishment of debt 54,506 — (417) (9,976) (2,667) Income (loss) from continuing operations (151,395) 35,870 42,649 21,618 15,121 Income (loss) from discontinued operations (118,213) 35,368 81,227 31,619 16,845 Net income (loss) (269,608) 71,238 123,876 53,237 31,966 Non-controlling interest — — — — (1,761) Dividends paid on unvested restricted stock compensation (447) (814) (1,007) (856) (537) Preferred stock dividends and accretion (20,749) (20,884) (20,795) (19,616) (10,973) Undistributed income allocated to unvested restricted stock compensation — — (222) — — Undistributed income allocated to Series C preferred stock — — (1,397) — — Income available (loss attributable) to common stockholders $ (290,804) $ 49,540 $ 100,455 $ 32,765 $ 18,695 Income (loss) from continuing operations available (attributable) to common stockholders per diluted common share $ (2.47) $ 0.26 $ 0.33 $ 0.02 $ 0.05 Cash flows provided by operating activities $ 70,095 $ 160,002 $ 214,862 $ 161,940 $ 111,713 Cash dividends declared per common share(1) $ 0.00 $ 1.20 $ 1.31 $ 1.22 $ 1.155 Balance sheet data Investment in hotel properties, net(2) $ 1,923,392 $ 2,004,914 $ 2,002,329 $ 1,696,885 $ 1,392,422 Total assets 2,513,530 2,805,611 3,049,152 2,760,373 2,249,189 Total debt(2) 1,203,797 1,389,783 1,394,904 1,170,778 916,826 Total liabilities 1,526,867 1,791,103 1,836,894 1,624,583 1,292,228 Equity 886,767 914,812 1,112,762 1,036,494 857,865 (1) Does not include non-cash common stock dividend of $0.60 per share declared in 2008. (2) Does not include the Marriott Ontario Airport and the Mass Mutual eight hotels, both of which have been reclassified to “operations held for non-sale disposition,” and the W San Diego and the Renaissance Westchester, both of which have been deconsolidated and included in discontinued operations due to the transfer of possession and control of these two hotels to receivers. the i in team 11


  • Page 16

    Management’s Discussion and Analysis of Financial represented by travelers who prefer the consistent service and quality Condition and Results of Operations associated with nationally recognized brands. ––– The following discussion should be read in conjunction with We seek to own hotels in urban locations that benefit from significant the consolidated financial statements and related notes included barriers to entry by competitors. Most of our hotels are considered elsewhere in this report. business, convention, or airport hotels, as opposed to resort, leisure or extended-stay hotels. Of the 29 hotels, the average hotel has 378 rooms. Overview ––– The demand for lodging generally fluctuates with the overall economy. We refer to these periodic changes in demand as the lodging cycle, Sunstone Hotel Investors, Inc. is a Maryland corporation. We operate and we seek to employ a cycle-appropriate portfolio management as a self-managed and self-administered real estate investment trust, strategy. During the recovery and growth phases of the lodging or REIT. A REIT is a legal entity that directly or indirectly owns cycle, our strategy emphasizes active investment, both in terms of real estate assets. REITs generally are not subject to federal income acquisitions of new hotels and selective renovations of our existing taxes at the corporate level as long as they pay stockholder dividends portfolio. During the mature phase of the lodging cycle, our strategy equivalent to 100% of their taxable income. REITs are required to emphasizes net hotel dispositions and during cyclical declines, our distribute to stockholders at least 90% of their taxable income. We strategy emphasizes capital preservation. own, directly or indirectly, 100% of the interests of Sunstone Hotel Partnership, LLC (the “Operating Partnership”), which is the entity Through all phases of the cycle, we seek to maximize the value of our that directly or indirectly owns our hotel properties. We also own portfolio through proactive asset management, which entails working 100% of the interests of our taxable REIT subsidiary, Sunstone Hotel closely with our third-party hotel operators to develop plans and actions TRS Lessee, Inc., which leases all of our hotels from the Operating designed to enhance revenues and minimize operational expenses. Partnership, and engages third parties to manage our hotels. During 2009, in light of the recent cyclical decline, we maintained a We own primarily upper upscale and upscale hotels in the United higher than historical unrestricted cash balance. We intend to deploy States. As of December 31, 2009, we owned 29 hotels (the “29 a portion of our excess cash balance in 2010 as we believe the lodging hotels”), excluding 11 hotels which are in the process of being, or cycle is entering a recovery phase and capital markets have stabilized. have been, transferred to court appointed receivers as a result of our During 2009, we selectively deployed a portion of our cash to fund secured debt restructuring program. These 11 hotels include the W certain transactions such as open market purchases of our Operating San Diego and the Renaissance Westchester, both of which are held Partnership’s 4.60% exchangeable senior notes (the “Senior Notes”) in receivership and included in discontinued operations, and nine and the tender offer the Operating Partnership closed in May 2009 additional hotels that we are currently in the process of transferring to (the “Senior Notes Tender Offer”), through the combination of which court-appointed receivers, all of which are included in operations held our Operating Partnership repurchased $187.5 million of its Senior for non-sale disposition. The nine hotels are comprised of the Marriott Notes at a price equivalent to 62.3% of par. Ontario Airport and eight of the 11 hotels securing the non-recourse mortgage with Massachusetts Mutual Life Insurance Company (the During 2009 we completed a secured debt restructuring program “Mass Mutual eight hotels”) consisting of the following hotels: to proactively address value and cash flow deficits among certain Renaissance Atlanta Concourse; Hilton Huntington; Residence of our mortgaged hotels. The primary goal of this program was to Inn by Marriott Manhattan Beach; Marriott Provo; Courtyard by achieve benefits for our stockholders through loan amendments, Marriott San Diego (Old Town); Holiday Inn Downtown San Diego; or in certain cases, consensual transfers to the lenders of the hotel Holiday Inn Express San Diego (Old Town); and Marriott Salt Lake assets in full satisfaction of the debt. Loans within our secured debt City (University Park). The three additional hotels securing the Mass restructuring program generally met two criteria: (1) the hotel, or Mutual loan (Courtyard by Marriott Los Angeles, Kahler Inn & hotels as a group, was not generating sufficient cash flow to cover Suites Rochester and Marriott Rochester) are included in the 29 debt service, and under the current terms of the mortgage, the hotel hotels as the Company is in the process of releasing these hotels from was not expected to generate sufficient cash flow for the foreseeable the Mass Mutual loan. Of the 29 hotels, we classify 27 as upscale or future, and (2) the present value of the hotel, or hotels as a group, was upper upscale, one as luxury and one as midscale as defined by Smith significantly less than the principal amount of the applicable loan. Travel Research, Inc. In addition to our wholly owned hotels, we The loans secured by such hotels, subject to customary exceptions, own a 38% equity interest in a joint venture that owns one hotel, are non-recourse to us. Five of our loans totaling $470.9 million were and we own other non-hotel investments. The majority of our hotels subject to our secured debt restructuring program. Pursuant to our are operated under nationally recognized brands such as Marriott, secured debt restructuring program, during 2009, we amended the Fairmont, Hilton and Hyatt, which are among the most respected $105.2 million loan secured by the Renaissance Baltimore, transferred and widely recognized brands in the lodging industry. We believe the W San Diego and Renaissance Westchester to receivers in advance the largest and most stable segment of demand for hotel rooms is of deeding back the hotels in satisfaction of their respective loans, 12 Sunstone Hotel Investors


  • Page 17

    and initiated the process to deed back the Marriott Ontario Airport. - comparable RevPAR, which we define as the RevPAR generated In addition, we worked with the lender’s representative for the Mass by hotels we owned as of the end of the reporting period, but Mutual non-recourse mortgage secured by 11 of our hotels to initiate excluding those hotels that experienced material and prolonged the process to deed back the Mass Mutual eight hotels and to release business interruption due to renovations, re-branding or property the remaining three hotels for a release price. If we and Mass Mutual damage during either the most recent calendar year presented or reach agreement on the three hotel release, we have offered to deed the calendar year immediately preceding it. For hotels that were back the Mass Mutual eight hotels in satisfaction of the debt balance not owned for the entirety of the comparison periods, comparable that will remain after the payment of the release price. If we and Mass RevPAR is calculated using RevPAR generated during periods Mutual are unable to reach agreement on this proposal, we have offered of prior ownership. We refer to this subset of our hotels used to to deed back all 11 hotels in satisfaction of the entire debt balance and calculate comparable RevPAR as our “Comparable Portfolio;” without making a cash payment to Mass Mutual. We hope to conclude - RevPAR index, which is the quotient of a hotel’s RevPAR divided this process in the first quarter of 2010, but no assurance can be given by the average RevPAR of its competitors, multiplied by 100. that either the partial release or the deed-in-lieu transaction will be A RevPAR index in excess of 100 indicates a hotel is achieving consummated, or upon their timing or terms. Through our secured higher RevPAR than its competitors. In addition to absolute debt restructuring program, we are in the process of eliminating $365.7 RevPAR index, we monitor changes in RevPAR index; million in mortgage debt by electing to deed back 11 hotels with an - operating flow through, which is the quotient of incremental estimated total fair market value of $182.0 million, and offering to operating income divided by incremental revenues; pay a release price to release the three hotels which had a book value - EBITDA, which is income available (loss attributable) to common including goodwill of $65.0 million at December 31, 2009. stockholders excluding: preferred stock dividends; interest expense (including prepayment penalties, if any); provision for income Consistent with our cycle-appropriate strategy, during 2009, we issued taxes, including income taxes applicable to sale of assets; and 43,700,000 shares of our common stock, including the underwriters’ depreciation and amortization; over-allotment of 5,700,000 shares. Net proceeds from this offering - Adjusted EBITDA, which includes EBITDA but excludes: of approximately $257.1 million were contributed to our subsidiary, amortization of deferred stock compensation; the impact of any Sunstone Hotel Partnership LLC, which will use the proceeds for gain or loss from asset sales; impairment charges; and any other working capital and other general corporate purposes, which may identified adjustments; include hotel acquisitions. - Funds from operations, or FFO, which includes income available (loss attributable) to common stockholders, excluding gains and All of our debt bears fixed interest at a weighted average rate of losses from sales of property, plus real estate-related depreciation 5.6%, and the weighted average term to maturity of our debt is and amortization (excluding amortization of deferred financing approximately 7.2 years. Of our total debt, approximately $180.8 costs), and after adjustment for unconsolidated partnerships and million matures over the next four years ($81.0 million in 2010, none joint ventures; and in 2011, $34.0 million in 2012 and $65.8 million in 2013, assuming - Adjusted FFO, which includes FFO but excludes prepayment we repay our Senior Notes remaining balance of $62.5 million at the penalties, written-off deferred financing costs, impairment losses first put date in 2013). In addition, we continue to negotiate with and other identified adjustments. Mass Mutual regarding the resolution of the 11 hotels comprising the collateral pool for a $246.0 million mortgage loan. We have offered Revenues. Substantially all of our revenues are derived from the operation to make a partial payment on the mortgage loan in an effort to secure of our hotels. Specifically, our revenues consist of the following: the release of three of the 11 hotels. As such, we expect to pay a release price in 2010. The $180.8 million does not include $61.9 million in - Room revenues, which is the product of the number of rooms sold mortgage debt associated with the three hotels, or $10.9 million of and the ADR; normal loan amortization payments due in 2010, $15.3 million due - Food and beverage revenues, which is comprised of revenues realized in 2011, $15.2 million due in 2012, or $17.1 million due in 2013. in the hotel food and beverage outlets as well as banquet and catering events; Operating Activities - Other operating revenues, which include ancillary hotel revenue ––– such as performance guaranties, if any, and other items primarily driven by occupancy such as telephone, transportation, parking, Operating Performance Indicators. The following performance spa, entertainment and other guest services. Additionally, this indicators are commonly used in the hotel industry: category includes, among other things, operating revenue from our two commercial laundry facilities located in Rochester, Minnesota - occupancy; and Salt Lake City, Utah, as well as hotel space leased by third - average daily room rate, or ADR; parties. Prior to December 2007, this category also included - revenue per available room, or RevPAR, which is the product of operating revenue from BuyEfficient, LLC (“BuyEfficient”). In occupancy and ADR, and does not include food and beverage December 2007, we entered into a joint venture agreement with revenue, or other operating revenue; the i in team 13


  • Page 18

    Strategic Hotels & Resorts, Inc. (“Strategic”), to own and operate maintenance, utilities, franchise costs, property tax, ground BuyEfficient. Our 50% interest in BuyEfficient is now reflected on lease and insurance expense, property general and administrative our balance sheet as investments in unconsolidated joint ventures, expense, and depreciation and amortization expense for those and on our statements of operations as equity in net losses of hotels which we intend to dispose of other than by sale. Currently, unconsolidated joint ventures; and this category includes the Marriott Ontario Airport and the Mass - Revenues of operations held for non-sale disposition, which includes Mutual eight hotels; room revenues, food and beverage revenues, and other operating - Property and goodwill impairment losses expense, which includes revenues for those hotels which we intend to dispose of other than the charges we have recognized to write-off goodwill in association by sale. Currently, this category includes the Marriott Ontario with our quarterly impairment evaluations and to reduce the Airport and the Mass Mutual eight hotels. In September 2009 carrying value of assets on our balance sheet to their fair value and November 2009, we elected to cease the subsidization of debt when required; and service on the non-recourse mortgages for the Marriott Ontario - Property and goodwill impairment losses of operations held for non- Airport and the Mass Mutual loan, respectively, as we believe that sale disposition, which includes property and goodwill impairment the values of the 12 hotels securing these loans are, on a collective losses expense for those hotels which we intend to dispose of other basis, significantly less than the principal amounts of their than by sale. Currently, this category includes the Marriott Ontario mortgages. Prior to electing this default, we worked with each Airport and the Mass Mutual eight hotels. loan’s lender representative to amend the repayment terms, but we were unable to reach mutually acceptable amendment terms. Other Revenue and Expense. Other revenue and expense consists of At this point, other than as noted above with respect to the partial the following: release of three of the hotels securing the Mass Mutual loan, we do not expect further negotiations with the lender representatives, - Equity in net losses of unconsolidated joint ventures, which includes and we are working to convey the hotels to the lenders in lieu of our portion of net losses from our joint ventures; repayment of the debt. We have reclassified the assets, liabilities - Interest and other income, which includes interest we have earned and results of operations of the Marriott Ontario Airport and on our restricted and unrestricted cash accounts, as well as any gains the Mass Mutual eight hotels to “operations held for non-sale or losses we have recognized on sales of assets other than hotels; disposition” on our balance sheets, statements of operations and - Interest and other income of operations held for non-sale disposition, statements of cash flows. which includes interest we have earned on our restricted and unrestricted cash accounts for those hotels which we intend to Expenses. Our expenses consist of the following: dispose of other than by sale. Currently this category includes the Marriott Ontario Airport and the Mass Mutual eight hotels; - Room expense, which is primarily driven by occupancy and, - Interest expense, which includes interest expense incurred on our therefore, has a significant correlation with room revenues; outstanding debt, accretion of the Senior Notes, amortization of - Food and beverage expense, which is primarily driven by food and deferred financing fees, any write-offs of deferred financing fees, beverage sales and banquet and catering bookings and, therefore, and any loan penalties and fees incurred on our debt; has a significant correlation with food and beverage revenues; - Interest expense of operations held for non-sale disposition, which - Other operating expense, which includes the corresponding expense includes interest expense, amortization of deferred financing fees of other operating revenue, advertising and promotion, repairs and and any loan penalties and fees incurred on our debt for those maintenance, utilities, and franchise costs; hotels which we intend to dispose of other than by sale. Currently, - Property tax, ground lease and insurance expense, which includes the this category includes the Marriott Ontario Airport and the Mass expenses associated with property tax, ground lease and insurance Mutual eight hotels; payments, each of which is primarily a fixed expense; - Gain (loss) on extinguishment of debt, which includes the gain we - Property general and administrative expense, which includes recognized on the repurchase and cancellation of the Senior Notes, our property-level general and administrative expenses, such as as well as any costs incurred to repay mortgage debt before its payroll and related costs, professional fees, travel expenses, and maturity date; management fees; - Dividends paid on unvested restricted stock compensation, which - Corporate overhead expense, which includes our corporate-level includes dividends earned on our unvested restricted stock expenses, such as payroll and related costs, amortization of deferred awards; and, stock compensation, professional fees, travel expenses and office rent; - Preferred stock dividends and accretion, which includes dividends - Depreciation and amortization expense, which includes depreciation earned on our 8.0% Series A Cumulative Redeemable Preferred Stock on our hotel buildings, improvements, furniture, fixtures and equip- (“Series A preferred stock”) and Series C Cumulative Convertible ment, along with amortization on our franchise fees and intangibles; Redeemable Preferred Stock (“Series C preferred stock”) and - Operating expenses of operations held for non-sale disposition, redemption value accretion on our Series C preferred stock. which includes room expense, food and beverage expense, other operating expenses, advertising and promotion, repairs and 14 Sunstone Hotel Investors


  • Page 19

    Factors Affecting Our Operating Results. The primary factors ADR even if the result may be lower occupancy, as increases in affecting our operating results include overall demand for hotel RevPAR attributable to increases in ADR may be accompanied rooms, the pace of new hotel development, or supply, and the relative by minimal additional expenses, while increases in RevPAR performance of our operators in increasing revenue and controlling attributable to higher occupancy may result in higher variable hotel operating expenses. expenses such as housekeeping, labor and utilities expense. Thus, increases in RevPAR associated with higher ADR may result in - Demand. The demand for lodging generally fluctuates with the better flow through, and as a result, higher operating margins. overall economy. During 2008, as a result of the U.S. recession and Increases in RevPAR associated with higher occupancy may result the deterioration of the credit markets, the lodging cycle entered in worse flow through and, as a result, poor margin preservation. a decline phase, with demand for lodging rooms declining by approximately 1.6% as compared to 2007. In 2009, this trend With respect to maximizing operational flow through, we continue continued, and lodging demand declined by 5.8% as compared to work with our operators to identify operational efficiencies to 2008. As a result of declining demand and increases in new designed to reduce expenses while minimally affecting guest hotel supply, total RevPAR for the 29 hotels declined by 18.2% experience. Key asset management initiatives include reducing in 2009 as compared to 2008. Consistent with prior trends, we hotel staffing levels, capitalizing on relaxed brand standards, such anticipate that lodging demand will improve as liquidity is restored as reducing complimentary amenities, and selectively closing in the credit markets and the U.S. economy begins to strengthen. certain food and beverage outlets. Our operational efficiency Historically, periods of declining demand are followed by extended initiatives may be difficult to implement, as most categories of periods of relatively strong demand, resulting in a cyclical lodging variable operating expenses, such as utilities and certain labor growth phase. Assuming the current U.S. recession ended in the costs, such as housekeeping, fluctuate with changes in occupancy. later part of 2009, we expect hotel demand to begin to show year- Furthermore, our hotels operate with significant fixed costs, such over-year increases beginning in 2010 and 2011. as general and administrative expense, insurance, property taxes, - Supply. The addition of new competitive hotels affects the ability and other expenses associated with owning hotels, over which our of existing hotels to drive RevPAR and profits. The development operators may have little control. We have experienced increases of new hotels is largely driven by construction costs and expected in hourly wages, employee benefits (especially health insurance) performance of existing hotels. We believe the lodging industry will and utility costs, which have negatively affected our operating eventually benefit from the current economic climate and restrictive margins. Moreover, there are limits to how far our operators can financing environment, as new hotel construction projects will be reduce expenses without adversely affecting the competitiveness difficult to finance. As a result, we believe the initiation of hotel of our hotels. development will be constrained until the construction financing markets recover, with a number of hotel projects currently in the Operating Results. The following table presents our operating results planning stages being postponed or cancelled. Given the one to for our total portfolio for 2009 and 2008, including the amount three year timeline needed to construct a typical hotel, we expect a and percentage change in the results between the two periods. The window of at least two to four years beginning in 2010 during which table presents the results of operations included in the consolidated the number of new hotel openings will be below historical levels. statements of operations, and includes the 29 hotels (10,966 rooms) - Revenues and expenses. We believe that marginal improvements in as of December 31, 2009 and 2008. In addition, operating results RevPAR index, even in the face of declining revenues, are a good for operations held for non-sale disposition for both 2009 and 2008 indicator of our operators’ effectiveness in maximizing revenues. includes the Marriott Ontario Airport and the Mass Mutual eight Similarly, we believe that strong operating flow through is a good hotels. Income (loss) from discontinued operations for 2009 includes indicator of our operators’ effectiveness in minimizing incremental the results of operations for the Marriott Napa Valley, the Marriott operating expenses in the context of increasing revenues or, Riverside and the Hyatt Suites Atlanta Northwest which were sold conversely, in reducing operating expenses in the context of in 2009, as well as the W San Diego and the Renaissance Westchester declining revenues. which have been deconsolidated from our operations as a result of the transfer of possession and control of these properties to receivers With respect to improving RevPAR index, we continue to work during 2009. Income from discontinued operations for 2008 includes with our hotel operators to optimize revenue management the results of operations for the Hyatt Regency Century Plaza and the initiatives while taking into consideration market demand trends Crowne Plaza Grand Rapids which were sold in 2008, the Marriott and the pricing strategies of competitor hotels in our markets. Napa Valley, the Marriott Riverside and the Hyatt Suites Atlanta Our revenue maximization initiatives may entail using alternative Northwest that were sold in 2009, as well as the W San Diego and distribution channels, such as internet wholesalers. Our operators the Renaissance Westchester that have been deconsolidated from our may also look to enter into long-term airline crew contracts, or operations. These amounts can be found in our consolidated financial they may accept forms of lower-rated business that we would not statements and related notes included elsewhere in this annual report. typically take during periods of stronger demand. Our revenue management initiatives are generally oriented towards maximizing the i in team 15


