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

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    TWO-THOUSAND AND TWELVE ANNUAL REPORT — NN pan, a EE INNS LA A OS HOTEL INVESTORS


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    In 2012, we assembled a strategic concentration of hotels within Chicago’s Magnificent Mile district by acquiring the Hyatt Chicago Magnificent Mile and the Hilton Garden Inn Chicago Magnificent Mile. 1 2 3 Embassy Suites Chicago Hyatt Chicago Magnificent Mile—Acquired June 4, 2012 Hilton Garden Inn Chicago Magnificent Mile—Acquired July 19, 2012 2 1 3


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    1 EMBASSY SUITES Chicago Located blocks from the Navy Pier and the Magnificent Mile shops along Michigan Avenue, the 368-room Embassy Suites Chicago is steps away from many of downtown Chicago’s tourist attractions, theaters, parks, museums and restaurants.


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    1 EMBASSY SUITES Chicago Following a comprehensive $12 million renovation, the Embassy Suites Chicago has all new suites, lobby and public areas. The all-suite hotel offers food & beverage options ranging from Italian specialties at Osteria Via Stato to custom burgers at MBurger to coffee & drinks at Starbucks.


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    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 5


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    OMA INS AGEL SN \ EN Y EEENne ADIDAS Zi MOSSA DETTATA


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    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 7 DISCIPLINED EXTERNAL GROWTH During 2012 we took several steps to improve the quality and scale of our portfolio. 2 HYATT Chicago Magnificent Mile We acquired the 417-room Hyatt Chicago Magnificent Mile on June 4, 2012, and we are currently underway with a comprehensive $25 million renovation which will transform the entire hotel into a showcase of modern design with inviting public spaces, contemporary rooms and exceptional food & beverage.


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    BEFORE 2 HYATT Chicago Magnificent Mile Upon completion in late spring 2013, we will have transformed the Hyatt Chicago Magnificent Mile within the first nine months of our ownership.


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    …AFTER


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    Our portfolio is comprised of 26 institutional-quality, primarily upper-upscale hotels with 11,632 rooms with concentrations in the top lodging markets across the country. CALIFORNIA ILLINOIS NEW YORK Courtyard by Marriott Los Angeles Embassy Suites Chicago Doubletree Guest Suites Times Square Embassy Suites La Jolla Hilton Garden Inn Chicago Hilton Times Square Fairmont Newport Beach Magnificent Mile Renaissance Westchester Hilton San Diego Bayfront Hyatt Chicago Magnificent Mile Hyatt Regency Newport Beach PENNSYLVANIA Renaissance Long Beach TEXAS Marriott Philadelphia Renaissance Los Angeles Airport Hilton Houston–North Sheraton Cerritos Marriott Houston MD/DC/VA OREGON Renaissance Baltimore–Harborplace LOUISIANA Renaissance Washington DC Marriott Portland JW Marriott New Orleans Marriott Tysons Corner UTAH MASSACHUSETTS FLORIDA Marriott Park City Marriott Boston Long Wharf Renaissance Orlando at SeaWorld® Marriott Quincy 2012 EBITDA by Region* 9% 34% 43% 14% 3 HILTON GARDEN INN Chicago Magnificent Mile We acquired the 357-room Hilton Garden Inn Chicago Magnificent Mile on July 19, 2012. Located across the street from our Embassy Suites Chicago, the 23-story hotel offers exceptional skyline views of downtown Chicago, as it neighbors Magnificent Mile and many of downtown Chicago’s attractions. *Percentages reflect 100% ownership of the Hilton San Diego Bayfront.


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    PROACTIVE PORTFOLIO MANAGEMENT Renovation Plan for the JW Marriott New Orleans


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    SUNSTONE HOTEL INVESTORS, INC. 2 021021 2A A N NNNUUA AL L RREEPPOORRTT // PPAA G G EE 11 9 9 FROM here... Prior to embarking on our $5 million renovation of the JW Marriott New Orleans, the public spaces were dated and compartmentalized. 3 Hyatt Chicago Magnificent Mile This copy is not intended to be read. It is merely a of what the text of this piece may look like set in this type size and style. The criteria for quality typography have not changed with the application of computers and state of the art technology.


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    …TO here With our renovation complete, the JW Marriott New Orleans provides guests with a welcoming environment to relax after spending time amidst the activity along Canal Street.


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    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 21


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    To Our SUNSTONE Shareholders, We defined a new completed a $23 million full guestroom and Third, with respect to disciplined external Sunstone back in 2011. bathroom renovation of our 807-room growth, during 2012 we took several steps to Renaissance Washington DC. Although the improve the quality and scale of our portfolio. renovation resulted in short-term displacement First, we acquired the 417-room Hyatt Looking back to 2011, we retooled our team, while the work was underway, the renovation Chicago Magnificent Mile for a contractual enhanced our corporate governance, estab- is already driving material outperformance at purchase price of $88.4 million. We are in lished a new long-term vision, redefined our this hotel in 2013. We expect to see similarly the process of investing approximately $25 core values and developed a new, cycle- strong year-over-year performance among all million on a complete repositioning of this appropriate strategy aimed at creating signif- the other hotels we renovated in 2012. well-located hotel aimed at elevating the icant shareholder value while improving the physical appearance and amenities of the quality and scale of our portfolio and gradually In addition to our capital investment program, hotel to a sophisticated destination catering deleveraging our balance sheet. Our strategy during 2012 we also divested of four legacy to high-rated business transient and group would be predicated on the following: hotels that no longer fit our investment param- travelers. Additionally, we acquired the 357- t Proactive portfolio management; room Hilton Garden Inn Chicago Downtown/ eters, based on the hotels’ market locations, t Intensive asset management; relatively small scale and low average RevPAR. Magnificent Mile for a gross purchase price t Disciplined external growth; and 2012 dispositions included the 284-room of $91.8 million. t Measured balance sheet improvement. Marriott Del Mar, the 229-room Doubletree Guest Suites Minneapolis, the 257-room Finally, with respect to measured balance Hilton Del Mar and the 350-room Marriott sheet improvement, we reduced our indebt- Troy for a gross sale price of $173.2 million, edness by over $180 million and reduced The new Sunstone delivered strong including the elimination of approximately our net debt 11 points from 53.6% to 42.8%. returns in its first year—2012. $122.7 million in mortgage debt. Additionally, we completed a favorable amendment and extension of our $150 mil- By remaining focused on our long-term vision, Second, with respect to intensive asset man- lion credit facility. embracing our core values and adhering to agement, our team continued to execute on a our balanced strategy, we delivered total wide array of initiatives designed to improve As a result of the concerted execution of shareholder returns of greater than 31% in the competitiveness and long-term value of our strategy by each of our core disciplines, 2012, more than double the average returns our individual hotels. During the year we ini- strengthen ing industry-wide demand trends generated by other comparable upper-upscale tiated a comprehensive, portfolio-wide energy and below-average supply growth, we achieved lodging REIT peers. At the same time, we management program to materially improve strong outputs, including: materially improved our portfolio quality and the efficiency of our portfolio. Additionally, t comparable RevPAR improved by 5.6% deleveraged our balance sheet through a series we continued to streamline our food and bev- to $139.22, of value-creating transactions. In short, dur- erage operations by redefining restaurant ing 2012 we advanced a number of our key concepts and consolidating outlets into seam- t comparable hotel EBITDA margins improved corporate objectives through solid execution by 110 basis points to 28.9%, less lobby, bar, restaurant venues. We also on each of Sunstone’s disciplines. made solid inroads in terms of refining our t adjusted Corporate EBITDA improved housekeeping and laundry functions. All of by 14.1% to $242.5 million, First, with respect to proactive portfolio these initiatives have helped to make our t adjusted FFO/diluted share improved by management, during 2012 we made in excess hotels more efficient, which we expect will approximately 16.1% to $1.01, and of $109 million of value-adding investments lead to significant margin improvement for t consolidated debt to total book capitalization throughout our portfolio. For example, we years to come. improved by over 13 points from 53.6% to 42.8%.