  • Page 20

    (dollars in thousands, 2009 2008 Change $ Change % possession and control of these properties to receivers during 2009. except statistical data) Income from discontinued operations for 2007 includes the results Revenues of operations for the seven hotels we sold during 2007 (Courtyard Room $ 408,150 $ 504,104 $ (95,954) (19.0)% by Marriott Oxnard, Courtyard by Marriott Riverside, Hawthorn Food and beverage 161,963 201,952 (39,989) (19.8)% Suites Sacramento, Hilton Garden Inn Lake Oswego, Residence Inn Other operating 53,744 59,140 (5,396) (9.1)% Revenues of operations held by Marriott Oxnard, Residence Inn by Marriott Sacramento, and for non-sale disposition 93,966 116,298 (22,332) (19.2)% Sheraton Salt Lake City), the Hyatt Regency Century Plaza and the Total revenues 717,823 881,494 (163,671) (18.6)% Crowne Plaza Grand Rapids which were sold in 2008, the Marriott Operating Expenses Napa Valley, the Marriott Riverside and the Hyatt Suites Atlanta Hotel operating 395,883 453,023 (57,140) (12.6)% Northwest that were sold in 2009, as well as the W San Diego and Property general and administrative 72,823 86,797 (13,974) (16.1)% the Renaissance Westchester that have been deconsolidated from our Corporate overhead 25,242 21,511 3,731 17.3% operations. These amounts can be found in our consolidated financial Depreciation and amortization 93,795 93,759 36 0.0% statements and related notes included elsewhere in this annual report. Operating expenses of operations held for 2008 2007 Change $ Change % non-sale disposition 87,007 96,548 (9,541) (9.9)% (dollars in thousands, Property and goodwill except statistical data) impairment losses 30,852 57 30,795 54,026.3% Revenues Property and goodwill impairment losses of Room $ 504,104 $ 492,240 $ 11,864 2.4% operations held for Food and beverage 201,952 199,831 2,121 1.1% non-sale disposition 100,143 — 100,143 100.0% Other operating 59,140 53,686 5,454 10.2% Revenues of operations Total operating expenses 805,745 751,695 54,050 7.2% held for non-sale disposition 116,298 120,353 (4,055) (3.4)% Operating income (loss) (87,922) 129,799 (217,721) (167.7)% Total revenues 881,494 866,110 15,384 1.8% Equity in net losses of unconsolidated joint Operating Expenses ventures (27,801) (1,445) (26,356) (1,823.9)% Interest and other income 1,388 3,639 (2,251) (61.9)% Hotel operating 453,023 439,964 13,059 3.0% Interest and other income Property general and of operations held for administrative 86,797 86,055 742 0.9% non-sale disposition 9 69 (60) (87.0)% Corporate overhead 21,511 27,849 (6,338) (22.8)% Interest expense (76,539) (83,176) 6,637 8.0% Depreciation and Interest expense of amortization 93,759 89,925 3,834 4.3% operations held for Operating expenses of non-sale disposition (15,036) (13,016) (2,020) (15.5)% operations held for Gain on extinguishment non-sale disposition 96,548 96,433 115 0.1% of debt 54,506 — 54,506 100.0% Property and goodwill impairment losses 57 — 57 100.0% Income (loss) from continuing operations (151,395) 35,870 (187,265) (522.1)% Total operating expenses 751,695 740,226 11,469 1.5% Income (loss) from Operating income 129,799 125,884 3,915 3.1% discontinued operations (118,213) 35,368 (153,581) (434.2)% Equity in net losses of Net income (loss) (269,608) 71,238 (340,846) (478.5)% unconsolidated joint Dividends paid on ventures (1,445) (3,588) 2,143 59.7% unvested restricted Interest and other income 3,639 8,880 (5,241) (59.0)% stock compensation (447) (814) 367 45.1% Interest and other income Preferred stock dividends of operations held for and accretion (20,749) (20,884) 135 0.6% non-sale disposition 69 103 (34) (33.0)% Interest expense (83,176) (77,463) (5,713) (7.4)% Income available Interest expense of (loss attributable) to operations held for common stockholders $ (290,804) $ 49,540 $ (340,344) (687.0)% non-sale disposition (13,016) (10,750) (2,266) (21.1)% Loss on extinguishment of debt — (417) 417 100.0% The following table presents our operating results for our total portfolio Income from continuing for 2008 and 2007, including the amount and percentage change in operations 35,870 42,649 (6,779) (15.9)% Income from discontinued the results between the two periods. The table presents the results of operations 35,368 81,227 (45,859) (56.5)% operations included in the consolidated statements of operations, and Net income 71,238 123,876 (52,638) (42.5)% Dividends paid on includes the 29 hotels (10,966 rooms) as of December 31, 2008 and unvested restricted 2007. In addition, operating results for operations held for non-sale stock compensation (814) (1,007) 193 19.2% Preferred stock dividends disposition for both 2008 and 2007 includes the Marriott Ontario and accretion (20,884) (20,795) (89) (0.4)% Airport and the Mass Mutual eight hotels. Income from discontinued Undistributed income allocated to unvested operations for 2008 includes the results of operations for the Hyatt restricted stock Regency Century Plaza and the Crowne Plaza Grand Rapids which compensation — (222) 222 100.0% Undistributed income were sold in 2008, the Marriott Napa Valley, the Marriott Riverside allocated to Series C and the Hyatt Suites Atlanta Northwest which were sold in 2009, as preferred stock — (1,397) 1,397 100.0% well as the W San Diego and the Renaissance Westchester which have Income available to common stockholders $ 49,540 $ 100,455 $ (50,915) (50.7)% been deconsolidated from our operations as a result of the transfer of 16 Sunstone Hotel Investors


  • Page 21

    Operating Statistics. Included in the following tables are comparisons of the key operating metrics for our hotel portfolio for the years ended December 31, 2009, 2008 and 2007. The comparisons do not include the results of operations for the three hotels sold in 2009, the two hotels sold in 2008, and the seven hotels sold in 2007. The comparisons also do not include the Marriott Ontario Airport and the Mass Mutual eight hotels both of which are held for non-sale disposition, and the W San Diego and the Renaissance Westchester both of which are held in receivership and included in discontinued operations. Because three of our hotels owned as of December 31, 2009 were acquired during 2007, the key operating metrics for the hotel portfolio reflect the results of operations of those three hotels under previous ownership for a portion of the periods presented. 2009 2008 Change Occ% ADR RevPAR Occ% ADR RevPAR Occ% ADR RevPAR (1) Hotel Portfolio (29 hotels) 69.3% $ 147.32 $ 102.09 74.5% $ 167.58 $ 124.85 (520) bps (12.1)% (18.2)% 2008 2007 Change Occ% ADR RevPAR Occ% ADR RevPAR Occ% ADR RevPAR Hotel Portfolio (29 hotels)(1) 74.5% $ 167.58 $ 124.85 76.1% $ 165.21 $ 125.72 (160) bps 1.4% (0.7)% Comparable Hotel Portfolio (27 hotels)(2) 75.2% $ 166.51 $ 125.22 77.0% $ 163.86 $ 126.17 (180) bps 1.6% (0.8)% (1) Includes all hotels owned by the Company on December 31, 2009, excluding the Marriott Ontario Airport and the Mass Mutual eight hotels, both of which have been reclassified to “operations held for non-sale disposition,” and the W San Diego and the Renaissance Westchester, both of which have been deconsolidated and included in discontinued operations due to the transfer of possession and control of these two hotels to receivers. (2) Includes the 29 hotels noted above, excluding hotels that experienced material disruption during the reporting periods (Renaissance Baltimore and Renaissance Orlando at SeaWorld®). For the year ended December 31, 2009, RevPAR for the 29-hotel 2009 2008 2007 portfolio decreased 18.2% from 2008 to $102.09. Occupancy decreased Income available (loss attributable) 520 basis points to 69.3%, while ADR decreased 12.1% to $147.32. to common stockholders $ (290,804) $ 49,540 $ 100,455 Dividends paid on unvested restricted stock compensation 447 814 1,007 For the year ended December 31, 2008, RevPAR for the 29-hotel Series A and C preferred stock dividends 20,749 20,884 20,795 Undistributed income allocated to portfolio decreased 0.7% from 2007 to $124.85. Occupancy unvested restricted stock compensation — — 222 decreased 160 basis points to 74.5%, while ADR increased 1.4% to Undistributed income allocated to Series C preferred stock — — 1,397 $167.58. For our pro forma comparable hotel portfolio, RevPAR Operations held for investment: decreased 0.8% from 2007 to $125.22. Occupancy decreased 180 Depreciation and amortization 93,795 93,759 89,925 Interest expense 71,940 78,538 74,740 basis points to 75.2%, while ADR increased 1.6% to $166.51. Interest expense – default rate 472 — — Amortization of deferred financing fees 1,823 1,133 936 Write-off of deferred financing fees 284 — — Non-GAAP Financial Measures. The following table reconciles Loan penalties and fees 207 — — net income available (loss attributable) to common stockholders to Non-cash interest related to discount EBITDA and Adjusted EBITDA for our hotel portfolio for the years on Senior Notes 1,813 3,505 1,787 Unconsolidated joint ventures: ended December 31, 2009, 2008 and 2007. We believe EBITDA Depreciation and amortization 5,131 5,000 6,492 and Adjusted EBITDA are useful to investors in evaluating our Interest expense 2,614 5,168 7,765 Amortization of deferred financing fees 192 1,547 1,323 operating performance because these measures help investors evaluate Amortization of deferred stock and compare the results of our operations from period to period compensation 47 47 — Operations held for non-sale disposition: by removing the impact of our capital structure (primarily interest Depreciation and amortization 11,157 11,561 11,170 expense and preferred stock dividends) and our asset base (primarily Interest expense 12,428 12,474 10,324 Interest expense – default rate 1,407 — — depreciation and amortization) from our operating results. We also Amortization of deferred financing fees 541 542 426 use EBITDA and Adjusted EBITDA as measures in determining Loan penalties and fees 660 — — Discontinued operations: the value of hotel acquisitions and dispositions. We caution investors Depreciation and amortization 6,108 14,094 22,150 that amounts presented in accordance with our definitions of Interest expense 4,513 5,575 14,129 EBITDA and Adjusted EBITDA may not be comparable to similar Amortization of deferred financing fees 25 27 135 Write-off of deferred financing fees — — 362 measures disclosed by other companies, because not all companies Loan penalties and fees 3,124 — 415 calculate these non-GAAP measures in the same manner. EBITDA EBITDA (51,327) 304,208 365,955 and Adjusted EBITDA should not be considered as an alternative Amortization of deferred stock measure of our net income (loss), operating performance, cash flow compensation 4,055 3,975 5,168 (Gain) loss on sale of assets 12,677 (26,013) (66,019) or liquidity. EBITDA and Adjusted EBITDA may include funds (Gain) loss on extinguishment of debt (54,506) — 417 that may not be available for our discretionary use due to functional Impairment loss – operations held for investment 30,852 57 — requirements to conserve funds for capital expenditures and property Impairment loss – unconsolidated acquisitions and other commitments and uncertainties. Although joint ventures 26,007 — — Impairment loss – operations held for we believe that EBITDA and Adjusted EBITDA can enhance an non-sale disposition 100,143 — — investor’s understanding of our results of operations, these non-GAAP Impairment loss – discontinued operations 95,150 2,847 — Bad debt expense on corporate financial measures, when viewed individually, are not necessarily a note receivable 5,557 — — better indicator of any trend as compared to GAAP measures such Costs associated with CEO succession as net income (loss) or cash flow from operations. In addition, you and executive officer severance — — 4,540 should be aware that adverse economic and market conditions may 219,935 (19,134) (55,894) harm our cash flow. Adjusted EBITDA $ 168,608 $ 285,074 $ 310,061 the i in team 17


  • Page 22

    Adjusted EBITDA was $168.6 million in 2009 as compared to $285.1 2009 2008 2007 million in 2008 and $310.1 million in 2007. Adjusted EBITDA Income available (loss attributable) decreased $116.5 million in 2009 as compared to 2008, and $25.0 to common stockholders $ (290,804) $ 49,540 $ 100,455 Dividends paid on unvested million in 2008 as compared to 2007 primarily due to decreased restricted stock compensation 447 814 1,007 earnings at our hotels. Series C preferred stock dividends(1) — 6,784 6,695 Undistributed income allocated to unvested restricted stock compensation — — 222 The following table reconciles net income available (loss attributable) Undistributed income allocated to to common stockholders to FFO and Adjusted FFO for our hotel Series C preferred stock — — 1,397 Real estate depreciation and amortization – portfolio for the years ended December 31, 2009, 2008 and 2007. We operations held for investment 93,248 92,953 89,066 believe that the presentation of FFO and Adjusted FFO provide useful Real estate depreciation and amortization – information to investors regarding our operating performance because unconsolidated joint ventures 5,060 4,949 6,492 Real estate depreciation and amortization – they are measures of our operations without regard to specified non- operations held for non-sale disposition 11,157 11,561 11,170 cash items such as real estate depreciation and amortization, gain or Real estate depreciation and amortization – loss on sale of assets and certain other items which we believe are not discontinued operations 6,108 14,094 22,150 (Gain) loss on sale of assets 12,677 (26,013) (66,019) indicative of the performance of our underlying hotel properties. FFO (162,107) 154,682 172,635 We believe that these items are more representative of our asset base Operations held for investment: and our acquisition and disposition activities than our ongoing Interest expense – default rate 472 — — operations. We also use FFO as one measure in determining our Write-off of deferred financing fees 284 — — results after taking into account the impact of our capital structure. Loan penalties and fees 207 — — Operations held for non-sale disposition: We caution investors that amounts presented in accordance with Interest expense – default rate 1,407 — — our definitions of FFO and Adjusted FFO may not be comparable Loan penalties and fees 660 — — Discontinued operations: to similar measures disclosed by other companies, because not all Write-off of deferred financing fees — — 362 companies calculate these non-GAAP measures in the same manner. Loan penalties and fees 3,124 — 415 FFO and Adjusted FFO should not be considered as an alternative (Gain) loss on extinguishment of debt (54,506) — 417 Impairment loss – operations held measure of our net income (loss), operating performance, cash flow for investment 30,852 57 — or liquidity. FFO and Adjusted FFO may include funds that may not Impairment loss – unconsolidated be available for our discretionary use due to functional requirements joint ventures 26,007 — — Impairment loss – operations held to conserve funds for capital expenditures and property acquisitions for non-sale disposition 100,143 — — and other commitments and uncertainties. Although we believe that Impairment loss – discontinued operations 95,150 2,847 — Bad debt expense on corporate FFO and Adjusted FFO can enhance an investor’s understanding of note receivable 5,557 — — our results of operations, these non-GAAP financial measures, when Costs associated with CEO succession viewed individually, are not necessarily a better indicator of any trend and executive officer severance — — 4,540 Amortization of deferred stock as compared to GAAP measures such as net income (loss) or cash compensation associated with flow from operations. In addition, you should be aware that adverse executive officer severance — — 437 economic and market conditions may harm our cash flow. 209,357 2,904 6,171 Adjusted FFO $ 47,250 $ 157,586 $178,806 (1) Our Series C preferred stock has been excluded from the calculation of FFO and Adjusted FFO for the year ended December 31, 2009 as their inclusion would have been anti-dilutive. Adjusted FFO was $47.3 million in 2009 as compared to $157.6 million in 2008 and $178.8 million in 2007. Adjusted FFO decreased $103.7 million in 2009 as compared to 2008, and $21.2 million in 2008 as compared to 2007 primarily due to decreased earnings at our hotels, partially offset by lower interest expense. Room revenue. Room revenue decreased $96.0 million, or 19.0%, for the year ended December 31, 2009 as compared to the year ended December 31, 2008. Room revenue generated by the 29 hotels (our “existing portfolio”) decreased in 2009 as compared to 2008 due to a decrease in occupancy ($26.2 million) combined with a decrease in ADR ($69.8 million). 18 Sunstone Hotel Investors


  • Page 23

    Room revenue increased $11.9 million, or 2.4% for the year ended Other operating revenue increased $5.5 million, or 10.2%, for the December 31, 2008 as compared to the year ended December 31, year ended December 31, 2008 as compared to the year ended 2007. We acquired three hotels during the period from January 1, December 31, 2007. The three acquired hotels contributed $1.2 2007 to December 31, 2008: Renaissance Los Angeles Airport, million to other operating revenue during 2008. Other operating Marriott Long Wharf, and Marriott Boston Quincy. The three revenue generated from our 2008 existing portfolio increased $4.3 acquired hotels contributed $10.9 million to room revenue during million during 2008. A substantial portion of our other operating 2008. In addition, room revenue generated by the 26 hotels we revenue in 2008 resulted from a performance guaranty provided by acquired prior to January 1, 2007 (our “2008 existing portfolio”) the manager of the Fairmont Newport Beach. We recognized $3.5 increased $1.0 million during 2008 due to an increase in ADR ($9.9 million of the $6.0 million performance guaranty during the year million) partially offset by a decrease in occupancy ($8.9 million). ended December 31, 2008, and recognized no guaranty amount during the year ended December 31, 2007. Other revenue generated Food and beverage revenue. Food and beverage revenue decreased from our 2008 existing portfolio also increased during 2008 as $40.0 million, or 19.8%, for the year ended December 31, 2009 as compared to 2007 due to an increase in transportation and parking compared to the year ended December 31, 2008. Food and beverage revenue generated by several of our hotels due to changes in parking revenue generated from our existing portfolio decreased in 2009 as management agreements, combined with an increase in revenue at compared to 2008 primarily due to declines in occupancy, as well both of our laundry facilities. These increases were partially offset as to a reduction in city-wide conventions and meetings held at our by the reclassification of BuyEfficient’s operations to equity in net hotels, which caused decreases in banquet, catering, restaurant and losses of unconsolidated joint ventures, combined with a decrease in room service revenue. Restaurant revenue also decreased in 2009 telephone revenue. as compared to 2008 as many of our hotels closed their restaurants during slow periods in order to save costs. Revenue of operations held for non-sale disposition. Revenue of operations held for non-sale disposition associated with the Marriott Food and beverage revenue increased $2.1 million, or 1.1%, for Ontario Airport and the Mass Mutual eight hotels decreased $22.3 the year ended December 31, 2008 as compared to the year ended million, or 19.2%, for the year ended December 31, 2009 as compared December 31, 2007. The three acquired hotels contributed $3.2 to the year ended December 31, 2008. This decrease was primarily million to food and beverage revenue during 2008. Food and beverage the result of a 500 basis point decrease in occupancy combined with revenue generated from our 2008 existing portfolio decreased a 13.0% decrease in ADR, causing room revenue to decrease $15.2 $1.1 million during 2008 as compared to 2007, due primarily to a million. In addition, food and beverage revenue decreased $6.1 decrease in banquet revenue as businesses and groups scaled back million, and other operating revenue decreased $1.0 million. their conferences and meetings due to the struggling economy. This decreased revenue was slightly offset by an increase in outlet Revenue of operations held for non-sale disposition associated with revenue as 2007 was negatively affected by renovation disruption the Marriott Ontario Airport and the Mass Mutual eight hotels at the Renaissance Baltimore, the Renaissance Long Beach and the decreased $4.1 million, or 3.4%, for the year ended December 31, Renaissance Orlando at SeaWorld®. 2008 as compared to the year ended December 31, 2007. This decrease was primarily the result of a 460 basis point decrease in Other operating revenue. Other operating revenue decreased $5.4 occupancy slightly offset by a 0.7% increase in ADR, causing room million, or 9.1%, for the year ended December 31, 2009 as compared revenue to decrease $3.8 million. In addition, food and beverage to the year ended December 31, 2008. A substantial portion of our revenue decreased $0.7 million, and other operating revenue increased other operating revenue in both 2009 and 2008 resulted from a $0.4 million. performance guaranty provided by the manager of the Fairmont Newport Beach. We recognized $2.5 million of the $6.0 million Hotel operating expenses. Hotel operating expenses, which are performance guaranty during the year ended December 31, 2009, and comprised of room, food and beverage, advertising and promotion, recognized $3.5 million of the performance guaranty during the year repairs and maintenance, utilities, franchise costs, property tax, ended December 31, 2008. As of December 31, 2009, we have fully ground lease and insurance, and other hotel operating expenses utilized the entire $6.0 million performance guaranty. Other revenue decreased $57.1 million, or 12.6%, for the year ended December 31, generated from our existing portfolio also decreased during 2009 as 2009 as compared to the year ended December 31, 2008. This decrease compared to 2008 primarily due to decreases in telephone, retail, in hotel operating expenses is the result of cost cutting initiatives, as business center and guest movie revenue, resulting from the decrease well as lower occupancy rates at our hotels. Hotel operating expenses in occupancy at our hotels and to the fact that discretionary spending declined during 2009 as compared to 2008 due to decreases in the by our hotel guests decreased in 2009 as a result of the recession, following expenses: departmental payroll due to staff reductions and combined with decreased cancellation and attrition revenue. These cost cutting initiatives; advertising and repairs and maintenance as decreases were partially offset by increases in parking revenue due to the hotels developed more efficient operating models; utilities due new contracts at several of our hotels. to the decline in occupancy and to reductions in gas rates at several of our hotels; franchise fees and assessments due to the decreased the i in team 19


  • Page 24

    revenue; and ground lease due to the elimination of expense at services, bad debt expense and credit card commissions partially offset our Renaissance Orlando at SeaWorld® as we purchased the land by decreased payroll expenses and management fees associated with underlying the hotel in September 2008. These decreases were slightly the decrease in revenue. offset by increased property taxes due to increased tax rates at several of our hotels combined with $0.2 million in supplemental prior year Corporate overhead expense. Corporate overhead expense increased taxes assessed on several of our hotels in 2009, slightly offset by $0.8 $3.7 million, or 17.3%, during the year ended December 31, 2009 million in property tax credits received at several of our hotels in as compared to the year ended December 31, 2008 due in part to 2009 and by $0.2 million in prior year tax reimbursements collected $5.6 million in bad debt expense recorded in 2009, along with $0.8 from the buyer upon our second quarter 2009 sale of land adjacent million in corporate severance due to our corporate reorganization to one of our hotels. in the second quarter of 2009 and $0.1 million in relocation expense. In December 2009, we determined that a $5.6 million note received Hotel operating expenses increased $13.1 million, or 3.0%, during from the buyer of 13 hotels we sold in 2006, along with the related the year ended December 31, 2008 as compared to the year ended interest accrued on the note may be uncollectible. As such, we December 31, 2007. The three acquired hotels contributed $11.5 recorded bad debt expense of $5.6 million to corporate overhead million in other operating expenses during 2008. In addition, hotel to reserve against both the discounted note and the related interest operating expenses in our 2008 existing portfolio increased $1.6 receivable. These increases were partially offset by decreases in salaries, million during 2008 as compared to 2007. These higher costs in our wages and deferred stock compensation in 2009 as compared to 2008. 2008 existing portfolio during 2008 were driven by the increases in During the second quarter of 2009, we made certain changes to our related room, food and beverage and other revenue noted above, organizational structure, and as a result, our corporate workforce was combined with increased utility expenses due to higher energy costs, reduced by approximately 40%, resulting in decreases in salaries, wages advertising and promotion expenses due to higher complimentary and deferred stock compensation. In addition, corporate overhead promotional food and beverage expenditures, and property taxes due decreased due to reductions in sales tax expenses, audit and legal fees, to supplemental property tax bills assessed to several of our hotels. recruitment, entity level state franchise and minimum tax payments, These increases were partially offset by decreased property insurance conferences and meetings, and travel. expense due to lower premiums, as well as decreased ground lease expense due to our purchase of the land underlying our Renaissance Corporate overhead expense decreased $6.3 million, or 22.8%, Orlando at SeaWorld®. Prior to our acquisition, the land had been during the year ended December 31, 2008 as compared to the leased from a third party. year ended December 31, 2007, primarily due to costs incurred in 2007 for severance related to the chief executive officer succession Property general and administrative expense. Property general and the senior management team transition. Corporate overhead and administrative expense decreased $14.0 million, or 16.1%, for expenses during 2008 were also reduced as compared to 2007 due the year ended December 31, 2009 as compared to the year ended to our elimination of a separate Chief Accounting Officer position, December 31, 2008, primarily due to decreased management fees which we combined with the Chief Financial Officer position. These and credit and collection expenses due to the decline in revenue, decreases were partially offset by $0.2 million in severance costs combined with decreased payroll and related costs, employee recorded in 2008 combined with increased costs associated with recruitment, employee relations, employee relocation, training, legal exploring potential hotel acquisitions and dispositions, entity level and travel due to staff reductions and cost control initiatives as our state franchise and minimum tax payments, sales tax expense, and hotels worked to control costs during the recession. These decreases legal expense. were slightly offset by an increase in sales tax audit expense due to audits at several of our hotels. Depreciation and amortization expense. Depreciation and amortization expense remained relatively flat for the year ended Property general and administrative expense increased $0.7 million, December 31, 2009 as compared to the year ended December 31, or 0.9%, for the year ended December 31, 2008 as compared to the 2008. Additional depreciation recognized on hotel renovations year ended December 31, 2007. The three acquired hotels contributed and purchases of furniture, fixtures and equipment for our hotel $1.8 million to property general and administrative expense during properties was offset due to the fact that we reduced the depreciable 2008. Property general and administrative expense in our 2008 assets of our existing portfolio by $25.4 million during 2009 due to existing portfolio decreased $2.1 million due to the reclassification impairment charges. of BuyEfficient’s operations to equity in net losses of unconsolidated joint ventures. This decrease was partially offset by $0.9 million in Depreciation and amortization expense increased $3.8 million, or severance and restructuring charges recorded in 2008 as our hotels 4.3%, during the year ended December 31, 2008 as compared to the worked to control costs during the current economic slowdown. In year ended December 31, 2007. The three acquired hotels contributed addition, property general and administrative expense increased $0.1 $3.7 million in depreciation and amortization expense during million during the year ended December 31, 2008 as compared to 2008. Depreciation and amortization expense in our 2008 existing the same period in 2007 due to increased contract and professional portfolio increased by $0.1 million due to additional depreciation 20 Sunstone Hotel Investors


  • Page 25

    recognized on hotel renovations and purchases of furniture, fixtures parcel of land adjacent to one of our hotels which we sold in June and equipment for our hotel properties. 2009. We also wrote off $1.3 million of goodwill associated with the Marriott Park City and $2.6 million of goodwill associated with the Operating expenses of operations held for non-sale disposition. Marriott Rochester. In 2008 we recognized a $0.1 million impairment Operating expenses of operations held for non-sale disposition loss on a vacant parcel of land which was sold in January 2009. associated with the Marriott Ontario Airport and the Mass Mutual eight hotels, which are comprised of room, food and beverage, Property and goodwill impairment losses of operations held for other operating expenses, advertising and promotion, repairs and non-sale disposition. Property and goodwill impairment losses of maintenance, utilities, franchise costs, property tax, ground lease operations held for non-sale disposition associated with the Marriott and insurance expense, property general and administrative expense, Ontario Airport and the Mass Mutual eight hotels totaled $100.1 depreciation and amortization, totaled $87.0 million for the year million for the year ended December 31, 2009 as compared to zero for ended December 31, 2009 as compared to $96.5 million for the both the years ended December 31, 2008 and 2007. In conjunction year ended December 31, 2008. During 2009, we recognized $75.8 with our quarterly impairment evaluations performed during 2009, million in operating expenses and $11.2 million in depreciation and we recognized impairment losses in order to reduce the carrying values amortization. During 2008, we recognized $85.0 million in operating of seven hotels held for non-sale disposition on our balance sheet to expenses and $11.5 million in depreciation and amortization. The their fair values: Marriott Ontario Airport $8.9 million; Marriott decrease in operating expenses of operations held for non-sale Provo $11.2 million; Holiday Inn Downtown San Diego $7.2 disposition associated with the Marriott Ontario Airport and the million; Holiday Inn Express San Diego (Old Town) $1.4 million; Mass Mutual eight hotels is primarily related to the decreases in Marriott Salt Lake City (University Park ) $6.8 million; Hilton related total revenue of operations held for non-sale disposition, Huntington $41.1 million; and Renaissance Atlanta Concourse combined with decreased advertising and promotion, repairs and $20.5 million. In addition, during 2009, we wrote off $3.0 million maintenance, franchise and management fees and utilities, slightly in goodwill associated with four of the Mass Mutual eight hotels: offset by increased property taxes. The decrease in depreciation Marriott Provo $0.7 million; Holiday Inn Downtown San Diego $1.4 in 2009 as compared to 2008 is primarily due to $97.1 million in million; Holiday Inn Express San Diego (Old Town) $0.2 million; impairment charges recorded in 2009, which reduced the depreciable and Marriott Salt Lake City (University Park) $0.7 million. assets for operations held for non-sale disposition. Equity in net losses of unconsolidated joint ventures. Equity in net Operating expenses of operations held for non-sale disposition losses of unconsolidated joint ventures totaled a net loss of $27.8 associated with the Marriott Ontario Airport and the Mass Mutual million for the year ended December 31, 2009 as compared to a net eight hotels totaled $96.5 million for the year ended December 31, loss of $1.4 million for the year ended December 31, 2008, and a 2008 as compared to $96.4 million for the year ended December 31, net loss of $3.6 million for the year ended December 31, 2007. In 2007. During 2008, we recognized $85.0 million in operating expenses 2009, we recognized a $28.3 million loss on our Doubletree Guest and $11.5 million in depreciation and amortization. During 2007, Suites Times Square joint venture, which we originally purchased we recognized $85.2 million in operating expenses and $11.2 million in December 2006. This $28.3 million loss was comprised of a $2.3 in depreciation and amortization. This increase in total operating million operating loss and a $26.0 million impairment loss. During expenses of operations held for non-sale disposition associated with the fourth quarter of 2009, we wrote off our entire remaining $26.0 the Marriott Ontario Airport and the Mass Mutual eight hotels is million investment to equity in net losses of unconsolidated joint primarily related to increased depreciation on renovations and fixed ventures in order to reduce the carrying value of our investment in the asset additions, combined with increased advertising and promotion, Doubletree Guest Suites Times Square joint venture to its fair value utilities and property taxes, partially offset by decreases in related as of December 31, 2009. Also during 2009, we recognized income total revenue of operations held for non-sale disposition, combined of $0.5 million on our BuyEfficient joint venture which began to with decreases in franchise and management fees, and property and be accounted for as an unconsolidated joint venture in December liability insurance. 2007 following our sale of a 50% interest in BuyEfficient. In 2008, we recognized a $1.6 million loss on our Doubletree Guest Suites Times Property and goodwill impairment losses. Property and goodwill Square joint venture, and income of $0.2 million on our BuyEfficient impairment losses totaled $30.9 million for the year ended joint venture. In 2007, we recognized a $3.6 million loss on our December 31, 2009 as compared to $0.1 million for the year ended Doubletree Guest Suites Times Square joint venture. December 31, 2008 and zero for the year ended December 31, 2007. In conjunction with our quarterly impairment evaluations performed Interest and other income. Interest and other income totaled $1.4 during 2009, we recognized a $25.4 million impairment loss on the million for the year ended December 31, 2009, $3.6 million for the Marriott Del Mar to reduce the carrying value of this hotel to its year ended December 31, 2008 and $8.9 million for the year ended fair value. In addition, during 2009 we recognized a $1.4 million December 31, 2007. In 2009, we recognized $0.9 million in interest impairment loss related to costs associated with a potential timeshare income, $0.4 million on the sale of surplus furniture, fixtures and development, and recognized a $0.1 million impairment loss on a equipment (“FF&E”) located in two of our hotels and $0.1 million the i in team 21


  • Page 26

    in other miscellaneous income. In 2008, we recognized $3.4 million Interest expense increased $5.7 million, or 7.4%, during the year ended in interest income and $0.2 million in other miscellaneous income. In December 31, 2008 as compared to the year ended December 31, 2007, we recognized a $6.1 million gain on our sale of a 50% interest 2007. Interest expense includes an additional $3.8 million incurred in BuyEfficient, $2.7 million in interest income and $0.1 million in during the year ended December 31, 2008 as compared to the year other miscellaneous income. ended December 31, 2007, as a result of a mortgage loan obtained to finance our acquisition of the Marriott Long Wharf in March 2008, Interest and other income of operations held for non-sale disposition. combined with the issuance of the Senior Notes in June 2007 and Interest and other income of operations held for non-sale disposition an increase in interest expense incurred on our credit facility, which associated with the Marriott Ontario Airport and the Mass Mutual was partially offset by our repayment of three mortgages during 2007. eight hotels totaled $9,000 in 2009 and $0.1 million for both 2008 Interest expense also increased in 2008 as compared to 2007 due to an and 2007, all of which was interest income. increase in amortization of deferred financing fees of $0.2 million. In addition, as part of our adoption of ASC 470-20, we retrospectively Interest expense. Interest expense is as follows (in thousands): adjusted interest expense by an additional $3.5 million in 2008 and Year Ended Year Ended Year Ended $1.8 million in 2007. Interest expense due to the accretion of the December 31, 2009 December 31, 2008 December 31, 2007 Senior Notes increased by $1.7 million during 2008 as compared to 2007 due to the fact that 2007 contains only a partial year of accretion Interest expense $ 72,412 $ 78,538 $ 74,740 Accretion of Senior Notes 1,813 3,505 1,787 as the Senior Notes were issued mid-year in June 2007. Amortization of deferred financing fees 1,823 1,133 936 Write-off of deferred financing fees 284 — — Our weighted average interest rate per annum was approximately Loan penalties and fees 207 — — 5.6% at December 31, 2009, and 5.5% at both December 31, 2008 $ 76,539 $ 83,176 $ 77,463 and 2007. At December 31, 2009, all of our outstanding notes payable had fixed interest rates. Interest expense decreased $6.6 million, or 8.0%, during the year ended December 31, 2009 as compared to the year ended December 31, Interest expense of operations held for non-sale disposition. Interest 2008. Interest expense decreased $6.1 million as a result of decreases expense of operations held for non-sale disposition associated with in our loan balances combined with our repurchase of $64.0 million the Marriott Ontario Airport and the Mass Mutual eight hotels is as in aggregate principal amount of the Senior Notes in the first quarter follows (in thousands): of 2009 and an additional $123.5 million repurchased in May 2009. Year Ended Year Ended Year Ended December 31, December 31, December 31, In addition, during the first quarter of 2009, we adopted Financial 2009 2008 2007 Accounting Standards Board (“FASB”) Accounting Standards Interest expense $ 13,835 $ 12,474 $ 10,324 Codification (“ASC”) 470-20, “Debt with Conversion and Other Amortization of deferred financing fees 541 542 426 Options (“ASC 470-20”). As part of this adoption, we recorded Loan penalties and fees 660 — — an additional $1.8 million in interest expense for the year ended $ 15,036 $ 13,016 $ 10,750 December 31, 2009, and we retrospectively adjusted interest expense by an additional $3.5 million for the year ended December 31, 2008. Interest expense of operations held for non-sale disposition increased Interest expense due to the accretion of the Senior Notes decreased by $2.0 million, or 15.5%, during the year ended December 31, 2009 as $1.7 million during 2009 as compared to 2008 due to the repurchase compared to the year ended December 31, 2008 primarily due to our of $64.0 million in aggregate principal amount of Senior Notes in the elective defaults of the non-recourse loans secured by the Marriott first quarter of 2009 combined with an additional $123.5 million Ontario Airport and the Mass Mutual eight hotels. Interest expense repurchased in May 2009. Partially offsetting these decreases, interest of operations held for non-sale disposition includes an additional expense increased in 2009 as compared to 2008 due to an increase in $1.4 million in 2009 as compared to 2008 as the lender increased amortization of deferred financing fees of $0.7 million related to an our interest rate by 5.0% in conjunction with our elective default of increase in fees associated with our repurchase of the Senior Notes, the the non-recourse loan secured by the Mass Mutual eight hotels. In amendment of our credit facility during the second quarter of 2009 addition, interest expense of operations held for non-sale disposition and the amendment of our loan on the Renaissance Baltimore during increased in 2009 as compared to 2008 due to $0.7 million in loan the third quarter of 2009. In addition, interest expense increased in penalties and fees recorded in 2009 related to our elective defaults of 2009 as compared to 2008 due to $0.3 million recognized in 2009 the non-recourse loans secured by the Marriott Ontario Airport and related to the write-off of deferred financing fees associated with the the Mass Mutual eight hotels. While we are required to record such amendment of our credit facility, and $0.2 million in loan penalties loan penalties and fees, as these loans are non-recourse to us, we do and fees recognized in 2009 due to our elective defaults pursuant to not intend to actually fund such fees, and consequently, we expect to our secured debt restructuring program. record a gain on the forgiveness of these expenses upon completion of the deed backs of these hotels. These increases were slightly offset by a decrease in interest expense of $0.1 million in 2009 as compared to 2008 due to decreased loan balances. 22 Sunstone Hotel Investors


  • Page 27

    Interest expense of operations held for non-sale disposition associated the year ended December 31, 2007 due to an increase in the dividend with the Marriott Ontario Airport and the Mass Mutual eight hotels rate for our Series C preferred stock to $1.605 per share in 2008 from increased $2.3 million, or 21.1%, for the year ended December 31, $1.583 per share in 2007. 2008 as compared to the year ended December 31, 2007. In 2007, the Mass Mutual loan was secured by 16 hotels, five of which were Investing Activities sold in June 2007 with the related interest expense reclassified to ––– discontinued operations. The remaining 11 hotels were reallocated Acquisitions. In light of the recent cyclical downturn, we did not the entire remaining interest expense for the loan. Interest expense acquire any hotel properties during either 2009 or 2008. Our only of operations held for non-sale disposition increased $2.2 million in material real estate acquisition during 2008 was made in September, 2008 as compared to 2007 due to the reallocation of interest expense when we acquired 32.6 acres of land underlying our Renaissance on the Mass Mutual eight hotels. Interest expense of operations held Orlando at SeaWorld® hotel using available cash on hand for $30.7 for non-sale disposition also increased due to a $0.1 million increase million, including costs of the acquisition. Prior to our acquisition, the in deferred financing fees. land had been leased from a third party. As a result of this acquisition, property tax, ground lease and insurance expense has been reduced Gain (loss) on extinguishment of debt. Gain (loss) on extinguishment by $2.0 million and $0.7 million for the year ended December 31, of debt totaled a gain of $54.5 million for the year ended December 31, 2009 and 2008, respectively. 2009, zero for the year ended December 31, 2008 and a loss of $0.4 million for the year ended December 31, 2007. During 2009, With better market clarity and in anticipation of an increasingly we recognized a gain of $54.5 million due to the repurchase and likely economic recovery, public REIT valuations have improved cancellation of $187.5 million in aggregate principal amount of the significantly during the course of 2009. While hotel sale transactions Senior Notes. During 2007, we recognized a loss of $0.4 million due were relatively limited in number during 2009, the hotel sale to the repayment of a mortgage loan before its maturity date. transactions that have recently been consummated indicate that hotel trading values have not recovered commensurately with public REIT Income (loss) from discontinued operations. Income (loss) from valuations. The pressure on single asset values is primarily caused by discontinued operations totaled a loss of $118.2 million for the year the ongoing dysfunction in the commercial mortgage markets, which ended December 31, 2009, income of $35.4 million for the year we expect may persist into 2010. Consequently, we believe the lack of ended December 31, 2008, and income of $81.2 million for the year a functioning commercial real estate secured debt market has created ended December 31, 2007. As described under “Investing Activities— opportunities for well-capitalized public lodging REITs to acquire Dispositions,” we sold three hotels in 2009, two hotels in 2008, and individual hotel assets at discounts to warranted values. Consistent seven hotels in 2007. In addition, we deconsolidated the W San with our cycle-appropriate strategy, and in order to capitalize on this Diego and the Renaissance Westchester and reclassified the hotels’ opportunity, we shifted our focus at the end of 2009 towards the results of operations to discontinued operations due to the transfer of pursuit of selective acquisitions of upper upscale hotels. possession and control of these hotels to a court-appointed receiver. Consistent with the Property, Plant and Equipment Topic of the The following table sets forth the hotels we have acquired since FASB ASC, we have reclassified the results of operations for all of January 1, 2007: these hotels, along with any impairments recognized and the gains and losses on the sales of these hotels, to discontinued operations. Hotels Rooms Acquisition Date 2009: Dividends paid on unvested restricted stock compensation. Due to our No hotel acquisitions — adoption of FASB ASC 260-10, “Determining Whether Instruments 2008: Granted in Share-Based Payment Transactions Are Participating No hotel acquisitions — Securities” (“ASC 260-10”) during the first quarter of 2009, common 2007: stock dividends earned on our unvested restricted stock awards were Marriott Boston Quincy, Quincy, Massachusetts 464 May 1, 2007 Marriott Long Wharf, Boston, Massachusetts(1) 402 March 23, 2007 $0.4 million for the year ended December 31, 2009, $0.8 million Renaissance Los Angeles Airport, for the year ended December 31, 2008, and $1.0 million for the year Los Angeles, California 499 January 4, 2007 ended December 31, 2007. Total January 1, 2007 to December 31, 2009 1,365 (1) Subsequent to this acquisition, the Company added an additional 10 rooms to this hotel, increasing the room count Preferred stock dividends and accretion. Preferred stock dividends to 412. and accretion decreased $0.1 million, or 0.6% during the year ended December 31, 2009 as compared to the year ended December 31, The combined cost for these three hotel acquisitions was approximately 2008, due to a decrease in the dividend rate for our Series C preferred $410.8 million, or $301,000 per room. stock to $1.572 per share during 2009 from $1.605 per share during 2008. Preferred stock dividends and accretion increased $0.1 million, or 0.4%, during the year ended December 31, 2008 as compared to the i in team 23