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    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 23 In short, 2012 marked the first of what The lodging industry is cyclical. We are now reputation of outperformance. Accordingly, we expect to be many years of solid execution entering the fourth year of what we believe we as a team remain focused on the daily of our strategy and strong returns for our will be a prolonged, albeit moderate growth execution of our long-term strategy in order shareholders, and through March 1, 2013, recovery phase for the lodging industry. to create lasting value and to earn your we’ve continued on this path. To date in Value in our business is primarily created ongoing support and commitment. 2013, we’ve eliminated $27 million of debt during the peaks and troughs of the lodging through the sale of four non-core hotels and a cycle. Our mid-term objective is to approach Our team, vision and strategic plan are commercial laundry facility at an attractive the next cyclical peak with signif icant fully in place, and in connection with the valuation, and we’ve continued to reduce our liquidity and a materially improved balance continued development of our senior lead- financial leverage through the repay ment of sheet, so that we may enter the next cyclical ership team, we announced a number of the remaining $58 million of exchangeable trough in a position of strength with the highly deserved promotions earlier in Senior Notes and the full redemp tion of capacity to capitalize on opportunities. 2013 which largely cements the leadership our 8% Series A preferred security totaling Accordingly, we will continue to adjust the structure of the new Sunstone. Continued $176 million. prominence of each of our strategic pillars strength in business trends throughout our based on our assessment of where we are in the portfolio, especially among the hotels we lodging cycle. For example, we will be more recently renovated, is driving meaningful focused on acquisitions during the first half of We will build value in growth in hotel revenues and profitability. the lodging cycle and more focused on har- 2013 and beyond. Looking ahead, fundamentals for Sunstone’s vesting gains through the sale of non-strategic portfolio are compelling: we now hold assets during the late phase of the cycle. focused investments in key growth markets, We believe that equal measures of vision, and we continue to improve our portfolio’s strategic focus, discipline and drive are the keys We are building a corporate-wide discipline competitiveness through high-quality reno- to sustained business success. based on rigorous quantitative analysis, vations. With the U.S. demand-to-supply cross-departmental communication and ratio well above historical norms and our We as a team are aligned around our vision to accountability. We have an abiding com- portfolio running at nearly 80% occupancy, become the premier hotel investor. While that mitment to learn from the mistakes that we our pricing power continues to improve. may seem like a lofty goal, we believe that and others in our industry have made in the Accordingly, we expect our portfolio’s prof- without high aspirations, nothing of signifi- past. We will continue to monitor external itability to accelerate over the next several cance can be accomplished. I am confident factors and make course corrections based years. We could not be more enthusiastic that we have the team, the tools and the plan on changes in market dynamics in order to about Sunstone’s future. to accomplish our vision. This won’t happen maximize value through all phases of the overnight—we will achieve our vision by lodging cycle. Our goal is to make decisions Thank you again for your commitment adhering to our plan and by taking one smart, and structure transactions based on what we to Sunstone. shareholder-friendly step at a time. fear could happen, rather than what we hope will happen. Sincerely, Our strategic focus remains on creating sig- nificant shareholder value while improving While we are proud of the progress we made the quality and scale of our portfolio and during 2012, we understand that positive gradually deleveraging our balance sheet track records are not built over the course through proactive portfolio management, of just one year. We are driven to unlock intensive asset management, disciplined Sunstone’s considerable potential by adher- Ken Cruse external growth and measured balance sheet ing to our stated strategy and building a Chief Executive Officer improvement.


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    $ FINANCIAL Review Selected Financial Data 25 Management’s Discussion and Analysis of Financial Condition and Results of Operations 26 Reports of Independent Registered Public Accounting Firm 52 Consolidated Balance Sheets 54 Consolidated Statements of Operations and Comprehensive Income 55 Consolidated Statements of Equity 56 Consolidated Statements of Cash Flows 57 Notes to Consolidated Financial Statements 59 Stock Information 85 Corporate Information 86


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    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 25 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, 2012 2011 2010 2009 2008 ($ in thousands) OPER ATING DATA: REVENUES: Room $ 576,146 $ 501,183 $ 351,039 $ 336,981 $ 417,785 Food and beverage 200,810 175,103 138,188 134,319 167,549 Other operating 52,128 45,508 26,373 30,241 34,825 Total revenues 829,084 721,794 515,600 501,541 620,159 OPER ATING EXPENSES: Room 147,932 128,225 92,101 85,879 98,606 Food and beverage 139,106 126,139 98,889 96,755 119,310 Other operating 16,162 14,004 11,535 11,786 14,217 Advertising and promotion 42,474 37,226 27,326 26,404 27,550 Repairs and maintenance 32,042 29,067 22,608 22,437 24,353 Utilities 25,596 25,537 19,117 18,879 21,890 Franchise costs 30,067 25,595 18,032 17,435 20,520 Property tax, ground lease and insurance 66,830 58,010 35,280 37,058 38,976 Property general and administrative 94,642 85,293 61,753 58,675 70,439 Corporate overhead 24,316 25,453 21,751 25,072 21,346 Depreciation and amortization 130,907 113,708 79,633 78,790 78,503 Impairment loss — 10,862 — 2,823 57 Total operating expenses 750,074 679,119 488,025 481,993 535,767 Operating income 79,010 42,675 27,575 19,548 84,392 Equity in net earnings (losses) of unconsolidated joint ventures — 21 555 (27,801) (1,445) Interest and other income 297 3,115 112 1,378 3,590 Interest expense (76,821) (74,195) (58,931) (62,137) (69,203) Gain (loss) on extinguishment of debt (191) — — 54,506 — Gain on remeasurement of equity interests — 69,230 — — — Income (loss) before income taxes and discontinued operations 2,295 40,846 (30,689) (14,506) 17,334 Income tax provision (1,148) — — — — Income (loss) from continuing operations 1,147 40,846 (30,689) (14,506) 17,334 Income (loss) from discontinued operations 48,410 40,453 69,231 (255,102) 53,904 Net income (loss) 49,557 81,299 38,542 (269,608) 71,238 Income from consolidated joint venture attributable to non-controlling interest (1,761) (312) — — — Distributions to non-controlling interest (31) (30) — — — Dividends paid on unvested restricted stock compensation — — — (447) (814) Preferred stock dividends and accretion (29,748) (27,321) (20,652) (20,749) (20,884) Undistributed income allocated to unvested restricted stock compensation (203) (636) (102) — — Income available (loss attributable) to common stockholders $ 17,814 $ 53,000 $ 17,788 $ (290,804) $ 49,540 Income (loss) from continuing operations available (attributable) to common stockholders per diluted common share $ (0.24) $ 0.11 $ (0.52) $ (0.51) $ (0.08) Cash dividends declared per common share (1) $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 1.20 BALANCE SHEET DATA: Investment in hotel properties, net(2) $2,681,877 $2,532,232 $1,666,180 $1,670,164 $1,716,814 Total assets $3,136,675 $3,101,240 $2,436,106 $2,513,530 $2,805,611 Total debt(2) $1,363,389 $1,416,890 $ 973,810 $ 968,816 $1,150,837 Total liabilities $1,517,362 $1,675,946 $1,236,807 $1,526,867 $1,791,103 Equity $1,519,313 $1,325,294 $1,099,299 $ 886,767 $ 914,812 (1) Does not include non-cash common stock dividend of $0.60 per share declared in 2008. (2) Does not include hotels or debt which have been reclassified to discontinued operations, or which have been classified as held for sale.


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    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 26 MANAGEMENT’S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. OVERVIEW Sunstone Hotel Investors, Inc. is a Maryland corporation. We operate as a self-managed and self-administered real estate investment trust, or REIT. A REIT is a legal entity that directly or indirectly owns real estate assets. REITs generally are not subject to federal income taxes at the corporate level as long as they pay stockholder dividends equivalent to 100% of their taxable income. REITs are required to distribute to stockholders at least 90% of their taxable income. We own, directly or indirectly, 100% of the interests of Sunstone Hotel Partnership, LLC (the “Operating Partnership”), which is the entity that directly or indirectly owns our hotel properties. We also own 100% of the interests of our taxable REIT subsidiary, Sunstone Hotel TRS Lessee, Inc., which leases all of our hotels from the Operating Partnership, and engages independent third-parties to manage our hotels. In addition, we own 100% of BuyEfficient, LLC (“BuyEfficient”), an electronic purchasing platform that allows members to procure food, operating supplies, furniture, fixtures and equipment. As of December 31, 2012, we also owned 100% of a commercial laundry facility located in Rochester, Minnesota, which we have classified as held for sale as of December 31, 2012 and included in discontinued operations due to its sale in January 2013. We own primarily upper upscale hotels in the United States. As of December 31, 2012, we had interests in 30 hotels, including four hotels which we have classified as held for sale and included in discontinued operations due to their sale in January 2013, leaving 26 hotels currently held for investment (the “26 hotels”). Of the 26 hotels, we classify 24 as upscale or upper upscale and two as luxury as defined by Smith Travel Research, Inc. All of our 26 hotels are operated under nationally recognized brands such as Marriott, Hilton, Hyatt, Fairmont and Sheraton, which are among the most respected and widely recognized brands in the lodging industry. We believe the largest and most stable segment of travelers prefer the consistent service and quality associated with nationally recognized brands. We seek to own hotels in urban locations that benefit from significant barriers to entry by competitors. All of our 26 hotels are considered business, convention, or airport hotels, as opposed to resort or leisure hotels. The hotels comprising our 26 hotel portfolio average 447 rooms in size. Our mission is to create meaningful value for our stockholders by becoming the premier hotel owner. Our values include transparency, trust, ethical conduct, communication and discipline. Our goal is to improve the quality and scale of our portfolio while deleveraging our balance sheet. As demand for lodging generally fluctuates with the overall economy (we refer to these changes in demand as the lodging cycle), we seek to employ a balanced, cycle-appropriate corporate strategy that encompasses proactive portfolio management, intensive asset management, disciplined external growth and measured balance sheet improvement as detailed below: t 1SPBDUJWF 1PSUGPMJP .BOBHFNFOU The leaders of each of our core disciplines function as a portfolio management team. The portfolio management team’s purpose is to strategically maximize the long-term value of our assets by enhancing our portfolio quality and scale, optimizing our exposure to key markets, and improving the effectiveness and efficiency of our decision making. Accordingly, the team is responsible for developing a portfolio-wide strategy related to brand and operator relationships, asset quality and scale, target markets, capital investments, and portfolio capitalizations. Our portfolio strategy may also include the disposition of certain hotels. t *OUFOTJWF"TTFU.BOBHFNFOU Through all phases of the lodging cycle, our strategy emphasizes internal growth and value enhancements through proactive asset management, which entails working closely with our third-party hotel operators to develop and implement long-term strategic plans for each hotel designed to enhance revenues, minimize operational expenses and asset risk, maximize the appeal of our hotels to travelers and maximize our return on invested capital. We also focus on improving the appeal and growth potential of our existing hotels through internally-managed hotel renovations. t %JTDJQMJOFE &YUFSOBM (SPXUI By gradually increasing the scale and quality of our portfolio, we may provide our stockholders with greater exposure to key growth markets, improved liquidity and broader access to value-adding transactions. Accordingly, our strategy emphasizes disciplined external growth during the recovery phase of the lodging cycle. Our external growth plan is oriented around investing in institutional-quality hotels that generate returns in excess of our cost of capital, that are additive to the quality of our portfolio, that have attractive growth potential and that may benefit from our asset management competencies. We endeavor to structure our acquisitions in ways that will not only increase the value of our shares of common stock, but also will advance our other corporate objectives, such as improving our financial flexibility and reducing our leverage. During periods of cyclical decline, our strategy may emphasize opportunistically investing in distressed assets and the repurchase of our equity or debt securities. In addition to hotel acquisitions, we may seek to grow our portfolio by making investments in defaulted and/or distressed debt positions in loan-to-own hotel transactions, utilizing our REIT structure to effect strategic combinations with select property owners, effecting portfolio purchases from institutional and other owners seeking portfolio liquidity, and by providing capital solutions to illiquid owners facing debt maturities or capital requirements.