  • Page 28

    Dispositions . Consistent with our cycle-appropriate strategy, we were 2009 2008 2007 a net seller of hotels in 2009, 2008 and 2007. In May 2009, we sold the Portfolio Data—Hotels Marriott Napa Valley for net proceeds of $34.8 million, and a net loss Number of hotels—beginning of period 43 45 49 Add: Acquisitions — — 3 of $13.7 million. In June 2009, we sold the Marriott Riverside for net Less: Dispositions (3) (2) (7) proceeds of $18.7 million and a net gain of $2.9 million. In July 2009 Less: Non-sale dispositions (11) — — we sold the Hyatt Suites Atlanta Northwest for net proceeds of $7.8 Number of hotels—end of period 29 43 45 million and an $18,000 gain, after having recorded an impairment Portfolio Data—Rooms Number of rooms—beginning of period 14,569 15,625 15,758 loss in June 2009 of $4.9 million in order to reduce the carrying value Add: Acquisitions — — 1,365 of this hotel on our balance sheet to its fair value. We retained the Add: Room expansions 3 — 21 Less: Dispositions (768) (1,046) (1,519) net proceeds from these three sales in cash. In May 2008, we sold the Less: Non-sale disposition (2,838) — — Hyatt Regency Century Plaza for net proceeds of $358.8 million, Less: Rooms converted to other usage — (10) — and a net gain of $42.1 million. In July 2008, we used a portion of the Number of rooms—end of period 10,966 14,569 15,625 net proceeds to repay amounts outstanding under our credit facility, Average rooms per hotel—end of period 378 339 347 which had been used to fund the repurchase of 7,374,179 shares of our common stock for $129.0 million (excluding fees and costs). In Renovations. During 2009, we invested $44.1 million in capital December 2008, we sold the Crowne Plaza Grand Rapids for net improvements to our hotel portfolio. Consistent with our cycle- proceeds of $3.6 million, including a $2.0 million note receivable that appropriate strategy, this investment in capital improvements to our we collected in January 2009, and a net loss of $16.1 million. Seven hotel portfolio was $50.6 million and $91.1 million less than the properties were sold during 2007 for net proceeds of $179.3 million amounts we spent in 2008 and 2007, respectively. and a net gain of $59.9 million. Consistent with our strategic plan, we continue to evaluate the potential divestiture of certain non-core Liquidity and Capital Resources hotels, which may be completed as a portfolio sale, single asset sales, ––– or not at all, depending on market conditions. Historical. During the periods presented, our sources of cash included The following table sets forth the hotels we have sold since January 1, our operating activities, working capital, sales of hotel properties and 2007: other assets, distributions received from our unconsolidated joint ventures, proceeds from notes payable including our Operating Hotels Rooms Disposition Date Partnership’s debt securities and our credit facility, and proceeds from 2009: our offerings of common stock. Our primary uses of cash were for Hyatt Suites Atlanta Northwest, Marietta, Georgia 202 July 31, 2009 hotel acquisitions, capital expenditures for hotels, operating expenses, Marriott, Riverside, California 292 June 18, 2009 Marriott, Napa, California 274 May 20, 2009 repayment of notes payable (including repurchases of Senior Notes), repurchases of our common stock, and dividends on our common 2008: Crowne Plaza, Grand Rapids, Michigan 320 December 10, 2008 and preferred stock. Recently, the capital markets have experienced Hyatt Regency, Los Angeles (Century City), extreme price volatility, dislocations and liquidity disruptions, all of California 726 May 30, 2008 which have exerted downward pressure on stock prices, widened credit 2007: spreads on prospective debt financing and led to declines in the market Sheraton, Salt Lake City, Utah 362 December 20, 2007 Courtyard by Marriott, Oxnard, California 166 June 29, 2007 values of U.S. and foreign stock exchanges. Accordingly, we cannot be Courtyard by Marriott, Riverside, California 163 June 29, 2007 certain that traditional sources of funds will be available in the future. Hawthorn Suites, Sacramento, California 272 June 29, 2007 Hilton Garden Inn, Lake Oswego, Oregon 179 June 29, 2007 Residence Inn by Marriott, Oxnard, California 251 June 29, 2007 Operating activities. Our cash provided by operating activities Residence Inn by Marriott, Sacramento, California 126 June 29, 2007 fluctuates primarily as a result of changes in RevPAR and operating Total January 1, 2007 to December 31, 2009 3,333 flow through of our hotels. Our net cash provided by operating activities may also be affected by changes in our portfolio resulting The aggregate net sale proceeds for the 12 hotel dispositions through from hotel acquisitions, dispositions or renovations. Net cash December 31, 2009 was $603.0 million, or $181,000 per room. The provided by operating activities was $70.1 million for 2009 compared results of operations of all of the hotels identified above and the gains to $160.0 million for 2008, and $214.9 million in 2007. The decrease or losses on dispositions through December 31, 2009 are included in in 2009 as compared to 2008 was primarily due to decreased earnings discontinued operations for all periods presented through the time of at our hotels during 2009. The decrease in 2008 as compared to 2007 sale. The proceeds from the sales are included in our cash flows from was primarily due to decreased earnings at our hotels during 2008, investing activities for the respective periods. combined with a decrease in accounts payable and other liabilities. In addition, net cash provided by operating activities decreased in 2008 The following table summarizes our portfolio and room data from as compared to 2007 because operating cash in 2007 includes the January 1, 2007 through December 31, 2009, adjusted for the receipt of previously restricted cash held by a lender in conjunction hotels acquired, held for non-sale disposition and sold during the with our early pay-off of a mortgage loan. respective periods. 24 Sunstone Hotel Investors


  • Page 29

    Investing activities. Our cash provided by (used in) investing Financing activities. Our cash provided by (used in) financing activities fluctuates primarily as a result of acquisitions, dispositions activities fluctuates primarily as a result of our issuance and repayment and renovations of hotels. Net cash provided by (used) in investing of notes payable, including the repurchase of Senior Notes, draws and activities in 2009, 2008 and 2007 was as follows (in thousands): repayments on our credit facility and the issuance and repurchase of other forms of capital, including preferred equity and common stock. Year Ended Year Ended Year Ended December 31, December 31, December 31, Net cash provided by financing activities was $93.8 million in 2009 2009 2008 2007 as compared to net cash used of $293.7 million in 2008 and net cash Proceeds from sale of hotel properties, provided of $141.7 million in 2007. Net cash provided by financing other real estate and 50% interest in subsidiary $ 64,073 $ 360,395 $ 185,728 activities in 2009 consisted primarily of $269.1 million in proceeds Restricted cash – replacement reserve (1,823) 5,136 5,993 received from the issuance of common stock and $60.0 million in Proceeds received from sale of note receivable — — 29,047 proceeds received from our credit facility. These cash inflows were Cash received from unconsolidated partially offset by $117.5 million used to repurchase a portion of joint ventures 500 5,675 426 our Senior Notes including related costs, $74.4 million of principal Acquisitions of hotel properties and land — (30,695) (403,249) Renovations and additions to hotel payments on our credit facility and notes payable, $27.9 million of properties and other real estate (44,105) (94,697) (135,231) dividends paid to our stockholders, $12.0 million in costs associated Net cash provided by (used in) with the issuance of our common stock, and $3.5 million in deferred investing activities $ 18,645 $ (245,814) $ (317,286) financing fees paid in connection with amendments to our Senior Notes indenture, our credit facility and our loan secured by the Pursuant to our cycle-appropriate strategy, we did not acquire any Renaissance Baltimore. hotels in either 2009 or 2008. Net cash provided by investing activities was $18.6 million in 2009 as compared to net cash used of $245.8 Net cash used in financing activities in 2008 consisted primarily of million in 2008 and net cash used of $317.3 million in 2007. During $190.4 million of principal payments on our credit facility and notes 2009, we received $64.1 million from the sale of hotel properties payable, $184.5 million used to repurchase shares of our common and other assets, which included $61.3 million from the sale of three stock, $99.8 million of dividends paid to our stockholders, and $0.1 hotels, a $2.0 million payment on a note receivable from the buyer million in deferred financing costs partially offset by $181.0 million of a hotel we sold in December 2008, $0.4 million from the sale of in proceeds received from draws on our credit facility. certain excess FF&E located in two of our hotels, and $0.4 million from the sales of two vacant parcels of land. In addition, we received Net cash provided by financing activities for 2007 consisted primarily $0.5 million from one of our unconsolidated joint ventures, increased of proceeds from the issuance of notes payable and draws on our the balance in our restricted cash replacement reserve accounts by $1.8 credit facility (including our Operating Partnership’s debt securities) million, and paid cash of $44.1 million for renovations to our hotels. of $609.0 million and net proceeds from the settlement of a forward sale agreement (with an affiliate of Citigroup Global Markets Inc. as During 2008, we received net proceeds of $360.4 million from the the forward counterparty, relating to 4,000,000 shares of our common sale of the two hotels, decreased the balance in our restricted cash stock) of $110.4 million. Net cash provided by financing activities for replacement reserve accounts by $5.1 million, and received $5.7 2007 was partially offset by $387.5 million of principal payments on million from one of our unconsolidated joint ventures. During notes payable and our credit facility, $86.4 million used to repurchase 2008, we also acquired the land underlying one of our hotels for shares of our common stock, $96.3 million of dividends paid to our $30.7 million, paid an additional $14,000 for two hotels acquired stockholders, and $7.5 million in deferred financing costs. in 2007, and received a $35,000 deposit paid in 2007 for a total cash outlay of $30.7 million. In addition, we paid cash of $94.7 million Future. We expect our primary uses of cash to be for acquisitions of for renovations to our hotels. hotels, capital expenditures for hotels, operating expenses, repayment of principal on our notes payable, interest expense and dividends. We During 2007, we acquired three hotels for $410.8 million, including expect our primary sources of cash will continue to be our operating an $8.5 million deposit paid at the end of 2006, and paid an additional activities, working capital, notes payable, sales of hotel properties, $0.9 million for a hotel acquired in 2006, for a total cash outlay of and proceeds from public and private offerings of debt securities and $403.2 million. In addition, we received net proceeds of $179.3 common and preferred stock. Our ability to incur additional debt million from the sale of seven hotels, $6.3 million from the sale of depends on a number of factors, including our leverage, the value a 50% interest in our subsidiary BuyEfficient, of which $0.3 million of our unencumbered assets and borrowing restrictions imposed was contributed to the new joint venture with Strategic to operate by lenders under our existing notes payable, as well as other factors BuyEfficient, and $0.4 million from the sale of a vacant land parcel for affecting the general willingness or ability of lenders to provide loans. a total of $185.7 million in net proceeds received. During 2007, we Our ability to raise funds through the issuance of equity securities also paid cash of $135.2 million for renovations to our hotels, received depends on, among other things, general market conditions for $29.0 million from the sale of a note receivable, decreased the balance hotel companies and REITs and market perceptions about us. We in our restricted cash replacement reserve accounts by $6.0 million, will continue to analyze alternate sources of capital in an effort to and received $0.4 million from our unconsolidated joint ventures. the i in team 25


  • Page 30

    minimize our capital costs and maximize our financial flexibility. credit facility at a future date when our business plan contemplates However, when needed, the capital markets may not be available to the need for revolving credit. us on favorable terms or at all. Consistent with our cycle-appropriate strategy, during 2009 we We believe that our current cash balance, our cash flow from initiated a secured debt restructuring program aimed at addressing operations, and our unencumbered properties will provide us with cash flow and value deficits among certain of our hotels securing non- sufficient liquidity to meet our current operating expenses and other recourse mortgage debt. We concluded the program in the fourth expenses directly associated with our business (including payment of quarter of 2009. The primary goal of the program was to amend the dividends on our capital stock, if declared) for the foreseeable future, terms of mortgage debt to eliminate existing cash flow and / or value and in any event for at least the next 12 months. deficits. In certain cases, however, where acceptable restructuring terms could not be reached, rather than employing corporate Debt. Consistent with our cycle-appropriate strategy, during the resources to subsidize debt service, we elected to initiate the process first quarter of 2009, we repurchased $64.0 million in aggregate to deed-back the collateral hotels in satisfaction of the associated debt. principal amount of the Senior Notes for $30.4 million using our Loans subject to our secured debt restructuring program generally available cash on hand. After the repurchase, such Senior Notes were met two criteria: (1) the hotel, or hotels as a group, was not generating cancelled. We wrote off $1.4 million in deferred financing fees and sufficient cash flow to cover debt service, and under the current terms $4.2 million of the Senior Notes discount, and recognized a net gain of the mortgage, the hotel was not expected to generate sufficient cash of $28.0 million on this early extinguishment of debt. In May 2009, flow for the foreseeable future, and (2) the present value of the hotel, in accordance with the terms and conditions of our Senior Notes or hotels as a group, was significantly less than the principal amount Tender Offer, we purchased a total of $123.5 million in principal of the applicable loan. The loans secured by such hotels, subject to amount of Senior Notes for $87.0 million, including $1.9 million in customary exceptions, are non-recourse to us. During 2009, five of our related consents solicited from the registered holders of the Senior loans totaling $470.9 million are or have been subject to our secured Notes to adopt a proposed amendment to the indenture governing the debt restructuring program. The status of each of these five loans is Senior Notes and $0.6 million in fees and costs. After the repurchase, discussed further below. such Senior Notes were cancelled. In addition, we paid $1.2 million, including $0.3 million in fees and costs, for consents from holders of W San Diego. Effective September 30, 2009, possession and control non-tendered Senior Notes. We wrote off $2.7 million in deferred of the 258-room W San Diego was transferred to a court-appointed financing fees and $7.3 million of the Senior Notes discount, and receiver. In connection with this transfer, we deconsolidated this recognized a net gain of $26.6 million on this early extinguishment hotel and reclassified the assets and liabilities, including the $29.0 of debt. We recognized an additional $0.1 million in fees and costs million hotel net asset and the hotel’s $65.0 million 6.14% non- during the third and fourth quarters of 2009 related to the repurchases recourse mortgage, to discontinued operations on our balance sheets. of the Senior Notes. We initially used our credit facility to fund this Additionally, we reclassified the W San Diego’s results of operations repurchase of the Senior Notes, and subsequently replaced such cash and cash flows to discontinued operations on our statements of with proceeds from our equity offering completed in May 2009. operations and cash flows. Once title to the hotel is transferred, we will record a gain on extinguishment of debt, and the net assets and In April 2009, we drew down $60.0 million on our credit facility liabilities will be removed from our balance sheets. in connection with our Senior Notes Tender Offer. We repaid the $60.0 million in May 2009 using available cash. In June 2009, we Renaissance Westchester. Effective December 28, 2009, possession and amended our credit facility, reducing the facility’s size from $200.0 control of the 347-room Renaissance Westchester was transferred million to $85.0 million. The amended credit facility was secured by to a court-appointed receiver. In connection with this transfer, we five of our hotels, had an interest rate based on grid pricing ranging deconsolidated this hotel and reclassified the assets and liabilities, from 375 – 525 basis points over LIBOR, and was set to mature in including the $25.2 million hotel net asset and the hotel’s $29.2 2012, assuming the exercise of a one-year extension option. As of million 4.98% non-recourse mortgage, to discontinued operations December 31, 2009, we had no outstanding indebtedness under on our balance sheets. Additionally, we reclassified the Renaissance our amended credit facility, and we had $2.9 million in outstanding Westchester’s results of operations and cash flows to discontinued irrevocable letters of credit backed by the amended credit facility, operations on our statements of operations and cash flows. Once title leaving, as of that date, up to $82.1 million available under the to the hotel is transferred, we will record a gain on extinguishment amended credit facility. We were in compliance with all credit facility of debt, and the net assets and liabilities will be removed from our covenants as of December 31, 2009. In February 2010, we elected to balance sheets. terminate the amended credit facility. In view of our strong liquidity position and the restrictive terms of the amended credit facility, our Marriott Ontario Airport. In September 2009, we elected to cease business plan does not anticipate accessing the facility in 2010. The the subsidization of debt service on the $25.5 million 5.34% non- termination of the facility will eliminate approximately $0.6 million recourse mortgage secured by the 299-room Marriott Ontario in fees and associated costs per annum. We expect to enter into a new Airport, and commenced restructuring negotiations with the loan’s 26 Sunstone Hotel Investors


  • Page 31

    special servicer. In November 2009, we determined in good faith investments that secure the loan. Accordingly, the hotels may become that further negotiations would not be productive. We are currently impaired, and we may record an impairment charge to the extent the working with the special servicer to transfer possession and control book values of the three hotels exceed their fair values. We hope to of the hotel to a court-appointed receiver, and to ultimately convey conclude this process in the first quarter of 2010, but no assurance can the hotel to the lender in lieu of repayment of the debt. Pending the be given that either the partial release or the deed-in-lieu transaction appointment of a receiver, we have reclassified the assets, liabilities and will be consummated, or upon their timing or terms. results of operations of the Marriott Ontario Airport to “operations held for non-sale disposition” on our balance sheets, statements of Renaissance Baltimore. During our fourth quarter 2009, we finalized operations and cash flows. Upon the appointment of a receiver, the an amendment to the $105.2 million 5.13% non-recourse mortgage assets and liabilities associated with the Marriott Ontario Airport will secured by the 622-room Renaissance Baltimore. The amendment be deconsolidated. As of December 31, 2009, the Marriott Ontario results in the elimination of amortization on this loan for a period Airport had a net book value of approximately $16.5 million. of up to 30 months. Massachusetts Mutual Life Insurance Company. In July 2009, we Our elections to initiate the process to deed back the W San Diego, commenced restructuring negotiations with Massachusetts Mutual Renaissance Westchester, Marriott Ontario Airport, and the Mass Life Insurance Company, or Mass Mutual, the lender’s representative Mutual eight hotels were precipitated by a number of unique, market for a $246.0 million, 5.95% non-recourse mortgage loan secured and hotel-specific factors, and were made after our efforts to amend by 11 of our hotels comprised of 2,587 rooms. In November 2009, the loans were unsuccessful. In the future, other factors may lead us we elected to cease the subsidization of debt service on the loan, to pursue similar options with certain of our other hotels securing and in December 2009, we determined that further negotiations non-recourse mortgages. We believe such cases will be limited in regarding the Mass Mutual eight hotels would not be productive. We number. We were not in default of the loan covenants on any other are currently working to transfer possession and control of the Mass of our notes payable at December 31, 2009. Mutual eight hotels to a court-appointed receiver, and to ultimately convey the hotels to the lender in lieu of repayment of the debt. The As of December 31, 2009, we had $1.5 billion of debt ($1.2 eight hotels include the following: Renaissance Atlanta Concourse; billion excluding the mortgages for the W San Diego, Renaissance Hilton Huntington; Residence Inn by Marriott Manhattan Beach; Westchester, Marriott Ontario Airport and Mass Mutual eight hotels), Marriott Provo; Courtyard by Marriott San Diego (Old Town); $397.8 million of cash and cash equivalents, including restricted cash, Holiday Inn Downtown San Diego; Holiday Inn Express San and total assets of $2.5 billion. We believe that by controlling debt Diego (Old Town); and Marriott Salt Lake City (University Park). levels, staggering debt maturity dates and maintaining a highly flexible Pending the appointment of a receiver, we have reclassified the assets, capital structure, we can maintain lower capital costs than more highly liabilities and results of operations of the Mass Mutual eight hotels leveraged companies, or companies with limited flexibility due to to “operations held for non-sale disposition” on our balance sheets, restrictive corporate-level financial covenants. statements of operations and cash flows. Upon the appointment of a receiver, the assets and liabilities associated with the Mass Mutual As of December 31, 2009, all of our outstanding debt had fixed eight hotels will be deconsolidated. In conjunction with our year- interest rates. The majority of our mortgage debt is in the form of end impairment evaluation, we recorded an impairment charge of single asset loans. We believe this structure is appropriate for the $88.2 million in order to reduce the value of the Mass Mutual eight operating characteristics of our business and provides flexibility for hotels on our balance sheet to their fair value. As of December 31, assets to be sold subject to the existing debt, and as evidenced by 2009, the Mass Mutual eight hotels had a net book value including our secured debt restructuring program, in instances where asset goodwill of $103.5 million. During the first quarter of 2010, we values have declined to levels below the principal amount of the reached an agreement in principle with Mass Mutual to secure the associated mortgage, non-recourse single asset mortgages may limit release of the three remaining hotels comprising the collateral pool for the degradation in value experienced by our stockholders by shifting the Mass Mutual loan (Courtyard by Marriott Los Angeles, Kahler a portion of asset risk to our secured lenders. Inn & Suites Rochester and Marriott Rochester). If we and Mass Mutual are able to finalize an agreement on this proposal, we have The weighted average term to maturity of our debt is 7.2 years, and offered to deed back the Mass Mutual eight hotels in satisfaction of the weighted average interest rate on our debt is 5.6%. Our first loan the debt balance that will remain after the payment of the release maturity, the $81.0 million mortgage on the Hilton Times Square price. If we and Mass Mutual are unable to finalize an agreement on New York, is in December 2010. this proposal, we have offered to deed back all 11 hotels in satisfaction of the entire debt balance and without making a cash payment to Financial Covenants. We are subject to compliance with various Mass Mutual. We expect and intend to gain the release of the three covenants under the Series C preferred stock and the Senior Notes. remaining hotels. If, however, we are unsuccessful in our negotiations With respect to our Series C preferred stock, if we fail to meet and we deed back the three remaining hotels along with the Mass certain financial covenants for four consecutive quarters, a financial Mutual eight hotels, we may be unable to recover certain hotel ratio violation will occur. During the continuation of a financial the i in team 27


  • Page 32

    ratio violation, among other things, we would be restricted from Additionally, we believe we could obtain mortgages on, or pledge paying dividends on our common stock, and may incur a 50 basis to a secured facility, one or all of our seven unencumbered hotels: point per quarter dividend increase on the Series C preferred stock. Fairmont Newport Beach, Hyatt Regency Newport Beach, Marriott Additionally, the Series C preferred stockholders would gain the Quincy, Marriott Portland, Renaissance Los Angeles Airport, right to appoint one board member. Unless operations improve, we Residence Inn by Marriott Rochester, and Sheraton Cerritos. These may fail to meet our financial covenants with respect to our Series C seven hotels had an aggregate of 2,351 rooms as of December 31, preferred stock during 2010. If we were to fail to meet certain financial 2009, and generated $116.5 million in revenue during 2009. covenants under the Series C preferred stock for each quarter of 2010, a financial ratio violation would occur during the first quarter of 2011. Cash Balance. During the recent economic downturn, we maintained higher than historical cash balances. By minimizing our need to access With respect to the Company’s Senior Notes, if the maturity dates of external capital by maintaining higher than typical cash balances, more than $300.0 million of the Company’s indebtedness were to be our financial security and flexibility were meaningfully enhanced. accelerated as the result of uncured defaults, either the trustee or the As we believe the lodging cycle has now entered a recovery phase, we holders of not less than 25% in principal amount of the outstanding expect to deploy a portion of our excess cash balance in 2010 towards Senior Notes would have the right to declare the Senior Notes and selective acquisitions of upper upscale hotels. any unpaid interest immediately due and payable. As of February 23, 2010, none of the maturity dates have been accelerated for any of the Company’s indebtedness. Contractual Obligations ––– The following table summarizes our payment obligations and commitments as of December 31, 2009 (in thousands): Payment due by period Total Less than 1 year 1 to 3 years 3 to 5 years More than 5 years Notes payable $ 1,206,990 $ 153,778 $ 64,427 $ 34,703 $ 954,082 Notes payable on operations held for non-sale disposition(1) 209,620 209,620 — — — Notes payable on hotel properties held in receivership(2) 94,249 94,249 — — — Interest obligations on notes payable 443,407 64,847 115,421 108,825 154,314 Interest obligations on notes payable on operations held for non-sale disposition(3) 1,803 1,803 — — — Interest obligations on notes payable on hotel properties held in receivership(4) 2,276 2,276 — — — Operating lease obligations 306,668 4,467 8,244 8,403 285,554 Operating lease obligations on operations held for non-sale disposition(5) 5,347 221 442 442 4,242 Construction commitments 8,680 8,680 — — — Employment obligations 2,513 888 1,300 325 — Total $ 2,281,553 $ 540,829 $ 189,834 $ 152,698 $ 1,398,192 (1) Notes payable on operations held for non-sale disposition currently includes the Marriott Ontario Airport and the Mass Mutual eight hotels. Due to our elective defaults on the non-recourse mortgages secured by the Marriott Ontario Airport and the Mass Mutual eight hotels, these two mortgages have been classified in their entirety as current obligations as of December 31, 2009. (2) Notes payable on hotel properties held in receivership currently includes the W San Diego and the Renaissance Westchester. Due to our elective defaults on the non-recourse mortgages secured by the W San Diego and the Renaissance Westchester, and the subsequent transfers of these two hotels to court-appointed receivers effective September 30, 2009, and December 28, 2009, respectively, we deconsolidated these hotels. As of December 31, 2009, the $65.0 million non-recourse mortgage for the W San Diego, along with the $29.2 million non-recourse mortgage for the Renaissance Westchester have been classified in their entirety as current obligations, and are included in “other current liabilities of discontinued operations, net” on our balance sheet. (3) Due to our elective defaults on the mortgages secured by the Marriott Ontario Airport and the Mass Mutual eight hotels, interest obligations on notes payable on operations held for non-sale disposition includes interest obligations only through December 31, 2009. (4) Due to our elective defaults on the mortgages secured by the W San Diego and the Renaissance Westchester, interest obligations on notes payable on hotel properties held in receivership includes interest obligations only through December 31, 2009. (5) Operating lease obligations on operations held for non-sale disposition includes the operating lease obligations on two hotels included in the Mass Mutual eight hotels. 28 Sunstone Hotel Investors


  • Page 33

    Capital Expenditures and Reserve Funds The amount funded into each of these reserve accounts is determined ––– pursuant to the management, franchise and loan agreements for each of the respective hotels, ranging between 3.0% and 5.0% of We believe we maintain each of our hotels in good repair and condition the respective hotel’s total annual revenue. As of December 31, and in general conformity with applicable franchise and management 2009, $23.5 million was held in FF&E reserve accounts for future agreements, ground and air leases, laws and regulations. Our capital capital expenditures at the 29 hotels. According to the respective expenditures primarily relate to the ongoing maintenance of our hotels loan agreements, the reserve funds are to be held by the lenders or and are budgeted in the reserve accounts described in the following managers in restricted cash accounts. We generally are not required paragraph. We also incur capital expenditures for renovation and to spend the entire amount in the FF&E reserve accounts each year. development. We invested $44.1 million in our hotels during 2009. Our renovation budget for 2010 includes $8.7 million of contractual Off-Balance Sheet Arrangements construction commitments. If we acquire, renovate or develop additional hotels in the future, our capital expenditures will increase. ––– Our off-balance sheet arrangements consist of our ownership interests With respect to our hotels that are operated under management or in the W San Diego, the Renaissance Westchester and two joint franchise agreements with major national hotel brands and for all of ventures. For further discussion of the W San Diego, the Renaissance our hotels subject to first mortgage liens, we are obligated to maintain a Westchester and our two joint ventures and their effect on our furniture, fixture and equipment (“FF&E”) reserve account for future financial condition, results of operations and cash flows, see Notes planned and emergency-related capital expenditures at these hotels. 4 and 6 to the consolidated financial statements. Seasonality and Volatility ––– As is typical of the lodging industry, we experience some seasonality in our business as indicated in the table below. Revenue for certain of our hotels is generally affected by seasonal business patterns (e.g., the first quarter is strong in Orlando, the second quarter is strong for the Mid-Atlantic business hotels, and the fourth quarter is strong for New York City). Quarterly revenue also may be adversely affected by renovations, our managers’ effectiveness in generating business and by events beyond our control, such as extreme weather conditions, terrorist attacks or alerts, public health concerns, airline strikes or reduced airline capacity, economic factors and other considerations affecting travel. Revenues for our comparable hotel portfolio by quarter during 2007 and 2008, and our 29 hotel portfolio by quarter for 2008 and 2009 were as follows (dollars in thousands): First Quarter Second Quarter Third Quarter Fourth Quarter Total Revenues 2007 Comparable Hotel Portfolio (27 Hotels)(1) $ 138,520 $ 160,218 $ 158,307 $ 182,812 $ 639,857 2007 revenues as a percentage of total 21.7% 25.0% 24.7% 28.6% 100.0% 2008 Comparable Hotel Portfolio (27 Hotels)(1) $ 142,997 $ 165,590 $ 157,963 $ 169,236 $ 635,786 2008 revenues as a percentage of total 22.6% 26.0% 24.8% 26.6% 100.0% 2008 Total Hotel Portfolio Held for Investment (29 Hotels)(2) $ 169,686 $ 194,817 $ 182,023 $ 199,346 $ 745,872 2008 revenues as a percentage of total 22.8% 26.1% 24.4% 26.7% 100.0% 2009 Total Hotel Portfolio Held for Investment (29 Hotels)(2) $ 146,029 $ 150,623 $ 145,215 $ 163,543 $ 605,410 2009 revenues as a percentage of total 24.1% 24.9% 24.0% 27.0% 100.0% (1) Includes all hotel properties owned on December 31, 2009, excluding the W San Diego and the Renaissance Westchester held in receivership and included in discontinued operations and the Marriott Ontario Airport and the Mass Mutual eight hotels held for non-sale disposition, and excluding hotels that experienced material disruption during the reporting periods (Renaissance Baltimore and Renaissance Orlando at SeaWorld®). (2) Includes all hotel properties owned on December 31, 2009, excluding the W San Diego and the Renaissance Westchester held in receivership and included in discontinued operations and the Marriott Ontario Airport and the Mass Mutual eight hotels held for non-sale disposition. the i in team 29


  • Page 34

    Inflation impairment losses related to a parcel of land adjacent to one of our ––– hotels which was sold in June 2009. During the fourth quarter of Inflation may affect our expenses, including, without limitation, 2009, our Doubletree Guest Suites Times Square joint venture by increasing such costs as labor, food, taxes, property and casualty recorded an impairment loss in accordance with the Property, insurance and utilities. Plant and Equipment Topic of the FASB ASC, reducing the partners’ equity in the joint venture to a deficit. We have no guaranteed Critical Accounting Policies obligations to fund any losses of the partnership; therefore in ––– accordance with the Investments—Equity Method and Joint Ventures Topic of the FASB ASC, our impairment loss was limited Our discussion and analysis of our financial condition and results of to our remaining $26.0 million investment in the partnership. operations is based upon our consolidated financial statements, which This impairment charge was taken against equity in net losses of have been prepared in accordance with accounting principles generally unconsolidated joint ventures, effectively reducing our investment in accepted in the United States (“GAAP”). The preparation of these the partnership to zero on our balance sheet as of December 31, 2009. financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses We account for goodwill in accordance with the Intangibles – and related disclosure of contingent assets and liabilities. Goodwill and Other Topic of the FASB ASC, which states that goodwill has an indefinite useful life that should not be amortized We evaluate our estimates on an ongoing basis. We base our estimates but should be reviewed annually for impairment, or more frequently on historical experience, information that is currently available to us if events or changes in circumstances indicate that goodwill might and on various other assumptions that we believe are reasonable under be impaired, as well as the Fair Value Measurements and Disclosures the circumstances. Actual results may differ from these estimates under Topic of the FASB ASC for financial and non financial assets and different assumptions or conditions. We believe the following critical liabilities, which establishes a framework for measuring fair value and accounting policies affect the most significant judgments and estimates expands disclosures about fair value measurements by establishing a used in the preparation of our consolidated financial statements. fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The review of any potential goodwill - Impairment of long-lived assets and goodwill. We periodically impairment requires estimates of fair value for our properties that have review each property and any related goodwill for possible goodwill arising from unallocated acquisition costs. These estimates impairment. Recoverability of assets to be held and used is of fair value are prepared using Level 3 measurements. During the measured by a comparison of the carrying amount of an asset to first, second and third quarters of 2009, in light of the continuing future undiscounted net cash flows expected to be generated by the decline in the economic environment, we determined that an intra- asset. If such assets are considered to be impaired, the impairment year impairment analysis should be performed as of March 31, recognized is measured by the amount by which the carrying 2009, June 30, 2009 and September 30, 2009. In conjunction with our amount of the assets exceeds the estimated fair value of the assets. first quarter impairment evaluation, we determined that the goodwill We perform a Level 3 analysis of fair value, using a discounted cash associated with four of our hotels was impaired as of March 31, 2009, flow analysis to estimate the fair value of our properties taking and, accordingly, we recorded an impairment loss of $3.6 million into account each property’s expected cash flow from operations, to property and goodwill impairment losses. In conjunction with holding period and proceeds from the disposition of the property. our second quarter impairment evaluation, we determined that the The factors addressed in determining estimated proceeds from goodwill associated with one of the hotels impaired during the first disposition include anticipated operating cash flow in the year quarter plus two additional hotels were impaired as of June 30, 2009, of disposition and terminal capitalization rate. Our judgment is and, accordingly, we recorded an impairment loss of $1.1 million to required in determining the discount rate applied to estimated property and goodwill impairment losses. In conjunction with our cash flows, growth rate of the properties, operating income of the third quarter impairment evaluation, we determined that the goodwill properties, the need for capital expenditures, as well as specific associated with one of the hotels impaired during the second quarter market and economic conditions. In conjunction with this review was further impaired as of September 30, 2009, and, accordingly, during 2009, we recorded an impairment loss of $217.7 million, we recorded an impairment loss of $2.2 million to property and including $25.4 million to property and goodwill impairment goodwill impairment losses. The goodwill impairments recorded losses, $97.1 million to property and goodwill impairment loss in conjunction with the Company’s 2009 impairment evaluations of operations held for non-sale disposition, and $95.2 million noted above totaled $6.9 million, of which $3.9 million was recorded to discontinued operations to reduce the carrying values of 11 to property and goodwill impairment losses, and $3.0 million was hotels on our balance sheet to their fair values. In addition, in recorded to property and goodwill impairment losses of operations March 2009 we recorded an impairment loss of $1.4 million to held for non-sale disposition. property and goodwill impairment losses related to the write-off of deferred costs associated with a potential time share development, and an impairment loss of $0.1 million to property and goodwill 30 Sunstone Hotel Investors


  • Page 35

    - Depreciation and amortization expense. Depreciation expense is change in methodology does not increase our cash interest payments. based on the estimated useful life of our assets. The life of the assets Upon our adoption of this pronouncement on January 1, 2009, we is based on a number of assumptions, including the cost and timing decreased notes payable and increased equity by $16.5 million. The of capital expenditures to maintain and refurbish our hotels, as well $16.5 million was comprised of the original debt discount adjustment as specific market and economic conditions. Hotel properties and of $21.8 million less discount accretion of $5.3 million from June other completed real estate investments are depreciated using the 2007 through December 2008. Interest expense for the years ended straight-line method over estimated useful lives ranging from five December 31, 2009, 2008 and 2007 includes $1.8 million, $3.5 to 35 years for buildings and improvements and three to 12 years million and $1.8 million, respectively, in accretion of the Senior Notes. for furniture, fixtures and equipment. While management believes its estimates are reasonable, a change in the estimated lives could In June 2008, the FASB issued a pronouncement which states that affect depreciation expense and net income or the gain or loss on unvested share-based payment awards that contain non-forfeitable the sale of any of our hotels. We have not changed the estimated rights to dividends or dividend equivalents (whether paid or unpaid) useful lives of any of our assets during the periods discussed. are participating securities and shall be included in the computation of earnings per share under the two-class method. The guidance is New Accounting Standards effective for financial statements issued for fiscal years beginning and Accounting Changes after December 15, 2008, and interim periods within those years. ––– All prior period earnings per share are adjusted retrospectively to conform with the provisions of this pronouncement. Early adoption In December 2007, the FASB issued a pronouncement which was not permitted. The adoption of this pronouncement impacted establishes new accounting and reporting standards for the non- our calculations of earnings (loss) per share for the years ended controlling interest in a subsidiary and for the deconsolidation of a December 31, 2009, 2008 and 2007 as distributed and undistributed subsidiary. This pronouncement is effective for fiscal years beginning earnings representing non-forfeitable dividends of $0.4 million, on or after December 15, 2008. The adoption of this pronouncement $0.8 million and $1.2 million, respectively, were allocated to the did not have any impact on our consolidated financial condition, participating securities. results of operations or cash flow. In April 2009, the FASB issued a pronouncement which amends In March 2008, the FASB issued a pronouncement intended to GAAP. This pronouncement addresses the initial recognition, improve financial reporting about derivative instruments and hedging measurement and subsequent accounting for assets and liabilities activities by requiring enhanced disclosures to enable investors to arising from contingencies in a business combination, and requires better understand their effects on an entity’s financial condition, that such assets acquired or liabilities assumed be initially recognized financial performance, and cash flows. This pronouncement is effective at fair value at the acquisition date if fair value can be determined for financial statements issued for fiscal years and interim periods during the measurement period. If the acquisition-date fair value beginning after November 15, 2008. This pronouncement impacts cannot be determined, the asset acquired or liability assumed arising disclosures only and did not have any impact on our consolidated from a contingency is recognized only if certain criteria are met. This financial condition, results of operations or cash flow. pronouncement also requires that a systematic and rational basis for subsequently measuring and accounting for the assets or liabilities In May 2008, the FASB issued a pronouncement which requires that be developed depending on their nature. This pronouncement is the liability and equity components of convertible debt instruments effective for assets or liabilities arising from contingencies in business that may be settled in cash upon conversion (including partial cash combinations for which the acquisition date is during or after 2010. settlement) be separately accounted for in a manner that reflects an This pronouncement will have an impact on accounting for business issuer’s non-convertible debt borrowing rate at the time of issuance. combinations once adopted but the effect is dependent upon As a result, the liability component is recorded at a discount reflecting acquisitions at that time. its below market interest rate. The liability component is subsequently accreted to its par value over its expected life based on a rate of interest In April 2009, the FASB issued two pronouncements to provide that reflects the issuer’s non-convertible debt borrowing rate at the additional guidance about (1) measuring the fair value of financial time of issuance, and is reflected in the results of operations as interest instruments when the markets become inactive and quoted prices may expense. This pronouncement is effective for financial statements reflect distressed transactions, and (2) recording impairment charges issued for fiscal years beginning after December 15, 2008, and interim on investments in debt instruments. The FASB issued two additional periods within those fiscal years. Retrospective application to all pronouncements in April 2009 to require disclosures of fair value of periods presented is required and early adoption was prohibited. certain financial instruments in interim financial statements. These four The Senior Notes are within the scope of this pronouncement. This pronouncements are effective for financial statements issued for interim change in methodology affects our calculations of net income and and annual reporting periods ending after June 15, 2009. The adoption earnings per share as the interest rate increases to 6.5% based on our of these four pronouncements did not materially impact the Company. non-convertible debt borrowing rate at the time of issuance. This the i in team 31