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    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 27 t .FBTVSFE #BMBODF 4IFFU *NQSPWFNFOU We believe that a low overall cost of capital and significant financial f lexibility are very important to the successful execution of our strategy. Our balance sheet strategy is oriented toward maximizing financial flexibility especially during cyclical declines. Accordingly, our financial objectives include the measured improvement of our credit ratios, maintenance of appropriate levels of liquidity, and a gradual reduction in our financial leverage throughout the cyclical recovery phase. Our financial objectives are integral to our overall corporate strategy and, accordingly, we have developed our financial objectives in conjunction with our portfolio management and growth objectives. The lodging industry is economically sensitive. Therefore, our financial objectives are aimed at reducing the potentially negative impact of combining high operating leverage with high financial leverage, while preserving access to multiple capital sources and minimizing our weighted-average cost of capital. We seek to capitalize our acquisitions in a way that will advance our financial objectives. For example, as the measured reduction of our financial leverage is currently a key objective, we expect to fund our acquisitions with a greater proportion of equity capital than debt capital. During the mature phase of the lodging cycle, our financial objectives may include increasing our liquidity position as a means to enhance financial flexibility in the event of a subsequent period of cyclical decline. Our liquidity improvement objective may be accomplished through selective hotel dispositions, capital raises or by retaining excess cash generated by our operations. During the past three years and continuing into 2013, demand for lodging in the U.S. has increased, which has resulted in improved hotel revenues and profits. In light of increasing demand for lodging and generally muted supply of new hotel development, we believe we are cur- rently in the first half of a recovery phase of the lodging cycle. Hotels acquired during the early stages of past cyclical recoveries have benefited from multi-year increases in profitability, which in many cases created long-term value in excess of investment hurdles. Accordingly, during 2011 and 2012 we made selective acquisitions including: the purchase of the outside 62.0% equity interests in our Doubletree Guest Suites Times Square joint venture in January 2011; the purchase of the outside 50.0% equity interest in our BuyEfficient joint venture in January 2011; the purchase of the JW Marriott New Orleans in February 2011; the purchase of a 75.0% majority interest in a joint venture that owns the Hilton San Diego Bayfront in April 2011; the purchase of the Wyndham Chicago in June 2012 (which we immediately rebranded the Hyatt Chicago Magnificent Mile); and the purchase of the Hilton Garden Inn Downtown/Magnificent Mile in July 2012. Our acquisition program is aimed at generating attractive risk-adjusted returns on our investment dollars, and therefore we may target lodging assets outside of the typical branded, urban, upper upscale profile represented by our existing portfolio in order to capitalize on opportunities which may arise. We intend to select the brands and operators for our hotels that we believe will lead to the highest returns. On June 4, 2012, we purchased the leasehold interest in the 417-room Wyndham Chicago located in Chicago, Illinois for a contractual pur- chase price of $88.425 million. The acquisition was funded with $29.7 million of cash on hand (including $0.3 million of proration credits) and the issuance of 5,454,164 shares of our common stock, the “Wyndham stock consideration.” The Wyndham stock consideration was determined by dividing $58.425 million by the product of (1) the closing price of $10.40 on the NYSE of our common stock on May 2, 2012 and (2) 1.03. In connection with this acquisition, we entered into a registration rights agreement requiring us to register the Wyndham stock consideration. We prepared the registration statement on Form S-3, which we filed with the SEC as required on June 4, 2012. Based on the $9.38 closing price of the Company’s common stock on the NYSE on June 4, 2012, the date the acquisition closed, the total purchase price of the Wyndham Chicago hotel for accounting purposes was $81.16 million, excluding proration adjustments and closing costs. Upon closing, we terminated the existing management agreement and entered into a new management agree- ment with Davidson Hotels & Resorts. We rebranded the hotel the Hyatt Chicago Magnificent Mile and have commenced planning for a $25.0 million renovation program. As an incentive to rebrand the hotel, Hyatt Franchising, L.L.C. will reimburse us for $6.5 million of our renovation costs once the renovation is complete. We expect to receive the $6.5 million during the third quarter of 2013, and will amortize the $6.5 million once received on a straight line basis over the remaining term of our franchise agreement with Hyatt, which term ends in 2039. On July 19, 2012, we purchased the 357-room Hilton Garden Inn Chicago Downtown/Magnificent Mile located in Chicago, Illinois for a net purchase price of $90.3 million. The acquisition was funded with a portion of the $126.2 million net proceeds we received from the issuance of 12,143,273 shares of our common stock on June 25, 2012. The scope of our acquisitions program may include large hotel portfolios or hotel loans. Future acquisitions may be funded by our issuance of additional debt or equity securities, including our common and preferred OP units, or by draws on our $150.0 million senior corporate credit facility entered into in November 2010 and amended in September 2012. However, in light of our current financial objectives, we expect to fund the majority of our near term acquisitions with a greater proportion of equity capital than debt capital. We have from time to time divested of assets that no longer fit our target profile, will not offer long-term returns in excess of our cost of capital, or that have a high risk profile relative to their anticipated return expectations. In connection with this strategy, during 2011 and 2012 we sold the following: the Royal Palm Miami Beach in April 2011; the Valley River Inn located in Eugene, Oregon in October 2011; the Marriott Del Mar in August 2012; and the Doubletree Guest Suites Minneapolis, the Hilton Del Mar, the Marriott Troy and an office building adjacent to the Marriott Troy in September 2012. In August 2012, we completed the sale of the Marriott Del Mar for a gross sales price of $66.0 million, and recognized a gain on the sale of $25.5 million. The buyer of the hotel assumed the $47.1 million mortgage secured by the hotel, resulting in our receipt of net proceeds totaling $17.7 million after proration adjustments and closing costs. In addition, we wrote off $48,000 in deferred financing fees in conjunction with the buyer’s assumption of the debt secured by the Marriott Del Mar.