  • Page 36

    In May 2009, the FASB issued a pronouncement which establishes Controls and Procedures general standards of accounting for and disclosure of events that occur ––– after the balance sheet date but before financial statements are issued (a) Evaluation of Disclosure Controls and Procedures or are available to be issued. Entities are also required to disclose the Based upon an evaluation of the effectiveness of disclosure controls date through which subsequent events have been evaluated and the and procedures, our Chief Executive Officer (CEO) and Chief basis for that date. This pronouncement is effective for interim or Financial Officer (CFO) have concluded that as of the end of the annual financial periods ending after June 15, 2009. The adoption period covered by this annual report our disclosure controls and of this pronouncement did not materially impact the Company. The procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Company has evaluated subsequent events through the date of issuance Exchange Act) were effective to provide reasonable assurance that of its December 31, 2009 financial statements, February 23, 2010. information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time In June 2009, the FASB issued a pronouncement which amends periods specified by the rules and forms of the SEC and is accumulated GAAP to require more information about transfers of financial and communicated to management, including the CEO and CFO, as assets, eliminates the qualifying special purpose entity (QSPE) appropriate to allow timely decisions regarding required disclosure. concept, changes the requirements for derecognizing financial assets and requires additional disclosures. The FASB issued a second (b) Management’s Report on Internal Control over pronouncement in June 2009, which amends GAAP regarding certain Financial Reporting guidance for determining whether an entity is a variable interest Our management is responsible for establishing and maintaining entity and modifies the methods allowed for determining the primary adequate internal control over financial reporting (as defined in Rule beneficiary of a variable interest entity. This second pronouncement 13a-15(f ) under the Exchange Act) to provide reasonable assurance requires ongoing reassessments of whether an enterprise is the primary regarding the reliability of our financial reporting and the preparation beneficiary of a variable interest entity and enhanced disclosures of financial statements for external purposes in accordance with related to an enterprise’s involvement in a variable interest entity. Both generally accepted accounting principles. of these pronouncements are effective for the first annual reporting period that begins after November 15, 2009. We do not anticipate Due to its inherent limitations, internal control over financial that the adoption of these pronouncements will materially impact reporting may not prevent or detect misstatements. Also, projections the Company. of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in In June 2009, the FASB issued a pronouncement establishing the FASB conditions, or that the degree of compliance with the policies or ASC as the single official source of authoritative, nongovernmental procedures may deteriorate. GAAP. The ASC did not change GAAP but reorganizes the literature. This pronouncement is effective for interim and annual Under the supervision and with the participation of our management, periods ending after September 15, 2009. This pronouncement impacts including our CEO and CFO, we conducted an evaluation of the disclosures only and did not have any impact on our consolidated effectiveness of our internal control over financial reporting using financial condition, results of operations or cash flow. the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Quantitative and Qualitative Disclosures Framework. Based on its evaluation, our management concluded About Market Risk that our internal control over financial reporting was effective as of ––– December 31, 2009. To the extent that we incur debt with variable interest rates, our future income, cash flows and fair values relevant to financial instruments Ernst & Young LLP, an independent registered public accounting are dependent upon prevailing market interest rates. Market risk firm, has audited the Consolidated Financial Statements included refers to the risk of loss from adverse changes in market prices and in this annual report and, as part of its audit, has issued its report, interest rates. At December 31, 2009, none of our outstanding debt included herein on the effectiveness of our internal control over was subject to variable interest rates. financial reporting. (c) Changes in Internal Control over Financial Reporting There was no change in our internal control over financial reporting that occurred during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 32 Sunstone Hotel Investors


  • Page 37

    Report of Independent Registered Public Accounting Firm ––– The Board of Directors and Stockholders Sunstone Hotel Investors, Inc. We have audited Sunstone Hotel Investors, Inc.’s internal control Because of its inherent limitations, internal control over financial over financial reporting as of December 31, 2009, based on criteria reporting may not prevent or detect misstatements. Also, projections established in Internal Control—Integrated Framework issued of any evaluation of effectiveness to future periods are subject to by the Committee of Sponsoring Organizations of the Treadway the risk that controls may become inadequate because of changes Commission (the COSO criteria). Sunstone Hotel Investors, Inc.’s in conditions, or that the degree of compliance with the policies or management is responsible for maintaining effective internal control procedures may deteriorate. over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying In our opinion, Sunstone Hotel Investors, Inc. maintained, in all Management’s Report on Internal Control over Financial Reporting. material respects, effective internal control over financial reporting Our responsibility is to express an opinion on the Company’s internal as of December 31, 2009, based on the COSO criteria. control over financial reporting based on our audit. We also have audited, in accordance with the standards of the We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States), Public Company Accounting Oversight Board (United States). the consolidated balance sheets of Sunstone Hotel Investors, Inc. Those standards require that we plan and perform the audit to obtain as of December 31, 2009 and 2008, and the related consolidated reasonable assurance about whether effective internal control over statements of operations, stockholders’ equity, and cash flows for financial reporting was maintained in all material respects. Our audit each of the years ended December 31, 2009, 2008, and 2007 of included obtaining an understanding of internal control over financial Sunstone Hotel Investors, Inc. and our report dated February 23, reporting, assessing the risk that a material weakness exists, testing and 2010 expressed an unqualified opinion thereon. evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our /s/ Ernst & Young LLP audit provides a reasonable basis for our opinion. Irvine, California A company’s internal control over financial reporting is a process February 23, 2010 designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. the i in team 33


  • Page 38

    Consolidated Balance Sheets ––– December 31, 2009 December 31, 2008 (In thousands, except per share data) Assets Current assets: Cash and cash equivalents $ 358,610 $ 176,102 Restricted cash 39,147 36,485 Accounts receivable, net 22,624 31,335 Due from affiliates 62 109 Inventories 2,446 2,490 Prepaid expenses 7,423 7,113 Investment in hotel properties of discontinued operations, net — 225,165 Other current assets of discontinued operations, net — 7,524 Investment in hotel properties of operations held for non-sale disposition, net 118,814 — Other current assets of operations held for non-sale disposition, net 8,235 5,459 Total current assets 557,361 491,782 Investment in hotel properties, net 1,923,392 2,004,914 Investment in hotel properties of operations held for non-sale disposition, net — 222,732 Other real estate, net 14,044 14,640 Investments in unconsolidated joint ventures 542 28,770 Deferred financing costs, net 7,300 9,913 Goodwill 4,673 8,621 Other assets, net 6,218 17,991 Other assets of operations held for non-sale disposition, net — 6,248 Total assets $ 2,513,530 $ 2,805,611 Liabilities And Stockholders’ Equity Current liabilities: Accounts payable and accrued expenses $ 12,425 $ 15,519 Accrued payroll and employee benefits 9,092 8,096 Due to Interstate SHP 9,817 13,785 Dividends payable 5,137 12,499 Other current liabilities 21,910 27,498 Current portion of notes payable 153,778 11,840 Current portion of notes payable of operations held for non-sale disposition 209,620 550 Other current liabilities of discontinued operations, net 40,451 100,052 Other current liabilities of operations held for non-sale disposition 7,362 5,766 Total current liabilities 469,592 195,605 Notes payable, less current portion 1,050,019 1,377,943 Notes payable, less current portion of operations held for non-sale disposition — 211,167 Other liabilities 7,256 6,334 Other liabilities of operations held for non-sale disposition — 54 Total liabilities 1,526,867 1,791,103 Commitments and contingencies (Note 15) — — Preferred stock, Series C Cumulative Convertible Redeemable Preferred Stock, $0.01 par value, 4,102,564 shares authorized, issued and outstanding at December 31, 2009 and 2008, liquidation preference of $24.375 per share 99,896 99,696 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 December 31, 2009 and 2008, stated at liquidation preference of $25.00 per share 176,250 176,250 Common stock, $0.01 par value, 500,000,000 shares authorized, 96,904,075 shares issued and outstanding at December 31, 2009 and 47,864,654 shares issued and outstanding at December 31, 2008 969 479 Additional paid in capital 1,119,005 829,274 Retained earnings (deficit) (8,949) 260,659 Cumulative dividends (397,527) (347,922) Accumulated other comprehensive loss (2,981) (3,928) Total stockholders’ equity 886,767 914,812 Total liabilities and stockholders’ equity $ 2,513,530 $ 2,805,611 See accompanying notes to consolidated financial statements. 34 Sunstone Hotel Investors


  • Page 39

    Consolidated Statements of Operations ––– Year Ended Year Ended Year Ended December 31, 2009 December 31, 2008 December 31, 2007 (In thousands, except per share data) Revenues Room $ 408,150 $ 504,104 $ 492,240 Food and beverage 161,963 201,952 199,831 Other operating 53,744 59,140 53,686 Revenues of operations held for non-sale disposition 93,966 116,298 120,353 Total revenues 717,823 881,494 866,110 Operating Expenses Room 98,382 110,444 106,589 Food and beverage 118,629 145,576 144,518 Other operating 26,916 29,823 29,755 Advertising and promotion 35,693 39,219 37,932 Repairs and maintenance 27,360 29,579 27,769 Utilities 24,895 28,731 25,840 Franchise costs 20,656 24,658 23,770 Property tax, ground lease, and insurance 43,352 44,993 43,791 Property general and administrative 72,823 86,797 86,055 Corporate overhead 25,242 21,511 27,849 Depreciation and amortization 93,795 93,759 89,925 Operating expenses of operations held for non-sale disposition 87,007 96,548 96,433 Property and goodwill impairment losses 30,852 57 — Property and goodwill impairment losses of operations held for non-sale disposition 100,143 — — Total operating expenses 805,745 751,695 740,226 Operating income (loss) (87,922) 129,799 125,884 Equity in net losses of unconsolidated joint ventures (27,801) (1,445) (3,588) Interest and other income 1,388 3,639 8,880 Interest and other income of operations held for non-sale disposition 9 69 103 Interest expense (76,539) (83,176) (77,463) Interest expense of operations held for non-sale disposition (15,036) (13,016) (10,750) Gain (loss) on extinguishment of debt 54,506 — (417) Income (loss) from continuing operations (151,395) 35,870 42,649 Income (loss) from discontinued operations (118,213) 35,368 81,227 Net Income (Loss) (269,608) 71,238 123,876 Dividends paid on unvested restricted stock compensation (447) (814) (1,007) Preferred stock dividends and accretion (20,749) (20,884) (20,795) Undistributed income allocated to unvested restricted stock compensation — — (222) Undistributed income allocated to Series C preferred stock — — (1,397) Income Available (Loss Attributable) to Common Stockholders $ (290,804) $ 49,540 $ 100,455 Basic per share amounts: Income (loss) from continuing operations available (attributable) to common stockholders $ (2.47) $ 0.26 $ 0.33 Income (loss) from discontinued operations (1.70) 0.66 1.37 Basic income available (loss attributable) to common stockholders per common share $ (4.17) $ 0.92 $ 1.70 Diluted per share amounts: Income (loss) from continuing operations available (attributable) to common stockholders $ (2.47) $ 0.26 $ 0.33 Income (loss) from discontinued operations (1.70) 0.66 1.37 Diluted income available (loss attributable) to common stockholders per common share $ (4.17) $ 0.92 $ 1.70 Weighted average common shares outstanding: Basic 69,820 53,633 58,998 Diluted 69,820 53,662 59,139 Dividends declared per common share $ — $ 1.80 $ 1.31 See accompanying notes to consolidated financial statements. the i in team 35


  • Page 40

    Consolidated Statements of Stockholders’ Equity ––– Preferred Stock Common Stock Accumulated Additional Retained Other Number of Number of Paid in Earnings Cumulative Comprehensive Shares Amount Shares Amount Capital (Deficit) Dividends Loss Total (In thousands, except per share data) Balance at December 31, 2006 7,050,000 $ 176,250 57,775,089 $ 578 $ 958,591 $ 65,545 $ (163,181) $ (1,289) $ 1,036,494 Net proceeds from sale of common stock 4,000,000 40 110,388 110,428 Vesting of restricted common stock 169,992 1 5,167 5,168 Repurchase of outstanding common stock (3,129,810) (31) (86,392) 834 (85,589) Retrospective adjustment due to adoption of APB 14-1 21,799 21,799 Common dividends and dividends payable at $1.31 per share (78,723) (78,723) Series A preferred dividends and dividends payable at $2.00 per share (14,100) (14,100) Series C preferred dividends and dividends payable at $1.583 per share (6,495) (6,495) Accretion of discount on Series C preferred stock (200) (200) Net income 123,876 123,876 Pension liability adjustment 104 104 Comprehensive income 123,980 Balance at December 31, 2007 7,050,000 176,250 58,815,271 588 1,009,353 189,421 (261,665) (1,185) 1,112,762 Vesting of restricted common stock 157,869 2 4,477 4,479 Repurchase of outstanding common stock (11,108,486) (111) (184,356) (184,467) Common dividends and dividends payable at $1.20 per share (65,573) (65,573) Series A preferred dividends and dividends payable at $2.00 per share (14,100) (14,100) Series C preferred dividends and dividends payable at $1.605 per share (6,584) (6,584) Accretion of discount on Series C preferred stock (200) (200) Net income 71,238 71,238 Pension liability adjustment (2,743) (2,743) Comprehensive income 68,495 Balance at December 31, 2008 7,050,000 176,250 47,864,654 479 829,274 260,659 (347,922) (3,928) 914,812 Net proceeds from sale of common stock 43,700,000 437 256,638 257,075 Vesting of restricted common stock 290,264 3 4,287 4,290 Common dividends at $0.60 per share 5,049,157 50 29,006 (29,056) — Series A preferred dividends and dividends payable at $2.00 per share (14,100) (14,100) Series C preferred dividends and dividends payable at $1.572 per share (6,449) (6,449) Accretion of discount on Series C preferred stock (200) (200) Net loss (269,608) (269,608) Pension liability adjustment 947 947 Comprehensive loss (268,661) Balance at December 31, 2009 7,050,000 $ 176,250 96,904,075 $ 969 $ 1,119,005 $ (8,949) $ (397,527) $ (2,981) $ 886,767 See accompanying notes to consolidated financial statements 36 Sunstone Hotel Investors


  • Page 41

    Consolidated Statements of Cash Flows ––– Year Ended Year Ended Year Ended December 31, 2009 December 31, 2008 December 31, 2007 (In thousands) Cash Flows From Operating Activities Net income (loss) $ (269,608) $ 71,238 $ 123,876 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Bad debt expense 5,976 671 538 (Gain) loss on sales of hotel properties, other real estate and 50% interest in subsidiary, net 12,677 (26,013) (66,019) (Gain) loss on extinguishment of debt (54,506) — 417 Depreciation 110,642 117,137 117,544 Amortization of deferred franchise fees and other intangibles 418 2,277 5,701 Amortization of deferred financing costs 2,673 1,702 1,859 Amortization of loan discounts and premiums, net 1,813 3,505 1,543 Amortization of deferred stock compensation 4,055 3,975 5,168 Property and goodwill impairment losses 226,145 2,904 — Equity in net losses of unconsolidated joint ventures 27,801 1,445 3,588 Changes in operating assets and liabilities: Restricted cash (1,783) 2,130 11,234 Accounts receivable 9,903 604 3,707 Due from affiliates 47 823 451 Inventories 290 7 (104) Prepaid expenses and other assets 2,008 1,555 (6,748) Accounts payable and other liabilities (4,537) (12,249) 6,643 Accrued payroll and employee benefits 712 (9,281) 6,137 Due to Interstate SHP (3,942) (2,891) (1,556) Discontinued operations (727) 301 684 Operations held for non-sale disposition 38 162 199 Net cash provided by operating activities 70,095 160,002 214,862 Cash Flows From Investing Activities Proceeds from sale of hotel properties, other real estate and 50% interest in subsidiary 64,073 360,395 185,728 Restricted cash – replacement reserve (1,823) 5,136 5,993 Proceeds received from sale of note receivable — — 29,047 Cash received from unconsolidated joint ventures 500 5,675 426 Acquisitions of hotel properties and land — (30,695) (403,249) Renovations and additions to hotel properties and other real estate (44,105) (94,697) (135,231) Net cash provided by (used in) investing activities 18,645 245,814 (317,286) Cash Flows From Financing Activities Proceeds from common stock offering 269,100 — 110,895 Payment of common stock offering costs (12,025) — (467) Payments for repurchases of outstanding common stock — (184,467) (86,423) Proceeds from notes payable 60,000 181,000 609,000 Payments on notes payable (74,406) (190,386) (387,494) Payments for repurchases of notes payable and costs (117,450) — — Payments of deferred financing costs (3,540) (117) (7,506) Dividends paid (27,911) (99,753) (96,315) Net cash provided by (used in) financing activities 93,768 (293,723) 141,690 Net increase in cash and cash equivalents 182,508 112,093 39,266 Cash and cash equivalents, beginning of year 176,102 64,009 24,743 Cash and cash equivalents, end of year $ 358,610 $ 176,102 $ 64,009 Supplemental Disclosures of Cash Flow Information Cash paid for interest $ 91,407 $ 97,431 $ 94,648 Noncash Investing Activity Deconsolidation of assets $ 60,770 $ — $ — Deconsolidation of liabilities $ 101,221 $ — $ — Amortization of deferred stock compensation – construction activities $ 188 $ 457 $ — Amortization of deferred stock compensation – unconsolidated joint venture $ 47 $ 47 $ — Forgiveness of interest on note receivable $ (1,050) $ — $ — Receipt of note receivable $ — $ 2,000 $ — Sale of 50% interest in subsidiary Assets $ — $ — $ 1,235 Liabilities $ — $ — $ 908 Noncash Financing Activity Issuance of stock dividend $ 29,056 $ — $ — Dividends payable $ 5,137 $ 12,499 $ 25,995 See accompanying notes to consolidated financial statements. the i in team 37


  • Page 42

    Notes to Consolidated Financial Statements Certain amounts included in the consolidated financial statements ––– for prior years have been reclassified to conform to the most recent financial statement presentation, including changes resulting from 1. Organization and Description the adoptions of ASC 470-20 (defined below) and ASC 260-10 of Business (defined below) issued by the Financial Accounting Standards Board ––– (the “FASB”), as well as from the reclassification of the W San Diego Sunstone Hotel Investors, Inc. (the “Company”) was incorporated in and the Renaissance Westchester to discontinued operations and the Maryland on June 28, 2004 in anticipation of an initial public offering Marriott Ontario Airport and eight of the 11 hotels securing the non- of common stock, which was consummated on October 26, 2004. recourse loan with Massachusetts Mutual Life Insurance Company The Company, through its 100% controlling interest in Sunstone (the “Mass Mutual eight hotels”) to “operations held for non-sale Hotel Partnership, LLC (the “Operating Partnership”), of which disposition” discussed later in this Note 2. the Company is the sole managing member, and the subsidiaries of the Operating Partnership, including Sunstone Hotel TRS Lessee, The Company has evaluated subsequent events through the date of Inc. (the “TRS Lessee”) and its subsidiaries, is currently engaged in issuance of these financial statements, February 23, 2010. acquiring, owning, asset managing and renovating hotel properties. The Company may also sell certain hotel properties from time to time. Adjustment of Previously Issued Financial Statements The Company operates as a real estate investment trust (“REIT”) for In May 2008, the FASB issued Accounting Standards Codification federal income tax purposes. (“ASC”) 470-20, “Debt with Conversion and Other Options” (“ASC 470-20”). ASC 470-20 requires that the liability and equity As a REIT, certain tax laws limit the amount of “non-qualifying” components of convertible debt instruments that may be settled in income the Company can earn, including income derived directly cash upon conversion (including partial cash settlement) be separately from the operation of hotels. As a result, the Company leases all accounted for in a manner that reflects an issuer’s non-convertible of its hotels to its TRS Lessee, which in turn enters into long-term debt borrowing rate at the time of issuance. As a result, the liability management agreements with third parties to manage the operations component is recorded at a discount reflecting its below market of the Company’s hotels. As of December 31, 2009, the Company interest rate. The liability component is subsequently accreted to owned 38 hotels, excluding the W San Diego and the Renaissance its par value over its expected life based on a rate of interest that Westchester held in receivership and included in discontinued reflects the issuer’s non-convertible debt borrowing rate at the time operations. The Company is currently in the process of transferring of issuance, and is reflected in the results of operations as interest ownership and control of nine of the 38 hotels to court-appointed expense. ASC 470-20 is effective for financial statements issued receivers, leaving 29 hotels (the “29 hotels”) currently held for for fiscal years beginning after December 15, 2008, and interim investment. The Company has reclassified the assets, liabilities and periods within those fiscal years. Retrospective application to all operating results of these nine hotels to “operations held for non- periods presented is required and early adoption was prohibited. sale disposition” on its balance sheets, statements of operations and The Operating Partnership’s 4.60% exchangeable senior notes due cash flows. The Company’s third-party managers included Sunstone 2027 (the “Senior Notes”) are within the scope of ASC 470-20. This Hotel Properties, Inc., a division of Interstate Hotels & Resorts, change in methodology affects the Company’s calculations of net Inc. (“Interstate SHP”), manager of 23 of the Company’s hotels; income and earnings per share as the interest rate increases to 6.5% subsidiaries of Marriott International, Inc. or Marriott Hotel Services, based on the Company’s non-convertible debt borrowing rate at the Inc. (collectively, “Marriott”), managers of 12 of the Company’s time of issuance. This change in methodology does not increase the hotels; and Fairmont Hotels & Resorts (U.S.) (“Fairmont”), Hilton Company’s cash interest payments. Upon the Company’s adoption Worldwide (“Hilton”) and Hyatt Corporation (“Hyatt”), each of this pronouncement on January 1, 2009, the Company decreased managers of one of the Company’s hotels. In addition to its wholly notes payable and increased equity by $16.5 million. The $16.5 owned hotels, the Company has a 38% equity interest in a joint million was comprised of the original debt discount adjustment venture that owns one hotel. of $21.8 million less discount accretion of $5.3 million from June 2007 through December 2008. Interest expense for the years ended December 31, 2009, 2008 and 2007 includes $1.8 million, $3.5 2. Summary of Significant million and $1.8 million, respectively, in accretion of the Senior Notes. Accounting Policies ––– On January 1, 2009, the Company adopted FASB ASC 260-10, “Determining Whether Instruments Granted in Share-Based Payment Basis of Presentation Transactions Are Participating Securities” (“ASC 260-10”). ASC 260- The accompanying consolidated financial statements as of December 31, 10 addresses whether instruments granted in share-based payment 2009 and 2008, and for the years ended December 31, 2009, 2008 and awards are participating securities prior to vesting, and therefore, 2007, include the accounts of the Company, the Operating Partnership, need to be included in the earnings allocation when computing the TRS Lessee and their subsidiaries. All significant intercompany earnings per share under the two-class method as described in the balances and transactions have been eliminated. 38 Sunstone Hotel Investors


  • Page 43

    Earnings Per Share Topic of the FASB ASC. In accordance with Use of Estimates ASC 260-10, unvested share-based payment awards that contain The preparation of consolidated financial statements in conformity non-forfeitable rights to dividends or dividend equivalents (whether with accounting principles generally accepted in the United States paid or unpaid) are participating securities and shall be included in the (“GAAP”) requires management to make estimates and assumptions computation of earnings per share pursuant to the two-class method. that affect the reported amounts of assets and liabilities and disclosure Upon adoption, all prior-period earnings per share data presented of contingent assets and liabilities at the date of the financial were adjusted retrospectively. The adoption of this pronouncement statements and the reported amounts of revenues and expenses during impacted the Company’s calculations of earnings (loss) per share for the reporting period. Actual results could differ materially from those the years ended December 31, 2009, 2008 and 2007 as distributed estimates. and undistributed earnings representing non-forfeitable dividends of $0.4 million, $0.8 million and $1.2 million, respectively were Reporting Periods allocated to the participating securities. The results the Company reports in its consolidated statements of operations are based on results reported to the Company by its hotel As a result of the adoptions of the pronouncements noted above on managers. These hotel managers use different reporting periods. January 1, 2009 and the reclassifications of the W San Diego and the Marriott uses a fiscal year ending on the Friday closest to December 31, Renaissance Westchester to discontinued operations and the Marriott and reports twelve weeks of operations each for the first three quarters Ontario Airport and the Mass Mutual eight hotels to “operations held of the year, and sixteen or seventeen weeks of operations for the for non-sale disposition,” the Company has restated its December 31, fourth quarter of the year. The Company’s other hotel managers 2008 consolidated balance sheet for the year ended December 31, report operations on a standard monthly calendar. The Company 2008, as well as its consolidated statements of stockholders’ equity has elected to adopt quarterly close periods of March 31, June 30 and and statements of operations for the years ended December 31, 2008 September 30, and an annual year end of December 31. As a result, and 2007, as follows (in thousands, except per share data): the Company’s 2009 results of operations for the Marriott-managed hotels include results from January 3 through March 27 for the first Adjustments As previously quarter, March 28 through June 19 for the second quarter, June 20 reported ASC 470-20 ASC 260-10 As adjusted through September 11 for the third quarter, and September 12 As of December 31, 2007: through January 1 for the fourth quarter. The Company’s 2008 Additional paid in capital $ 987,554 $ 21,799 $ — $ 1,009,353 results of operations for the Marriott-managed hotels include results Retained earnings $ 191,208 $ (1,787) $ — $ 189,421 from December 29 through March 21 for the first quarter, March 22 For the year ended December 31, 2007: through June 13 for the second quarter, June 14 through September 5 Interest expense(1) $ 75,676 $ 1,787 $ — $ 77,463 for the third quarter, and September 6 through January 2 for the Net income $ 125,663 $ (1,787) $ — $ 123,876 fourth quarter. The Company’s 2007 results of operations for the Net income per share – basic $ 1.75 $ (0.03) $ (0.02) $ 1.70 Marriott-managed hotels include results from December 30 through Net income per share – March 23 for the first quarter, March 24 through June 15 for the diluted $ 1.75 $ (0.03) $ (0.02) $ 1.70 second quarter, June 16 through September 7 for the third quarter, As of December 31, 2008: and September 8 through December 28 for the fourth quarter. Notes payable, less current portion(1) $ 1,394,450 $ (16,507) $ — $ 1,377,943 Additional paid in capital $ 807,475 $ 21,799 $ — $ 829,274 Due to the one less day included in Marriott’s 2009 results of Retained earnings $ 265,951 $ (5,292) $ — $ 260,659 operations, the Company estimates it recorded $0.2 million less in For the year ended revenue and approximately $41,000 less in net income based on the December 31, 2008: Interest expense(1) $ 79,671 $ 3,505 $ — $ 83,176 average daily revenues and income generated by its Marriott managed Net income $ 74,743 $ (3,505) $ — $ 71,238 hotels during 2009. Due to the five extra days included in Marriott’s Net income per share – basic $ 1.00 $ (0.06) $ (0.02) $ 0.92 2008 results of operations, the Company estimates it recorded an Net income per share – additional $3.1 million in revenue and approximately $0.8 million in diluted $ 1.00 $ (0.06) $ (0.02) $ 0.92 additional net income based on the average daily revenues and income (1) The amounts shown in the “As previously reported” column have been adjusted to reflect the reclassification of the generated by its Marriott managed hotels during 2008. W San Diego and the Renaissance Westchester to discontinued operations, and the Marriott Ontario Airport and the Mass Mutual eight hotels to “operations held for non-sale disposition.” Adjustments for the W San Diego were as follows (in thousands): notes payable, less current portion $(65,000); interest expense for the year ended December 31, 2008 $(4,070); and interest expense for the year ended December 31, 2007 $(4,057). Adjustments for Cash and Cash Equivalents the Renaissance Westchester were as follows (in thousands): notes payable, less current portion $(29,146); interest Cash and cash equivalents are defined as cash on hand and in various expense for the year ended December 31, 2008 $(1,532); and interest expense for the year ended December 31, 2007 $(1,531). Adjustments for the Marriott Ontario Airport were as follows (in thousands): notes payable, less current bank accounts plus all short-term investments with an original portion $(25,406); interest expense for the year ended December 31, 2008 $(1,437); and interest expense for the year ended December 31, 2007 $(1,457). Adjustments for the Mass Mutual eight hotels were as follows (in thousands): maturity of three months or less. notes payable, less current portion $(185,761); interest expense for the year ended December 31, 2008 $(11,579); and interest expense for the year ended December 31, 2007 $(9,293). The Company maintains cash and cash equivalents and certain other financial instruments with various financial institutions. These financial institutions are located throughout the country and the the i in team 39


  • Page 44

    Company’s policy is designed to limit exposure to any one institution. During the second quarter of 2009, the Company recorded an The Company performs periodic evaluations of the relative credit impairment loss of $1.6 million related to one of the easement standing of those financial institutions that are considered in the agreements. This impairment loss was included in the $25.4 million Company’s investment strategy. At December 31, 2009 and 2008, impairment loss recorded to property and goodwill impairment losses the Company had amounts in banks that were in excess of federally in order to reduce the carrying value of the Marriott Del Mar to its fair insured amounts. value. Accumulated amortization amounted to $1.1 million and $0.9 million at December 31, 2009 and 2008, respectively. Amortization Restricted Cash expense for these two intangible assets amounted to $0.3 million for Restricted cash is comprised of reserve accounts for debt service, both of the years ended December 31, 2009 and 2008, respectively, interest reserves, capital replacements, ground leases, and property and will be $0.3 million every year thereafter until the agreements taxes. These restricted funds are subject to supervision and expire. The second easement agreement, recorded at fair value of $9.7 disbursement approval by certain of the Company’s lenders. million, has an indefinite useful life, and, therefore, is not amortized. This non-amortizable intangible asset is reviewed annually for Accounts Receivable impairment and more frequently if events or circumstances indicate Accounts receivable primarily represents receivables from hotel that the asset may be impaired. If a non-amortizable intangible asset guests who occupy hotel rooms and utilize hotel services. Accounts is subsequently determined to have a finite useful life, the intangible receivable also includes, among other things, receivables from asset will be written down to the lower of its fair value or carrying customers who utilize the Company’s laundry facilities in Salt Lake amount and then amortized prospectively, based on the remaining City, Utah, and Rochester, Minnesota, as well as tenants who lease useful life of the intangible asset. space in the Company’s hotels. The Company maintains an allowance for doubtful accounts sufficient to cover potential credit losses. The Initial franchise fees are recorded at cost and amortized using the Company’s accounts receivable at December 31, 2009 and 2008 straight-line method over the lives of the franchise agreements ranging includes an allowance for doubtful accounts of $0.1 million, and $0.3 from six to 20 years. All other franchise fees that are based on the million, respectively, all of which is included in continuing operations. Company’s results of operations are expensed as incurred. At December 31, 2009 and 2008, the Company had approximately $2.6 million and $4.9 million, respectively, in accounts receivable The Company follows the requirements of the Property, Plant and with one customer who is operating under a contract with the United Equipment Topic of the FASB ASC, which requires impairment States government. No amounts have been reserved for this receivable losses to be recorded on long-lived assets to be held and used by the as of either December 31, 2009 or 2008 as all amounts have been Company when indicators of impairment are present and the future deemed to be collectible. undiscounted net cash flows expected to be generated by those assets are less than the assets’ carrying amount. If such assets are considered Inventories to be impaired, the related assets are adjusted to their estimated fair Inventories, consisting primarily of food and beverages at the hotels, value and an impairment is recognized. The impairment recognized are stated at the lower of cost or market, with cost determined on is measured by the amount by which the carrying amount of the assets a method that approximates first-in, first-out basis. In addition, exceeds the estimated fair value of the assets. In computing fair value, inventories include linens leased to customers of our commercial the Company uses a discounted cash flow analysis to estimate the fair laundry facilities, which are carried at their historical cost basis, less value of its properties, taking into account each property’s expected accumulated amortization. cash flow from operations, holding period and proceeds from the disposition of the property. The factors addressed in determining Investments In Hotel Properties, Other Real Estate estimated proceeds from disposition include anticipated operating and Franchise Fees cash flow in the year of disposition and terminal capitalization Hotel properties and other real estate assets are recorded at cost, less rate. When an impairment loss is required for assets held for sale, accumulated depreciation. Hotel properties and other completed real the related assets are adjusted to their estimated fair values, less estate investments are depreciated using the straight-line method over costs to sell. Operating results of any long-lived assets with their estimated useful lives ranging from five to 35 years for buildings and own identifiable cash flows that are disposed of or held for sale are improvements and three to 12 years for furniture, fixtures and equipment. removed from income from continuing operations and reported as discontinued operations. Depreciation ceases when a property is held Intangible assets consist of two easement agreements and one ground for sale. The operating results for any such assets for any prior periods lease with use rights agreement, and are recorded at fair value. One presented must also be reclassified as discontinued operations. of the easement agreements and the ground lease with use rights agreement are amortized using the straight-line method over the In conjunction with its 2009 review, the Company recorded hotel remaining non-cancelable term of the related agreement, 82 to 89 property impairment losses totaling $217.7 million, including $25.4 years. The cost basis of these two intangible assets totaled $24.4 million million to property and goodwill impairment losses, $97.1 million and $26.0 million at December 31, 2009 and 2008, respectively. to property and goodwill impairment losses of operations held for 40 Sunstone Hotel Investors


  • Page 45

    non-sale disposition, and $95.2 million to discontinued operations Total amortization of deferred financing costs was $2.4 million, $1.7 to reduce the carrying values of 11 hotels on its balance sheet to their million and $1.5 million for the years ended December 31, 2009, fair values. The 11 hotels and their respective impairment losses for 2008 and 2007, respectively. Amortization of deferred financing the year ended December 31, 2009 were: Marriott Del Mar $25.4 costs included in interest expense was $1.8 million, $1.1 million million; Marriott Ontario Airport $8.9 million; Marriott Provo and $0.9 million for the years ended December 31, 2009, 2008 and $11.2 million; Holiday Inn Downtown San Diego $7.2 million; 2007, respectively. Interest expense of operations held for non-sale Holiday Inn Express San Diego (Old Town) $1.4 million; Marriott disposition included amortization of deferred financing costs of Salt Lake City (University Park) $6.8 million; Hilton Huntington $0.5 million for the years ended December 31, 2009 and 2008, and $41.1 million; Renaissance Atlanta Concourse $20.5 million; Hyatt $0.4 million for the year ended December 31, 2007. Discontinued Suites Atlanta Northwest $4.9 million; W San Diego $60.0 million; operations included amortization of deferred financing costs of and Renaissance Westchester $30.3 million. In addition, in March $25,000, $27,000 and $0.1 million for the years ended December 31, 2009 the Company recorded an impairment loss of $1.4 million to 2009, 2008 and 2007, respectively. property and goodwill impairment losses related to the write-off of deferred costs associated with a potential time share development, Goodwill and an impairment loss of $0.1 million to property and goodwill The Company follows the requirements of the Intangibles – Goodwill impairment losses related to a parcel of land adjacent to one of its and Other Topic of the FASB ASC, which states that goodwill and hotels, which was sold in June 2009. In 2008, the Company recorded intangible assets deemed to have indefinite lives are subject to annual an impairment loss to property and goodwill impairment losses of impairment tests. As a result, the carrying value of goodwill allocated $0.1 million on a vacant parcel of land, which was sold in January to the hotel properties is reviewed at least annually for impairment. In 2009. Based on the Company’s review, management believes that addition, when facts and circumstances suggest that the Company’s there were no other impairments on its long-lived assets held for use or goodwill may be impaired, an interim evaluation of goodwill is held for non-sale disposition, and that the carrying values of its hotel prepared. Such review entails comparing the carrying value of the properties and other real estate are recoverable at December 31, 2009. individual hotel property (the reporting unit) including the allocated goodwill to the fair value determined for that hotel property. If the Fair value represents the amount at which an asset could be bought aggregate carrying value of the hotel property exceeds the fair value, or sold in a current transaction between willing parties, that is, other the goodwill of the hotel property is impaired to the extent of the than a forced or liquidation sale. The estimation process involved in difference between the fair value and the aggregate carrying value, determining if assets have been impaired and in the determination not to exceed the carrying amount of the allocated goodwill. The of fair value is inherently uncertain because it requires estimates Company’s annual impairment evaluation is performed each year as of current market yields as well as future events and conditions. of December 31. Such future events and conditions include economic and market conditions, as well as the availability of suitable financing. The During the first, second and third quarters of 2009, in light of the realization of the Company’s investment in hotel properties and other continuing decline in the economic environment, the Company real estate is dependent upon future uncertain events and conditions determined that an intra-year impairment analysis should be and, accordingly, the actual timing and amounts realized by the performed as of March 31, 2009, June 30, 2009 and September 30, Company may be materially different from their estimated fair values. 2009. In conjunction with its first quarter impairment evaluation, the Company determined that the goodwill associated with four of Deferred Financing Costs its hotels was impaired as of March 31, 2009, and, accordingly, the Deferred financing costs consist of loan fees and other financing costs Company recorded an impairment loss of $3.6 million to property and related to the Company’s outstanding indebtedness and are amortized goodwill impairment losses. In conjunction with its second quarter to interest expense over the terms of the related debt. impairment evaluation, the Company determined that the goodwill associated with one of the hotels impaired during the first quarter During 2009 and 2008, approximately $3.5 million and $0.1 million, plus two additional hotels was impaired as of June 30, 2009, and, respectively, were incurred and paid, related to new debt and debt accordingly, the Company recorded an impairment loss of $1.1 million refinancings. Such costs are being amortized over the related terms of to property and goodwill impairment losses. In conjunction with the loans. Upon repayment or modification of the underlying debt, its third quarter impairment evaluation, the Company determined any related unamortized deferred financing cost is charged to interest that the goodwill associated with one of the hotels impaired during expense. Unamortized deferred financing costs written off and charged the second quarter was further impaired as of September 30, 2009, to interest expense due to the repayment or modification of the and, accordingly, the Company recorded an impairment loss of $2.2 underlying debt totaled $0.3 million for the year ended December 31, million to property and goodwill impairment losses. The goodwill 2009, and zero for both of the years ended December 31, 2008 and impairments recorded in conjunction with the Company’s 2009 2007. In addition, interest expense of discontinued operations for the impairment evaluations noted above totaled $6.9 million, of which year ended December 31, 2007 includes the write off of unamortized $3.9 million was recorded to property and goodwill impairment deferred financing costs of $0.4 million. losses and $3.0 million to property and goodwill impairment losses the i in team 41


  • Page 46

    of operations held for non-sale disposition. As part of its 2008 annual The Company follows the requirement of the Fair Value Measurements impairment evaluation, the Company determined that the goodwill and Disclosures Topic of the FASB ASC, which establishes a associated with its Marriott Napa Valley hotel should be written off, framework for measuring fair value and disclosing fair value and, accordingly, the Company recorded an impairment loss of $2.8 measurements by establishing a fair value hierarchy that prioritizes million in December 2008 to property and goodwill impairment the inputs to valuation techniques used to measure fair value. The losses. In conjunction with the sale of seven hotel properties during hierarchy gives the highest priority to unadjusted quoted prices in the second and fourth quarters of 2007, the Company wrote off active markets for identical assets or liabilities (Level 1 measurements) the goodwill associated with these properties totaling $6.0 million and lowest priority to unobservable inputs (Level 3 measurements). against gain on sale of hotels in 2007. The 2008 and 2007 amounts The three levels of the fair value hierarchy are described below: are included in income from discontinued operations. Basis of Fair Value Measurement As of December 31, 2009 and 2008, goodwill consisted of the following (in thousands): Level 1 Observable inputs that reflect quoted prices (unadjusted) 2009 2008 for identical assets or liabilities in active markets. Balance at beginning of year $ 8,621 $ 16,251 Level 2 Inputs reflect quoted prices for identical assets or liabilities in Goodwill impairment loss – operations held for investment (3,948) — markets that are not active; quoted prices for similar assets or Goodwill impairment loss – discontinued operations — (2,847) liabilities in active markets; inputs other than quoted prices Reclass to other current assets of operations that are observable for the asset or the liability; or inputs that held for non-sale disposition, net — (4,783) are derived principally from or corroborated by observable Balance at end of year $ 4,673 $ 8,621 market data by correlation or other means. Level 3 Unobservable inputs reflecting the Company’s own Property and Equipment assumptions incorporated in valuation techniques used to Property and equipment is stated on the cost basis and includes determine fair value. These assumptions are required to be computer equipment and other corporate office equipment and consistent with market participant assumptions that are furniture. Property and equipment is depreciated on a straight-line reasonably available. basis over the estimated useful lives ranging from three to 12 years. The cost basis of property and equipment amounted to $8.2 million The Company currently pays the premiums for a $5,000,000 split life and $7.6 million at December 31, 2009 and 2008, respectively. insurance policy for its former Chief Executive Officer and current Accumulated depreciation amounted to $7.1 million and $6.5 Executive Chairman, Robert A. Alter. Under the terms of the policy, million at December 31, 2009 and 2008, respectively. Property and the Company is entitled to receive the greater of the cash surrender equipment net of related accumulated depreciation is included in value of the policy or the premiums paid by the Company following other assets, net. the termination of Mr. Alter’s employment with the Company. Within 60 days following the date of the termination of the split Investments in Unconsolidated Joint Ventures dollar policy during Mr. Alter’s lifetime, Mr. Alter may obtain a release In December 2007, the Company entered into a joint venture of such obligation by paying the Company the greater of the total agreement with Strategic Hotels & Resorts, Inc. (“Strategic”) to amount of the premiums paid by the Company or the then-current own and operate BuyEfficient, LLC (“BuyEfficient”), an electronic cash surrender value. The Company has valued this policy using Level purchasing platform that allows members to procure food, operating 2 measurements at $1.8 million and $1.7 million as of December 31, supplies, furniture, fixtures and equipment. Under the terms of the 2009 and 2008, respectively. These amounts are included in other agreement, Strategic acquired a 50% interest in BuyEfficient from assets, net in the accompanying balance sheets. the Company. In December 2006 the Company entered into a joint venture agreement to obtain a 38% interest in the 460-room The Company also has a Retirement Benefit Agreement with Mr. Alter. Doubletree Guest Suites Times Square in New York City, New York. Pursuant to the Retirement Benefit Agreement, Mr. Alter may defer a The Company accounts for both of these ownership interests using portion of his compensation. Mr. Alter may amend the amount of his the equity method. The Company’s accounting policies are consistent compensation to be deferred from time to time; provided, however, with those of the unconsolidated joint ventures. that any such amendment must be in compliance with Section 409A of the Internal Revenue Code. The Company will match 50% of Fair Value of Financial Instruments Mr. Alter’s deferrals for each year, up to a maximum of $1,500 for that As of December 31, 2009 and 2008, the carrying amount of certain year. Earnings on Mr. Alter’s deferrals and the Company’s matching financial instruments, including cash and cash equivalents, restricted contributions are an amount equal to the amount which would have cash, accounts receivable, accounts payable, and accrued expenses been earned on such deferrals and matching contributions had they were representative of their fair values due to the short-term maturity been paid as premiums on the life insurance policy noted above in of these instruments. accordance with the investment designations made by Mr. Alter. The balance in Mr. Alter’s deferred compensation account is payable over 42 Sunstone Hotel Investors