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    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 28 In September 2012, we completed the portfolio sale of the Doubletree Guest Suites Minneapolis, the Hilton Del Mar, the Marriott Troy and an office building adjacent to the Marriott Troy for a gross sales price of $105.0 million, and recognized a $12.7 million gain on the sale. The buyer of the portfolio assumed three separate mortgages secured by the hotels totaling $75.6 million, including: $16.9 million on the Doubletree Guest Suites Minneapolis; $24.4 million on the Hilton Del Mar; and $34.3 million on the Marriott Troy. In addition, the buyer of the portfolio assumed a $2.2 million liability for deferred management fees payable to the Marriott Troy’s independent third-party manager. We received net proceeds on the portfolio sale of $28.6 million after proration adjustments, closing costs and the debt and deferred management fee assumptions. In addition, we wrote off $0.1 million in deferred financing fees in conjunction with the buyer’s assumption of the debt secured by the three hotels. The mortgages secured by the Marriott Del Mar, Hilton Del Mar and Marriott Troy contain “cash trap” provisions that were triggered in prior years due to the decline in the performance of these hotels. Once triggered, substantially all of the excess cash flow from operations generated by the three hotels was deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of the lenders. As of December 31, 2012, a total of $8.2 million of our cash was held by the lenders of these three hotels. The cash will be returned to us once the lenders release the cash to the buyers according to the terms of the respective loan agreements, which is expected to occur within the near term. In January 2013, we sold the Kahler Grand, the Kahler Inn & Suites, the Marriott Rochester, and the Residence Inn by Marriott Rochester in a portfolio sale that also included our commercial laundry facility in Rochester, Minnesota for a gross sales price of $230.0 million. We retained a $25.0 million preferred equity investment in the four-hotel portfolio that yields an 11% dividend. In addition, we retained a $14.0 million liability related to the portfolio’s pension plan, which could be triggered in certain circumstances, including termination of the pension plan. We also provided a $3.7 million working cash advance to the buyer that will be repaid to us from the portfolio’s available cash flow. In conjunction with the sale, we defeased the outstanding $26.7 million mortgage secured by the Kahler Grand for a total cost of approximately $30.0 million, prepaid the $0.4 million loan secured by the commercial laundry facility, and wrote off $51,000 in deferred financing fees. We have classified the four hotels and commercial laundry facility as held for sale as of December 31, 2012, and reclassified the results of operations for these assets to discontinued operations for all periods presented. In February 2012, we repurchased $4.5 million in aggregate principal amount of our Senior Notes for $4.57 million, including $13,000 in interest, using our existing cash. After the repurchase, such Senior Notes were cancelled. We wrote off $47,000 in deferred financing fees and $0.1 million of the Senior Notes discount, and recognized a loss of $0.2 million on this early extinguishment of debt. We repurchased the remaining $58.0 million balance of the Senior Notes at the first put date in January 2013 for $58.0 million plus approximately $23,000 in accrued interest using our existing cash. After the repurchase, such Senior Notes were cancelled, leaving no amounts outstanding for the Senior Notes. In April 2012, we used our existing cash to repay the remaining balance on the $32.2 million non-recourse mortgage secured by the Renaissance Long Beach, which was originally scheduled to mature in July 2012. In September 2012, we amended and restated our $150.0 million senior unsecured revolving credit facility, which was scheduled to mature in November 2013. The pricing on the amended revolving credit facility was reduced and the 1% LIBOR floor was eliminated. The maturity of the credit facility was extended to November 2015 with an option to extend to November 2016. The amended credit facility’s interest rate is based on a pricing grid with a range of 175 to 350 basis points, which represents a reduction from the previous grid that ranged from 325 to 425 basis points over LIBOR depending on our leverage ratio. The credit facility also includes an accordion option that allows us to request additional lender commitments up to a total of $350.0 million. We paid $1.3 million in deferred financing fees in conjunction with this amendment, which will be amortized over the term of the amended credit facility. The credit facility currently has no outstanding borrowings; however, as of December 31, 2012, we have $3.8 million in outstanding irrevocable letters of credit backed by the credit facility. Of our total debt outstanding as of December 31, 2012, approximately $605.6 million matures over the next four years ($58.0 million in 2013, none in 2014, $136.9 million in 2015 and $410.7 million in 2016). In January 2013, we repurchased the remaining $58.0 million balance of our Senior Notes for a price of $58.0 million plus accrued interest of approximately $23,000, leaving approximately $547.6 million of our debt maturing over the next four years. The $547.6 million does not include $18.7 million of scheduled loan amortization payments due in 2013, $22.3 million due in 2014, $21.3 million due in 2015, or $12.9 million due in 2016. As of December 31, 2012, the weighted average term to maturity of our debt is approximately five years, and 70.2% of our debt is fixed rate with a weighted average interest rate of 5.5%. The weighted average interest rate on all of our debt, which includes our variable-rate debt obligations based on variable rates at December 31, 2012, is 4.9%. After our repurchase of the Senior Notes and the repayment of debt included in discontinued operations in January 2013, the weighted average term to maturity of our debt continues to be approximately five years, and 68.2% of our debt is fixed rate with a weighted average interest rate of 5.6%. The weighted average interest rate on all of our debt, which includes our variable-rate obligations based on variable rates at December 31, 2012, continues to be 4.9%.


  • Page 31

    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 29 OPER ATING ACTIVITIES Operating Performance Indicators. The following performance indicators are commonly used in the hotel industry: t O  ccupancy;  verage daily room rate, or ADR; t A  evenue per available room, or RevPAR, which is the product of occupancy and ADR, and does not include food and beverage revenue, or t R other operating revenue;  omparable RevPAR, which we define as the RevPAR generated by hotels we owned as of the end of the reporting period, but excluding t C those hotels that we classified as held for sale. For hotels that were not owned for the entirety of the comparison periods, comparable RevPAR is calculated using RevPAR generated during periods of prior ownership. We refer to this subset of our hotels used to calculate comparable RevPAR as our “Comparable Portfolio.” Currently our Comparable Portfolio includes all 26 hotels in which we have interests as of December 31, 2012. In addition, our Comparable Portfolio includes prior ownership results for the Doubletree Guest Suites Times Square, the JW Marriott New Orleans, the Hilton San Diego Bayfront, the Hyatt Chicago Magnificent Mile and the Hilton Garden Inn Chicago Downtown/Magnificent Mile, as well as operating results for the Renaissance Westchester during the period in 2010 while it was held in receivership;  evPAR index, which is the quotient of a hotel’s RevPAR divided by the average RevPAR of its competitors, multiplied by 100. t R A RevPAR index in excess of 100 indicates a hotel is achieving higher RevPAR than its competitors. In addition to absolute RevPAR index, we monitor changes in RevPAR index; t O perating flow through, which is the quotient of operating income divided by revenues; t E BITDA, which is net income (loss) excluding: non-controlling interests; interest expense; provision for income taxes, including income taxes applicable to sale of assets; and depreciation and amortization; t Adjusted EBITDA, which includes EBITDA but excludes: amortization of deferred stock compensation; the impact of any gain or loss from asset sales; impairment charges; prior year property tax and other adjustments; and any other identified adjustments; t Funds from operations, or FFO, which includes net income (loss), excluding non-controlling interests, gains and losses from sales of prop- erty, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs) and real estate-related impairment losses, and after adjustment for unconsolidated partnerships and joint ventures; and t Adjusted FFO, which includes FFO but excludes penalties, written-off deferred financing costs, non-real estate-related impairment losses, income tax provisions, and any other identified adjustments. Revenues. Substantially all of our revenues are derived from the operation of our hotels. Specifically, our revenues consist of the following:  oom revenue, which is the product of the number of rooms sold and the ADR; t R  ood and beverage revenue, which is comprised of revenue realized in the hotel food and beverage outlets as well as banquet and catering t F events; and  ther operating revenue, which includes ancillary hotel revenue and other items primarily driven by occupancy such as telephone, t O transportation, parking, spa, entertainment and other guest services. Additionally, this category includes, among other things, operating revenue from BuyEfficient (subsequent to our purchase of the outside 50.0% equity interest in January 2011), and hotel space leased by third parties. Expenses. Our expenses consist of the following:  oom expense, which is primarily driven by occupancy and, therefore, has a significant correlation with room revenue; t R  ood and beverage expense, which is primarily driven by food and beverage sales and banquet and catering bookings and, therefore, has a t F significant correlation with food and beverage revenue;  ther operating expense, which includes the corresponding expense of other operating revenue, advertising and promotion, repairs and t O maintenance, utilities, and franchise costs;  roperty tax, ground lease and insurance expense, which includes the expenses associated with property tax, ground lease and insurance t P payments, each of which is primarily a fixed expense, but property tax is subject to regular revaluations based on the specific tax regulations and practices of each municipality; t Property general and administrative expense, which includes our property-level general and administrative expenses, such as payroll and related costs, contract and professional fees, credit and collection expenses, employee recruitment, relocation and training expenses, travel expenses, and management fees. Additionally, this category includes general and administrative expense from BuyEfficient (subsequent to our purchase of the outside 50.0% equity interest in January 2011); t Corporate overhead expense, which includes our corporate-level expenses, such as payroll and related costs, amortization of deferred stock compensation, acquisition and due diligence costs, legal expenses, contract and professional fees, bad debt, relocation, entity level state franchise and minimum tax payments, travel expenses and office rent; t Depreciation and amortization expense, which includes depreciation on our hotel buildings, improvements, furniture, fixtures and equipment, along with amortization on our franchise fees and certain intangibles. Additionally, this category includes depreciation and amortization related to both our corporate office and BuyEfficient’s fixtures, equipment and intangibles (subsequent to our purchase of the outside 50.0% equity interest in January 2011); and t I mpairment loss, which includes the charges we have recognized to reduce the carrying value of assets on our balance sheets to their fair value.


  • Page 32

    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 30 Other Revenue and Expense. Other revenue and expense consists of the following: t E quity in earnings of unconsolidated joint ventures, which includes our portion of earnings from our two joint ventures, BuyEfficient and Doubletree Guest Suites Times Square, prior to our acquisitions of the outside interests in both joint ventures in January 2011. Subsequent to these acquisitions, both entities are now presented on a consolidated basis; t I nterest and other income, which includes interest income we have earned on our restricted and unrestricted cash accounts and the Royal Palm note, as well as any gains or losses we have recognized on sales of assets other than hotels; t I nterest expense, which includes interest expense incurred on our outstanding fixed and variable-rate debt, capital lease obligation, accretion of the Senior Notes, amortization of deferred financing fees, any write-offs of deferred financing fees, gains or losses on derivatives and any loan penalties and fees incurred on our debt; t L oss on extinguishment of debt, which includes the loss we recognized on the repurchase and cancellation of the Senior Notes; t Gain on remeasurement of equity interests, which includes the gain we recognized to mark up the equity interests in our BuyEfficient and Doubletree Guest Suites Times Square joint ventures to fair market value upon our purchases of the outside equity interests in these joint ventures, as well as our gain to mark up the mezzanine loan to its fair value in connection with the acquisition of the outside equity interest in the Doubletree Guest Suites Times Square joint venture; t I ncome tax provision, which includes federal and state income taxes charged to the Company; t Income from consolidated joint venture attributable to non-controlling interest, which includes net income attributable to the outside 25.0% interest in the joint venture that owns the Hilton San Diego Bayfront;  istributions to non-controlling interest, which includes preferred dividends earned by investors from an entity that owns the Doubletree t D Guest Suites Times Square, including related administrative fees;  referred stock dividends and accretion, which includes dividends earned on our 8.0% Series A Cumulative Redeemable Preferred Stock t P (“Series A preferred stock”), Series C Cumulative Convertible Redeemable Preferred Stock (“Series C preferred stock”) and 8.0% Series D Cumulative Redeemable Preferred Stock (“Series D preferred stock”), as well as redemption value accretion on our Series C preferred stock; and t U ndistributed income allocated to unvested restricted stock compensation, which includes undistributed income allocated to unvested share- based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) pursuant to the two-class method. Factors Affecting Our Operating Results. The primary factors affecting our operating results include overall demand for hotel rooms, the pace of new hotel development, or supply, and the relative performance of our operators in increasing revenue and controlling hotel operating expenses. t Demand. The demand for lodging generally fluctuates with the overall economy. In 2010, following a two-year cyclical trough, we began to see signs of improving demand trends, and Comparable Portfolio RevPAR increased 5.5% as compared to 2009, with a 230 basis point increase in portfolio occupancy. These improving demand trends continued in 2011 and 2012. As a result, our Comparable Portfolio RevPAR increased 7.4% in 2011 as compared to 2010, and 5.6% in 2012 as compared to 2011. Comparable Portfolio occupancy increased 280 basis points in 2011 as compared to 2010, and increased an additional 280 basis points in 2012 as compared to 2011. Consistent with prior trends, we anticipate that lodging demand will continue to improve as the U.S. economy continues to strengthen. Historically, cyclical troughs are followed by extended periods of relatively strong demand, resulting in a cyclical lodging growth phase. While growth is not expected to be uniform, we expect hotel demand to remain strong over the next several quarters if the U.S. economy continues to grow and employment levels improve. t Supply. The addition of new competitive hotels affects the ability of existing hotels to drive RevPAR and profits. The development of new hotels is largely driven by construction costs and expected performance of existing hotels. The recession and credit crisis which occurred in 2008 and 2009, served to restrict credit and tighten lending standards, which resulted in a curtailment of funding for new hotel construction projects. Moreover, with same-property hotel profitability still below peak levels and hotel trading values generally well below replacement cost, new supply in many markets is difficult to justify economically. Accordingly, we believe hotel development will be constrained until such time as the construction financing markets recover, and operating trends and trading values of existing hotels improve to levels where developer return targets can be achieved. Given the one-to-three-year timeline needed to construct a typical hotel that would compete with our hotels, we expect a window of at least two to four years during which aggregate U.S. hotel supply, as indicated by the number of new hotel openings, will be below historical levels. On a market-by-market basis, some markets may experience new hotel room openings at or greater than historic levels, including in New York City where there is currently a higher- than-average supply of new hotel room openings. In addition, lenders are seeking higher yielding instruments, which may lead to riskier lending practices, including lending on new hotel construction. t R evenues and expenses. We believe that marginal improvements in RevPAR index, even in the face of declining revenues, are a good indicator of the relative quality and appeal of our hotels, and our operators’ effectiveness in maximizing revenues. Similarly, we also evaluate our operators’ effectiveness in minimizing incremental operating expenses in the context of increasing revenues or, conversely, in reducing operating expenses in the context of declining revenues. With respect to improving RevPAR index, we continue to work with our hotel operators to optimize revenue management initiatives while taking into consideration market demand trends and the pricing strategies of competitor hotels in our markets. We also develop capital investment programs designed to ensure each of our hotels is well renovated and positioned to appeal to groups and individual travelers fitting target guest profiles. Increased capital investment in our properties may lead to short-term revenue disruption and negatively impact RevPAR index. Our revenue management initiatives are generally oriented towards maximizing ADR even if the result may be lower


  • Page 33

    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E P ORT / PAG E 31 occupancy than may be achieved through lower ADR. Increases in RevPAR attributable to increases in ADR may be accompanied by minimal additional expenses, while increases in RevPAR attributable to higher occupancy may result in higher variable expenses such as housekeeping, labor and utilities expense. Thus, increases in RevPAR associated with higher ADR may result in higher hotel EBITDA margins. Increases in RevPAR associated with higher occupancy may result in more muted hotel EBITDA margin improvement. Our Comparable Portfolio RevPAR index was 110.7 in 2010, improving approximately 80 basis points in 2011 to 111.5. Our Comparable Portfolio RevPAR index, which was negatively impacted by several capital investment programs at our hotels, decreased 20 basis points in 2012 to 111.3. With respect to maximizing operating flow through, we continue to work with our operators to identify operational efficiencies designed to reduce expenses while minimally affecting guest experience. Key asset management initiatives include optimizing hotel staffing levels, increasing the efficiency of the hotels, such as installing energy efficient management and inventory control systems, and selectively combining food and beverage outlets. Our operational efficiency initiatives may be difficult to implement, as most categories of variable operating expenses, such as utilities and housekeeping labor costs, fluctuate with changes in occupancy. Furthermore, our hotels operate with significant fixed costs, such as general and administrative expense, insurance, property taxes, and other expenses associated with owning hotels, over which our operators have little control. We have experienced either currently or in the past, increases in hourly wages, employee benefits (especially health insurance), utility costs and property insurance, which have negatively affected our operating margins. Moreover, there are limits to how far our operators can reduce expenses without affecting brand standards or the competitiveness of our hotels. Our Comparable Portfolio operating flow through was 33% in 2011 as compared to 2010, and 50% in 2012 as compared to 2011. Operating Results. The following table presents our operating results for our total portfolio for 2012 and 2011, including the amount and percentage change in the results between the two periods. The table presents the results of operations included in the consolidated statements of operations, and includes the 26 hotels (11,632 rooms) as of December 31, 2012 and 24 hotels (10,857 rooms) as of December 31, 2011, as well as discontinued operations for 8 hotels (2,342 rooms) as of December 31, 2012 and 10 hotels (3,017 rooms) as of December 31, 2011. These amounts can be found in our consolidated financial statements and related notes included elsewhere in this Annual Report. 2012 2011 Change $ Change % (dollars in thousands, except statistical data) REVENUES Room $576,146 $501,183 $ 74,963 15.0% Food and beverage 200,810 175,103 25,707 14.7% Other operating 52,128 45,508 6,620 14.5% Total revenues 829,084 721,794 107,290 14.9% OPER ATING EXPENSES Hotel operating 500,209 443,803 56,406 12.7% Property general and administrative 94,642 85,293 9,349 11.0% Corporate overhead 24,316 25,453 (1,137) (4.5)% Depreciation and amortization 130,907 113,708 17,199 15.1% Impairment loss — 10,862 (10,862) (100.0)% Total operating expenses 750,074 679,119 70,955 10.4% OPER ATING INCOME 79,010 42,675 36,335 85.1% Equity in earnings of unconsolidated joint ventures — 21 (21) (100.0)% Interest and other income 297 3,115 (2,818) (90.5)% Interest expense (76,821) (74,195) (2,626) (3.5)% Loss on extinguishment of debt (191) — (191) (100.0)% Gain on remeasurement of equity interests — 69,230 (69,230) (100.0)% Income before income taxes and discontinued operations 2,295 40,846 (38,551) (94.4)% Income tax provision (1,148) — (1,148) (100.0)% INCOME FROM CONTINUING OPER ATIONS 1,147 40,846 (39,699) (97.2)% Income from discontinued operations 48,410 40,453 7,957 19.7% NET INCOME 49,557 81,299 (31,742) (39.0)% Income from consolidated joint venture attributable to non-controlling interest (1,761) (312) (1,449) (464.4)% Distributions to non-controlling interest (31) (30) (1) (3.3)% Preferred stock dividends (29,748) (27,321) (2,427) (8.9)% Undistributed income allocated to unvested restricted stock compensation (203) (636) 433 68.1% INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 17,814 $ 53,000 $ (35,186) (66.4)%