  • Page 47

    a period of time following the termination of his employment with The following table presents the impairment charges recorded as a the Company, regardless of the reason for such termination. The result of applying Level 3 measurements included in earnings for Company has valued this agreement using Level 2 measurements at the years ended December 31, 2009, 2008 and 2007 (in thousands): $1.8 million and $1.7 million as of December 31, 2009 and 2008, 2009 2008 2007 respectively. These amounts are included in accrued payroll and Investment in hotel properties, net $ 25,488 $ — $ — employee benefits in the accompanying balance sheets. Investment in hotel properties of discontinued operations, net 95,150 2,847 — Investment in hotel properties The Company has analyzed the carrying values of its hotel properties of operations held for non-sale using Level 3 measurements, including a discounted cash flow analysis disposition, net 97,136 — — Goodwill 3,948 — — to estimate the fair value of its hotel properties taking into account Other real estate, net — 57 — each property’s expected cash flow from operations, holding period Other assets, net 1,416 — — Investment in unconsolidated and estimated proceeds from the disposition of the property. The joint ventures 26,007 — — factors addressed in determining estimated proceeds from disposition Other current assets of operations held for non-sale disposition, net(1) 3,007 — — included anticipated operating cash flow in the year of disposition Total Level 3 measurement impairment and terminal capitalization rate. The Company used terminal losses included in earnings $ 252,152 $ 2,904 $ — capitalization rates ranging between 8.1% and 9.6% in its analyses, (1) Includes goodwill impairment losses recorded on operations held for non-sale disposition. based on the Company’s weighted average cost of capital, a hurdle rate assigned to each hotel to account for a hotel’s individual characteristics The following tables present our assets and liabilities measured at fair including, but not limited to, size, age and market supply, and an value on a recurring and non-recurring basis at December 31, 2009 estimated average annual growth rate. and 2008 (in thousands): Total Fair Value Measurements at Reporting Date The Company also has analyzed the carrying value of its goodwill December 31, 2009 Level 1 Level 2 Level 3 using Level 3 measurements, including a discounted cash flow analysis Assets: to estimate the fair value of its reporting units. The Company used Investment in hotel properties of operations discount rates ranging between 13.0% and 13.8%, taking into account held for non-sale each related reporting unit’s expected cash flow from operations, disposition, net(1) $ 69,272 $ — $ — $ 69,272 Life insurance policy 1,814 — 1,814 — holding period and proceeds from the potential disposition of the Goodwill 4,673 — — 4,673 property. The factors addressed in determining estimated proceeds Goodwill of operations from disposition include anticipated operating cash flow in the year of held for non-sale disposition(2) 1,174 — — 1,174 potential disposition and terminal capitalization rate. The Company Total assets $ 76,933 $ — $ 1,814 $ 75,119 used terminal capitalization rates ranging between 8.1% and 9.6% in Liabilities: its 2009 analyses, based on the Company’s weighted average cost of Retirement benefit capital, a hurdle rate assigned to each hotel to account for a hotel’s agreement $ 1,814 $ — $ 1,814 $ — individual characteristics including, but not limited to, size, age Total liabilities $ 1,814 $ — $ 1,814 $ — and market supply, and an estimated average annual growth rate. (1) Includes the six hotel properties that were impaired and recorded at fair value as of December 31, 2009. (2) Goodwill of operations held for non-sale disposition is included in other current assets of operations held for non-sale The Company’s judgment is required in determining the discount disposition, net. rate applied to estimated cash flows, the terminal capitalization rate, Total Fair Value Measurements at Reporting Date December 31, the growth rate of each property’s projected revenues and expenses, 2008 Level 1 Level 2 Level 3 the need for capital expenditures, as well as specific market and Assets: Life insurance policy $ 1,660 $ — $ 1,660 $ — economic conditions. Other real estate, net 265 — 265 — Goodwill 8,621 — — 8,621 As of December 31, 2009 and 2008, all of the Company’s outstanding Total assets $ 10,546 $ — $ 1,925 $ 8,621 debt had fixed interest rates. The Company’s carrying value of its debt, Liabilities: Retirement benefit including the Marriott Ontario Airport and the Mass Mutual eight agreement $ 1,660 $ — $ 1,660 $ — hotels, totaled $1.4 billion and $1.6 billion as of December 31, 2009 Total liabilities $ 1,660 $ — $ 1,660 $ — and 2008, respectively. Using Level 3 measurements, including the Company’s weighted average cost of capital ranging between 8.1% Revenue Recognition and 9.6%, the Company estimates that the fair market value of its Room revenue and food and beverage revenue are recognized as debt as of December 31, 2009 and 2008 totaled $1.2 billion and $1.4 earned, which is generally defined as the date upon which a guest billion, respectively. occupies a room and/or utilizes the hotel’s services. Additionally, some of the Company’s hotel rooms are booked through independent internet travel intermediaries. Revenue for these rooms is booked at the price the Company sold the room to the independent internet travel intermediary less any discount or commission paid. the i in team 43


  • Page 48

    Other operating revenues consist of revenues derived from incidental REIT. Therefore, the Company is permitted to deduct distributions hotel services such as concessions, movie rentals, retail sales, fitness paid to our stockholders, eliminating the federal taxation of income services, internet access, telephone, and sublease revenues relating to represented by such distributions at the company level. REITs are the restaurants and retail shops. In addition, the Company entered subject to a number of organizational and operational requirements. into a 40-year term agreement (which includes a 10-year initial term, If the Company fails to qualify as a REIT in any taxable year, the plus two extension terms totaling 30 years) with Fairmont whereby Company will be subject to federal income tax (including any Fairmont will provide the Company with a limited performance applicable alternative minimum tax) on taxable income at regular guaranty that will ensure, subject to certain limitations, a return on corporate tax rates. equity to the Company. Under the terms of this agreement, should the net cash flow generated by the hotel be insufficient to cover a 9.0% With respect to taxable subsidiaries, the Company accounts for return on the Company’s equity investment in the hotel in 2008 and income taxes in accordance with the Income Taxes Topic of the FASB a 10.0% return on the Company’s equity investment in subsequent ASC. Accordingly, deferred tax liabilities and assets are determined years, Fairmont is required to pay the Company the difference, up to based on the difference between the financial statement and tax bases $6.0 million over the term of the agreement. The Company recognizes of assets and liabilities, using enacted tax rates in effect for the year in into revenue annually, the amount due from Fairmont under this which the differences are expected to reverse. agreement. During 2009 and 2008, the Company recognized $2.5 million and $3.5 million, respectively, of the $6.0 million performance Dividends guaranty. As of December 31, 2009, the Company has fully utilized The Company pays quarterly dividends to its Series A Cumulative the $6.0 million performance guaranty. Also, as an adjunct to the Redeemable and Series C Cumulative Convertible Redeemable Company’s hotels located in Rochester, Minnesota and Salt Lake City, preferred stockholders as declared by the Board of Directors. The Utah, the Company operates commercial laundries at those locations Company may also pay dividends on its common stock to the extent providing laundry services to the Company’s hotels and other third declared by the Board of Directors. The Company’s ability to pay parties in the respective locations. Revenues from incidental hotel dividends is dependent on the receipt of distributions from the services, management agreements, and laundry services are recognized Operating Partnership. in the period the related services are provided or the revenue is earned. In addition, prior to December 7, 2007, the Company wholly Earnings Per Share owned BuyEfficient. Revenues generated by BuyEfficient prior to The Company applies the two-class method when computing its December 7, 2007 were included in the Company’s other operating earnings per share as required by the Earnings Per Share Topic of revenue, and consisted primarily of transaction and development fees, the FASB ASC, which requires the net income per share for each as BuyEfficient charges the third party for the installation associated class of stock (common stock and convertible preferred stock) to be with configuring the third party’s information technology system with calculated assuming 100% of the Company’s net income is distributed the purchasing platform and access rights to the purchasing platform. as dividends to each class of stock based on their contractual rights. To Fees for the installation are typically based on time and materials and the extent the Company has undistributed earnings in any calendar are recognized as the services are performed. Fees associated with quarter, the Company will follow the two-class method of computing access rights are based on a percentage of the price of goods purchased earnings per share. by the third party from the vendor and are recognized when earned. On December 7, 2007 the Company entered into a joint venture On January 1, 2009, the Company adopted ASC 260-10. ASC 260- agreement with Strategic whereby Strategic acquired a 50% interest 10 addresses whether instruments granted in share-based payment in BuyEfficient from the Company. In accordance with the equity awards are participating securities prior to vesting, and therefore, method of accounting, the Company’s share of BuyEfficient’s earnings need to be included in the earnings allocation when computing is now shown in equity in net losses of unconsolidated joint ventures. earnings per share under the two-class method. In accordance with ASC 260-10, unvested share-based payment awards that contain Advertising and Promotion Costs non-forfeitable rights to dividends or dividend equivalents (whether Advertising and promotion costs are expensed when incurred. paid or unpaid) are participating securities and shall be included Advertising and promotion costs represent the expense for advertising in the computation of earnings per share pursuant to the two-class and reservation systems under the terms of the hotel franchise and method. Upon adoption, all prior-period earnings per share data brand management agreements and general and administrative presented were adjusted retrospectively with no material impact. For expenses that are directly attributable to advertising and promotions. the years ended December 31, 2009, 2008 and 2007, distributed and undistributed earnings representing non-forfeitable dividends of $0.4 Income Taxes million, $0.8 million and $1.2 million, respectively, were allocated to For the years ended December 31, 2009, 2008 and 2007, the the participating securities. Company elected to be treated as a REIT pursuant to the Internal Revenue Code, as amended (the “Code”). Management believes that the Company has qualified and intends to continue to qualify as a 44 Sunstone Hotel Investors


  • Page 49

    In accordance with the Earnings Per Share Topic of the FASB ASC, Segment Reporting basic earnings available (loss attributable) to common stockholders The Company reports its consolidated financial statements in per common share is computed based on the weighted average accordance with the Segment Reporting Topic of the FASB ASC. number of shares of common stock outstanding during each period. Currently, the Company operates in two segments, operations held Diluted earnings available (loss attributable) to common stockholders for investment and operations held for non-sale disposition. per common share is computed based on the weighted average number of shares of common stock outstanding during each period, Recent Accounting Pronouncements plus potential common shares considered outstanding during the In December 2007, the FASB issued a pronouncement which period, as long as the inclusion of such awards is not anti-dilutive. establishes new accounting and reporting standards for the non- Potential common shares consist of unvested restricted stock awards controlling interest in a subsidiary and for the deconsolidation of a (using the treasury stock method), the incremental common shares subsidiary. This pronouncement is effective for fiscal years beginning issuable upon the exercise of stock options (using the treasury stock on or after December 15, 2008. The adoption of this pronouncement method) and the conversion of the Company’s Series C Cumulative did not have any impact on the Company’s consolidated financial Convertible Redeemable Preferred Stock (“Series C preferred stock”). condition, results of operations or cash flow. The following table sets forth the computation of basic and diluted In March 2008, the FASB issued a pronouncement intended to earnings (loss) per common share (in thousands, except per share data): improve financial reporting about derivative instruments and hedging Year Ended Year Ended Year Ended activities by requiring enhanced disclosures to enable investors to December 31, 2009 December 31, 2008 December 31, 2007 better understand their effects on an entity’s financial condition, financial performance, and cash flows. This pronouncement is effective Numerator: Net income (loss) $ (269,608) $ 71,238 $ 123,876 for financial statements issued for fiscal years and interim periods Less dividends paid on unvested beginning after November 15, 2008. This pronouncement impacts restricted stock compensation (447) (814) (1,007) disclosures only and did not have any impact on the Company’s Less preferred stock dividends and accretion (20,749) (20,884) (20,795) consolidated financial condition, results of operations or cash flow. Less undistributed income allocated to unvested restricted In April 2009, the FASB issued a pronouncement which amends stock compensation — — (222) Less undistributed income allocated GAAP. This pronouncement addresses the initial recognition, to Series C preferred stock — — (1,397) measurement and subsequent accounting for assets and liabilities Numerator for basic and diluted arising from contingencies in a business combination, and requires earnings available (loss attributable) that such assets acquired or liabilities assumed be initially recognized to common stockholders $ (290,804) $ 49,540 $ 100,455 at fair value at the acquisition date if fair value can be determined Denominator: Weighted average basic common during the measurement period. If the acquisition-date fair value shares outstanding 69,820 53,633 58,998 cannot be determined, the asset acquired or liability assumed arising Unvested restricted stock awards — 29 141 from a contingency is recognized only if certain criteria are met. This Weighted average diluted common pronouncement also requires that a systematic and rational basis for shares outstanding 69,820 53,662 59,139 subsequently measuring and accounting for the assets or liabilities Basic earnings available (loss attributable) to common be developed depending on their nature. This pronouncement is stockholders per common share $ (4.17) $ 0.92 $ 1.70 effective for assets or liabilities arising from contingencies in business Diluted earnings available (loss combinations for which the acquisition date is during or after 2010. attributable) to common This pronouncement will have an impact on accounting for business stockholders per common share $ (4.17) $ 0.92 $ 1.70 combinations once adopted but the effect is dependent upon acquisitions at that time. The Company’s unvested restricted stock units and shares associated with its long-term incentive plan have been excluded from the In April 2009, the FASB issued two pronouncements to provide above calculation of earnings (loss) per share for the year ended additional guidance about (1) measuring the fair value of financial December 31, 2009, as their inclusion would have been anti-dilutive. instruments when the markets become inactive and quoted prices may The Company’s common stock options have been excluded from reflect distressed transactions, and (2) recording impairment charges the above calculation of earnings (loss) per share for the years ended on investments in debt instruments. The FASB issued two additional December 31, 2009 and 2008 as their inclusion would have been anti- pronouncements in April 2009 to require disclosures of fair value of dilutive. The Company’s shares of Series C preferred stock have been certain financial instruments in interim financial statements. These excluded from the above calculation of earnings (loss) per share for four pronouncements are effective for financial statements issued for the years ended December 31, 2009, 2008 and 2007 as their inclusion interim and annual reporting periods ending after June 15, 2009. The would have been anti-dilutive. adoption of these four pronouncements did not materially impact the Company. the i in team 45


  • Page 50

    In May 2009, the FASB issued a pronouncement which establishes During the first quarter of 2009, the Company sold certain excess general standards of accounting for and disclosure of events that occur furniture, fixtures and equipment (“FF&E”) for net proceeds of $0.3 after the balance sheet date but before financial statements are issued million and a net gain of $0.3 million. During the second quarter of or are available to be issued. Entities are also required to disclose the 2009, the Company sold additional excess FF&E for net proceeds date through which subsequent events have been evaluated and the of $0.1 million and a net gain of $0.1 million. The gains on these basis for that date. This pronouncement is effective for interim or sales are included in interest and other income on the consolidated annual financial periods ending after June 15, 2009. The adoption statements of operations. of this pronouncement did not materially impact the Company. The Company has evaluated subsequent events through the date of issuance In March 2009, the Company recorded an impairment loss of $0.1 of its December 31, 2009 financial statements, February 23, 2010. million to property and goodwill impairment losses on a parcel of land adjacent to one of its hotels which was sold in June 2009. The In June 2009, the FASB issued a pronouncement which amends Company received net proceeds of $0.1 million, and recorded a net GAAP to require more information about transfers of financial loss of $0.1 million on this sale, which is included in interest and other assets, eliminates the qualifying special purpose entity (QSPE) income on the consolidated statements of operations. concept, changes the requirements for derecognizing financial assets and requires additional disclosures. The FASB issued a second In June 2009, the Company performed a review of each property pronouncement in June 2009, which amends GAAP regarding certain for possible impairment in accordance with the Property, Plant guidance for determining whether an entity is a variable interest and Equipment Topic of the FASB ASC. In conjunction with entity and modifies the methods allowed for determining the primary this review, the Company recorded an impairment loss totaling beneficiary of a variable interest entity. This second pronouncement $34.3 million, including $25.4 million to property and goodwill requires ongoing reassessments of whether an enterprise is the primary impairment losses (Marriott Del Mar) and $8.9 million to property beneficiary of a variable interest entity and enhanced disclosures and goodwill impairment losses of operations held for non-sale related to an enterprise’s involvement in a variable interest entity. Both disposition (Marriott Ontario Airport). In December 2009, the of these pronouncements are effective for the first annual reporting Company performed an additional review of each property for period that begins after November 15, 2009. The Company does not possible impairment in accordance with the Property, Plant and anticipate that the adoption of these pronouncements will materially Equipment Topic of the FASB ASC. In conjunction with this review, impact the Company’s consolidated financial condition, results of the Company recorded an impairment loss totaling $88.2 million operations or cash flows. to property and goodwill impairment losses of operations held for non-sale disposition for the following hotels: Marriott Provo $11.2 In June 2009, the FASB issued a pronouncement establishing million; Holiday Inn Downtown San Diego $7.2 million; Holiday the FASB ASC as the single official source of authoritative, Inn Express San Diego (Old Town) $1.4 million; Marriott Salt Lake nongovernmental GAAP. The ASC did not change GAAP but City (University Park ) $6.8 million; Hilton Huntington $41.1 reorganized the literature. This pronouncement is effective for million, and Renaissance Atlanta Concourse $20.5 million. interim and annual periods ending after September 15, 2009. This pronouncement impacts disclosures only and did not have any In September 2009, the Company elected to cease the subsidization impact on the Company’s consolidated financial condition, results of debt service on the $25.5 million 5.34% non-recourse mortgage of operations or cash flow. secured by the 299-room Marriott Ontario Airport, and commenced restructuring negotiations with the loan’s special servicer. In November 2009, the Company determined in good faith that further 3. Investment in Hotel Properties negotiations would not be productive. The Company is currently ––– working with the special servicer to transfer possession and control of the hotel to a court-appointed receiver, and to ultimately convey Investment in hotel properties, net consisted of the following the hotel to the lender in lieu of repayment of the debt. Pending the (in thousands): December 31, appointment of a receiver, the Company has reclassified the assets, 2009 2008 liabilities and results of operations of the Marriott Ontario Airport Land $ 233,812 $ 236,088 to “operations held for non-sale disposition” on its balance sheets, Buildings and improvements 1,848,435 1,843,809 statements of operations and statements of cash flows. The $8.9 Furniture, fixtures and equipment 243,415 228,901 Intangibles 34,081 35,736 million impairment loss on the Marriott Ontario Airport recorded Franchise fees 1,133 1,133 in June 2009 has been reclassified from property and goodwill Construction in process 6,182 10,541 impairment losses to property and goodwill impairment losses of 2,367,058 2,356,208 operations held for non-sale disposition in the Company’s statement Accumulated depreciation and amortization (443,666) (351,294) of operations for the year ended December 31, 2009. $ 1,923,392 $ 2,004,914 46 Sunstone Hotel Investors

  • View More

Get the full picture and Receive alerts on lawsuits, news articles, publications and more!