  • Page 34

    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 32 The following table presents our operating results for our total portfolio for 2011 and 2010, including the amount and percentage change in the results between the two periods. The table presents the results of operations included in the consolidated statements of operations, and includes continuing operations for 24 hotels (10,857 rooms) as of December 31, 2011 and 21 hotels (8,705 rooms) as of December 31, 2010, as well as discontinued operations for 10 hotels (3,017 rooms) as of December 31, 2011 and 20 hotels (5,508 rooms) as of December 31, 2010. An additional 347 rooms are included in discontinued operations for the first six months of 2010 due to our disposal and subsequent reacquisition of the Renaissance Westchester in June 2010. These amounts can be found in our consolidated financial statements and related notes included elsewhere in this Annual Report. 2011 2010 Change $ Change % (dollars in thousands, except statistical data) REVENUES Room $501,183 $351,039 $150,144 42.8% Food and beverage 175,103 138,188 36,915 26.7% Other operating 45,508 26,373 19,135 72.6% Total revenues 721,794 515,600 206,194 40.0% OPER ATING EXPENSES Hotel operating 443,803 324,888 118,915 36.6% Property general and administrative 85,293 61,753 23,540 38.1% Corporate overhead 25,453 21,751 3,702 17.0% Depreciation and amortization 113,708 79,633 34,075 42.8% Impairment loss 10,862 — 10,862 100.0% Total operating expenses 679,119 488,025 191,094 39.2% OPER ATING INCOME 42,675 27,575 15,100 54.8% Equity in earnings of unconsolidated joint ventures 21 555 (534) (96.2)% Interest and other income 3,115 112 3,003 2,681.3% Interest expense (74,195) (58,931) (15,264) (25.9)% Gain on remeasurement of equity interests 69,230 — 69,230 100.0% INCOME LOSS FROM CONTINUING OPER ATIONS 40,846 (30,689) 71,535 233.1% Income from discontinued operations 40,453 69,231 (28,778) (41.6)% NET INCOME 81,299 38,542 42,757 110.9% Income from consolidated joint venture attributable to non-controlling interest (312) — (312) (100.0)% Distributions to non-controlling interest (30) — (30) (100.0)% Preferred stock dividends and accretion (27,321) (20,652) (6,669) (32.3)% Undistributed income allocated to unvested restricted stock compensation (636) (102) (534) (523.5)% INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 53,000 $ 17,788 $ 35,212 198.0% Operating Statistics. Included in the following tables are comparisons of the key operating metrics for our 26 hotel Comparable Portfolio, which includes prior ownership results for the Hyatt Chicago Magnificent Mile, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Doubletree Guest Suites Times Square, the JW Marriott New Orleans and the Hilton San Diego Bayfront, as well as operating results for the Renaissance Westchester during the periods in 2010 while it was held in receivership. 2012 2011 Change Occ% ADR RevPAR Occ% ADR RevPAR Occ% ADR RevPAR 79.2% $175.78 $139.22 76.4% $172.63 $131.89 280 bps 1.8% 5.6% 2011 2010 Change Occ% ADR RevPAR Occ% ADR RevPAR Occ% ADR RevPAR 76.4% $172.63 $131.89 73.6% $166.84 $122.79 280 bps 3.5% 7.4% Non-GAAP Financial Measures. The following table reconciles net income to EBITDA and Adjusted EBITDA for our hotel portfolio for the years ended December 31, 2012, 2011 and 2010. We believe EBITDA and Adjusted EBITDA are useful to investors in evaluating our operating performance because these measures help investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization) from our operating results. We also use EBITDA and Adjusted EBITDA as measures in determining the value of hotel acquisitions and disposi- tions. We caution investors that amounts presented in accordance with our definitions of EBITDA and Adjusted EBITDA may not be comparable to similar measures disclosed by other companies, because not all companies calculate these non-GAAP measures in the same manner. EBITDA and Adjusted EBITDA should not be considered as an alternative measure of our net income (loss), operating performance, cash flow or liquidity. EBITDA and Adjusted EBITDA may include funds that may not be available for our discretionary use


  • Page 35

    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 33 to fund interest expense, capital expenditures or general corporate purposes. Although we believe that EBITDA and Adjusted EBITDA can enhance an investor’s understanding of our results of operations, these non-GAAP financial measures, when viewed individually, are not necessarily a better indicator of any trend as compared to GAAP measures such as net income (loss) or cash flow from operations. In addition, you should be aware that adverse economic and market conditions may harm our cash flow. 2012 2011 2010 (in thousands) Net income $ 49,557 $ 81,299 $ 38,542 Operations held for investment: Depreciation and amortization 130,907 113,708 79,633 Amortization of lease intangibles 4,319 3,979 254 Interest expense 71,664 67,319 54,839 Amortization of deferred financing fees 3,690 3,138 1,457 Write-off of deferred financing fees 3 21 1,462 Loan penalties and fees — — 177 Non-cash interest related to discount on Senior Notes 1,058 1,062 996 Non-cash interest related to loss on derivatives 406 2,655 — Income tax provision 1,148 — — Non-controlling interests: Income from consolidated joint venture attributable to non-controlling interest (1,761) (312) — Depreciation and amortization (5,685) (4,014) — Interest expense (2,252) (1,562) — Amortization of deferred financing fees (224) (160) — Non-cash interest related to loss on derivative (1) (31) — Unconsolidated joint ventures: Depreciation and amortization — 3 52 Discontinued operations: Depreciation and amortization 13,164 16,188 21,299 Amortization of lease intangibles 14 28 27 Interest expense 6,231 9,191 19,257 Interest expense—default rate — — 7,955 Amortization of deferred financing fees 74 104 581 Write-off of deferred financing fees 185 42 123 Loan penalties and fees — — 1,155 EBITDA 272,497 292,658 227,809 Operations held for investment: Amortization of deferred stock compensation 3,466 2,745 3,942 Non-cash straight-line lease expense 2,777 2,398 944 Capital lease obligation interest—cash ground rent (819) — — (Gain) loss on sale of assets 18 (83) 382 Gain on remeasurement of equity interests — (69,230) — Loss on extinguishment of debt 191 — — Closing costs—completed acquisitions 1,965 3,403 — Due diligence costs—abandoned project — — 959 Impairment loss — 10,862 — Lawsuit settlement costs, net 158 1,553 — Prior year property tax and CAM adjustments, net 621 — — Hotel laundry closing costs 623 — — Costs associated with CEO severance — — 2,242 Non-controlling interests: Non-cash straight-line lease expense (450) (354) — Prior year property tax adjustments, net (202) — — Unconsolidated joint ventures: Amortization of deferred stock compensation — 2 32 Discontinued operations: Gain on sale of assets, net (38,292) (14,912) — Impairment loss — 1,495 1,943 Gain on extinguishment of debt — (18,145) (86,235) Lawsuit settlement (reversal) costs (48) 67 — Closing costs—completed acquisition — — 6,796 (29,992) (80,199) (68,995) Adjusted EBITDA $242,505 $212,459 $158,814


  • Page 36

    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 34 Adjusted EBITDA was $242.5 million in 2012 as compared to $212.5 million in 2011 and $158.8 million in 2010. Adjusted EBITDA increased $30.0 million in 2012 as compared to 2011 due to additional earnings generated by the two hotels we acquired in 2012 (the Hyatt Chicago Magnificent Mile and the Hilton Garden Inn Downtown/Magnificent Mile), and the three hotels we acquired or purchased interests in during 2011 (the Doubletree Guest Suites Times Square, the JW Marriott New Orleans and the Hilton San Diego Bayfront), combined with increased earnings at our other hotels. Adjusted EBITDA increased $53.6 million in 2011 as compared to 2010 due to additional earnings generated by the three hotels we acquired or purchased interests in during 2011 and by the Renaissance Westchester, which we reacquired from a court-appointed receiver in June 2010, combined with increased earnings at our other hotels. The following table reconciles net income to FFO and Adjusted FFO for our hotel portfolio for the years ended December 31, 2012, 2011 and 2010. We believe that the presentation of FFO and Adjusted FFO provides useful information to investors regarding our operating performance because they are measures of our operations without regard to specified non-cash items such as real estate depreciation and amortization, any real estate impairment loss, gain or loss on sale of assets and certain other items which we believe are not indicative of the performance of our underlying hotel properties. We believe that these items are more representative of our asset base and our acquisition and disposition activities than our ongoing operations. We also use FFO as one measure in determining our results after taking into account the impact of our capital structure. We caution investors that amounts presented in accordance with our definitions of FFO and Adjusted FFO may not be comparable to similar measures disclosed by other companies, because not all companies calculate these non- GAAP measures in the same manner. FFO and Adjusted FFO should not be considered as an alternative measure of our net income (loss), operating performance, cash flow or liquidity. FFO and Adjusted FFO may include funds that may not be available for our discretionary use to fund interest expense, capital expenditures or general corporate purposes. Although we believe that FFO and Adjusted FFO can enhance an investor’s understanding of our results of operations, these non-GAAP financial measures, when viewed individually, are not necessarily better indicators of any trend as compared to GAAP measures such as net income (loss) or cash flow from operations. In addition, you should be aware that adverse economic and market conditions may harm our cash flow. 2012 2011 2010 (in thousands) Net income $ 49,557 $ 81,299 $ 38,542 Preferred stock dividends (29,748) (27,321) (20,652) Operations held for investment: Real estate depreciation and amortization 129,668 112,539 79,083 Amortization of lease intangibles 4,319 3,979 254 (Gain) loss on sale of other assets 18 (83) 382 Non-controlling interests: Income from consolidated joint venture attributable to non-controlling interest (1,761) (312) — Real estate depreciation and amortization (5,685) (4,014) — Discontinued operations: Real estate depreciation and amortization 13,164 16,188 21,299 Amortization of lease intangibles 14 28 27 Real estate impairment loss — — 1,943 Gain on sale of assets, net (38,292) (14,912) — FFO 121,254 167,391 120,878 Operations held for investment: Non-cash straight-line lease expense 2,777 2,398 944 Write-off of deferred financing fees 3 21 1,462 Loan penalties and fees — — 177 Non-cash interest related to loss on derivatives 406 2,655 — Gain on remeasurement of equity interests — (69,230) — Loss on extinguishment of debt 191 — — Closing costs—completed acquisitions 1,965 3,403 — Due diligence costs—abandoned project — — 959 Prior year property tax and CAM adjustments, net 621 — — Hotel laundry closing costs 623 — — Impairment loss — 10,862 — Lawsuit settlement costs, net 158 1,553 — Income tax provision 1,148 — — Costs associated with CEO severance — — 2,242 Amortization of deferred stock compensation associated with CEO severance — — 1,074 Non-controlling interests: Non-cash straight-line lease expense (450) (354) — Non-cash interest related to loss on derivative (1) (31) — Prior year property tax adjustments, net (202) — — (continued)


  • Page 37

    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 35 2012 2011 2010 (in thousands) Discontinued operations: Write-off of deferred financing fees $ 185 $ 42 $ 123 Interest expense—default rate — — 7,955 Loan penalties and fees — — 1,155 Impairment loss — 1,495 — Gain on extinguishment of debt — (18,145) (86,235) Lawsuit settlement (reversal) costs (48) 67 — Closing costs—completed acquisition — — 6,796 7,376 (65,264) (63,348) Adjusted FFO $128,630 $102,127 $ 57,530 Adjusted FFO was $128.6 million in 2012 as compared to $102.1 million in 2011 and $57.5 million in 2010. Adjusted FFO increased $26.5 million in 2012 as compared to 2011 due to additional earnings generated by the two hotels we acquired in 2012 (the Hyatt Chicago Magnificent Mile and the Hilton Garden Inn Downtown/Magnificent Mile), and the three hotels we acquired or purchased interests in during 2011 (the Doubletree Guest Suites Times Square, the JW Marriott New Orleans and the Hilton San Diego Bayfront), combined with increased earnings at our other hotels. Adjusted EBITDA increased $44.6 million in 2011 as compared to 2010 due to additional earnings generated by the three hotels we acquired or purchased interests in during 2011 and by the Renaissance Westchester, which we reacquired from a court-appointed receiver in June 2010, combined with increased earnings at our other hotels. Room revenue. Room revenue increased $75.0 million, or 15.0%, for the year ended December 31, 2012 as compared to the year ended December 31, 2011. We acquired the Hyatt Chicago Magnificent Mile in June 2012 and the Hilton Garden Inn Downtown/Magnificent Mile in July 2012. In addition, we acquired the outside 62.0% equity interests in the Doubletree Guest Suites Times Square in January 2011 (resulting in our 100% ownership of the hotel) and the JW Marriott New Orleans in February 2011. We also purchased a 75.0% majority interest in the joint venture that owns the Hilton San Diego Bayfront in April 2011. These five recently acquired hotels (the “five recently acquired hotels”) contributed additional room revenue of $57.4 million during the year ended December 31, 2012. Room revenue in our five recently acquired hotels was negatively impacted in 2012 by Hurricane Sandy, which caused a loss in room revenue of approximately $0.3 million. Room revenue generated by the 21 hotels we owned prior to January 1, 2011 (our “existing portfolio”) increased $17.6 million during 2012 as compared to 2011 due to an increase in occupancy ($14.8 million) combined with an increase in ADR ($2.8 million). The increase in occupancy was driven by an additional 22,641 group room nights sold combined with an additional 72,391 transient room nights sold. Room revenue in our existing portfolio was impacted during 2012 by major room renovations at both the Renaissance Washington DC and the Hyatt Regency Newport Beach. The major room renovation at the Renaissance Washington DC caused 13,656 room nights to be out of service during the last six months of 2012, displacing approximately $2.9 million in room revenue based on the hotel achieving a potential 72.7% occupancy rate and RevPAR of $148.24 without the renovation. The major room renovation at the Hyatt Regency Newport Beach caused 4,333 room nights to be out of service during the last two months of 2012, displacing approximately $0.5 million in room revenue based on the hotel achieving a potential 85.0% occupancy rate and RevPAR of $110.96 without the renovation. Room revenue in our existing portfolio was also negatively impacted in 2012 by Hurricane Sandy, which caused a loss in room revenue of approximately $1.4 million. Room revenue increased $150.1 million, or 42.8%, for the year ended December 31, 2011 as compared to the year ended December 31, 2010. We acquired the outside 62.0% equity interests in the Doubletree Guest Suites Times Square in January 2011 (resulting in our 100% ownership of the hotel) and the JW Marriott New Orleans in February 2011. We also purchased a 75.0% majority interest in the joint venture that owns the Hilton San Diego Bayfront in April 2011, and reacquired possession and control of the Renaissance Westchester in June 2010 from a court-appointed receiver. These three hotels acquired in 2011 (the “three hotels acquired in 2011”) and the Renaissance Westchester contributed additional room revenue of $127.1 million. Room revenue generated by the 20 hotels we acquired prior to January 1, 2010 (our “2011 existing portfolio”) increased $23.0 million in 2011 as compared to 2010 due to an increase in occupancy ($13.4 million) combined with an increase in ADR ($9.6 million). The increase in occupancy was driven by an additional 28,089 group room nights sold combined with an additional 57,518 transient room nights sold. Room revenue at some of our northeast hotels was negatively impacted in 2011 by Hurricane Irene, which caused a loss in room revenue of approximately $0.9 million. Food and beverage revenue. Food and beverage revenue increased $25.7 million, or 14.7%, for the year ended December 31, 2012 as compared to the year ended December 31, 2011. Our five recently acquired hotels contributed an additional $17.5 million to food and beverage revenue during 2012. Food and beverage revenue in our existing portfolio increased $8.2 million during 2012 as compared to 2011, primarily due to increased occupancy and group room nights in our hotels, which drove revenue growth in both outlets and banquets. In addition, outlet and banquet revenue increased during 2012 as compared to 2011 as many outlets and meeting spaces were under renovation during 2011. Food and beverage revenue in our existing portfolio was negatively impacted by a major room renovation at the Renaissance Washington DC, which caused 13,656 room nights to be out of service during the last six months of 2012, decreasing revenue in both outlets and banquets. Food and beverage revenue in our existing portfolio was also negatively impacted in 2012 by Hurricane Sandy, which caused a loss in food and beverage revenue of approximately $0.8 million.


  • Page 38

    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 36 Food and beverage revenue increased $36.9 million, or 26.7%, for the year ended December 31, 2011 as compared to the year ended December 31, 2010. The three hotels acquired in 2011 and the Renaissance Westchester contributed an additional $38.2 million. Food and beverage revenue in our 2011 existing portfolio decreased $1.3 million during 2011 as compared to 2010. This decrease is primarily due to a reduction in business at one of our Houston, Texas hotels with a customer who was operating under a contract with the United States government. In addition, our 2011 existing portfolio lost approximately $0.1 million during 2011 due to Hurricane Irene. Banquet revenue also decreased in our 2011 existing portfolio during 2011 as compared to 2010 as a few of our larger group-oriented hotels experienced higher traffic from transient demand than from group demand. These decreases were slightly offset by an increase in food and beverage revenue generated by our outlets due to increased transient occupancy at several of our hotels, as well as to increased volume from local businesses and residents at several of our recently renovated restaurants and lounges. Other operating revenue. Other operating revenue increased $6.6 million, or 14.5%, for the year ended December 31, 2012 as compared to the year ended December 31, 2011. Our five recently acquired hotels contributed an additional $4.8 million to other operating revenue during 2012. In addition, other operating revenue increased $0.3 million in 2012 as compared to 2011 due to the consolidation of BuyEfficient with our operations due to the purchase of the outside 50.0% equity interest in the joint venture in January 2011. Previously, our 50.0% portion of BuyEfficient’s net income was included in equity in earnings of unconsolidated joint ventures. BuyEfficient contributed an additional $0.3 million in other operating revenue during 2012 as compared to 2011 due to increased transaction and development fees. In addition, other operating revenue in our existing portfolio increased $1.2 million during 2012 as compared to 2011, due to increased cancellation, attrition, parking, spa and lease rent revenue at our hotels, partially offset by decreased telephone revenue. Other operating revenue increased $19.1 million, or 72.6%, for the year ended December 31, 2011 as compared to the year ended December 31, 2010. The three hotels acquired in 2011 and the Renaissance Westchester contributed an additional $12.8 million to other operating revenue during 2011. Other operating revenue also increased $5.4 million in 2011 as compared to 2010 due to the consolidation of BuyEfficient with our operations due to the purchase of the outside 50.0% equity interest in the joint venture in January 2011. Previously, our 50.0% portion of BuyEfficient’s net income was included in equity in earnings of unconsolidated joint ventures. Other operating revenue in our 2011 existing portfolio increased $0.9 million in 2011 as compared to 2010, as increased parking and lease rent revenue was slightly offset by decreased telephone, cancellation, attrition, guest movies, lift ticket, spa and retail revenue. Hotel operating expenses. Hotel operating expenses increased $56.4 million, or 12.7%, during the year ended December 31, 2012 as compared to the year ended December 31, 2011. Our five recently acquired hotels contributed an additional $45.0 million to hotel operating expenses during 2012. Hotel operating expenses in our existing portfolio increased $11.4 million during 2012 as compared to 2011. This increase in hotel operating expenses is primarily related to the corresponding increases in room, food and beverage, parking and spa revenue. In addition, hotel operating expenses in our existing portfolio increased during 2012 as compared to 2011 due to increases in the following expenses: advertising and repairs and maintenance as the hotels increased spending due to the improved economy; franchise fees and assessments due to the increased revenue; property and liability insurance due to increased premiums; and ground lease due to increased contingent rent resulting from the increased revenue at several of our hotels. These increases were partially offset by decreases in the following expenses: utilities due to reduced consumption and lower rates at many of our hotels during 2012; real estate property taxes due to lower assessments received at several of our hotels; and common area maintenance charges due to a settlement received at one of our hotels. Hotel operating expenses increased $118.9 million, or 36.6%, for the year ended December 31, 2011 as compared to the year ended December 31, 2010. The three hotels acquired in 2011 and the Renaissance Westchester contributed an additional $109.3 million to hotel operating expenses during 2011. Hotel operating expenses in our 2011 existing portfolio increased $9.6 million during 2011 as compared to 2010. This increase in hotel operating expenses is primarily related to increased room expense, corresponding to the increased room revenue. In addition, hotel operating expenses in our 2011 existing portfolio increased in 2011 as compared to 2010 due to increases in the following expenses: advertising and repairs and maintenance as the hotels increased spending due to the improved economy; franchise fees and assessments due to the increased revenue; and property taxes due to increased assessments. In addition, hotel operating expenses increased in our 2011 existing portfolio during 2011 as compared to 2010 due to increased food and beverage expense, as many of our outlets which were under renovation during 2011 continued to incur labor expenses, including training on new menus and restaurant concepts, along with pre-opening costs. These increases were partially offset by decreased utilities due to reductions in gas rates and usage at several of our hotels and by decreased property and liability insurance due to an actuarial adjustment. Property general and administrative expense. Property general and administrative expense increased $9.3 million, or 11.0%, during the year ended December 31, 2012 as compared to the year ended December 31, 2011. Our five recently acquired hotels contributed an additional $7.1 million to property general and administrative expense during 2012. In addition, property general and administrative expense increased $0.2 million in 2012 as compared to 2011 due to the consolidation of BuyEfficient with our operations due to the purchase of the outside 50.0% equity interest in the joint venture in January 2011. Previously, our 50.0% portion of BuyEfficient’s net income was included in equity in earnings of unconsolidated joint ventures. BuyEfficient contributed an additional $0.4 million in property general and administrative expense during 2012 as compared to 2011 due to the corresponding increase in revenue. Property general and administrative expense in our existing portfolio increased $1.6 million during 2012 as compared to 2011, primarily due to increased payroll and related costs, management fees, and credit and collection expenses due to the increase in revenue, combined with increased computer hardware/ software costs, employee relocation, recruitment and training, partially offset by decreased contract and professional fees.


  • Page 39

    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 37 Property general and administrative expense increased $23.5 million, or 38.1%, for the year ended December 31, 2011 as compared to the year ended December 31, 2010. The three hotels acquired in 2011 and the Renaissance Westchester contributed an additional $16.8 million to hotel operating expenses during 2011. Property general and administrative expense also increased $3.7 million in 2011 as compared to 2010 due to the consolidation of BuyEfficient with our operations due to the purchase of the outside 50.0% equity interest in the joint venture in January 2011. Property general and administrative expense in our 2011 existing portfolio increased $3.0 million during the year ended December 31, 2011 as compared to the year ended December 31, 2010, primarily due to increased payroll, management fees and credit and collection expenses due to the increase in revenue, combined with increased legal expenses, travel, training and sales tax audit expense, partially offset by decreased contract and professional fees, employee recruitment expenses and computer hardware/software costs. Corporate overhead expense. Corporate overhead expense decreased $1.1 million, or 4.5%, during the year ended December 31, 2012 as compared to the year ended December 31, 2011, primarily due to decreased legal costs combined with decreased acquisition and due diligence costs. Legal costs decreased $1.5 million in 2012 as compared to 2011 primarily due to our accrual in 2011 of $1.6 million for settlement costs related to litigation involving three separate claims by certain employees at three of the 26 hotels. As of December 31, 2012, we have reached court-approved settlements on all three claims. Regarding acquisition and due diligence costs, during 2012 we incurred due diligence costs of $2.0 million related to our completed acquisitions, and an additional $0.9 million related to in-process or abandoned projects. During 2011 we incurred due diligence costs of $3.4 million related to our completed acquisitions, and an additional $0.3 million related to in-process or abandoned projects. Corporate overhead expense also decreased during 2012 as compared to 2011 due to a $1.0 million decrease in entity-level state franchise and minimum tax expense and a $0.2 million decrease in relocation expenses. These decreases were partially offset by a $1.0 million increase in payroll and related costs, a $0.5 million increase in amortization of deferred stock compensation, a $0.5 million increase in contract and professional fees, a $0.1 million increase in donations expense, a $0.1 million increase in employee relations, and a $0.2 million increase in bad debt expense. Bad debt expense increased in 2012 as compared to 2011 due to our reserving the entire $0.2 million outstanding balance of a subordinate note secured by a boutique hotel known as the Twelve Atlantic Station in Atlanta, Georgia, as the note is currently in default. We are currently working with the borrower and the special servicer to bring the note current, at which time we may reverse the bad debt expense we recorded in 2012. Corporate overhead expense increased $3.7 million, or 17.0%, during the year ended December 31, 2011 as compared to the year ended December 31, 2010, primarily due to increases of $0.4 million related to payroll and related costs, $0.3 million related to contract and professional fees, $0.2 million related to relocation, $0.2 million related to travel, $0.1 million related to bad debt, $1.5 million related to legal expenses and $2.4 million related to due diligence costs. In September 2011, we accrued $1.6 million in settlement costs related to litigation involving three separate claims by certain employees at three of the 24 hotels included in continuing operations. As of December 31, 2012, we have reached court-approved settlements on all three claims. During 2011 we incurred due diligence costs of $3.4 million related to our completed acquisitions, and an additional $0.3 million related to in-process or abandoned projects. During 2010, we incurred due diligence costs of $1.3 million related to in-process or abandoned projects. These increases in corporate overhead expense in 2011 as compared to 2010 were partially offset by decreases of $1.1 million related to deferred stock compensation, $0.1 million related to corporate office rent and maintenance, and $0.2 million related to sales tax audit expenses. Depreciation and amortization expense. Depreciation and amortization increased $17.2 million, or 15.1%, for the year ended December 31, 2012 as compared to the year ended December 31, 2011. Our five recently acquired hotels contributed an additional $15.2 million to depreciation and amortization expense during 2012. Depreciation and amortization expense in our existing portfolio increased $2.0 million during 2012 as compared to 2011 due to additional depreciation recognized on hotel renovations and purchases of furniture, fixtures and equipment (“FF&E”) for our hotel properties. Depreciation and amortization expense increased $34.1 million, or 42.8%, for the year ended December 31, 2011 as compared to the year ended December 31, 2010. The three hotels acquired in 2011 and the Renaissance Westchester contributed an additional $31.0 million to depreciation and amortization expense during 2011. Depreciation and amortization in our 2011 existing portfolio increased $3.1 million during 2011 as compared to 2010 due to additional depreciation recognized on hotel renovations and purchases of FF&E for our hotel properties. Impairment loss. Impairment loss totaled zero for the year ended December 31, 2012, $10.9 million for the year ended December 31, 2011, and zero for the year ended December 31, 2010. During 2011, we recognized an impairment loss of $10.9 million on our Royal Palm note due to its sale in October 2011. Equity in earnings of unconsolidated joint ventures. Equity in earnings of unconsolidated joint ventures totaled zero for the year ended December 31, 2012, $21,000 for the year ended December 31, 2011, and $0.6 million for the year ended December 31, 2010. In January 2011, we acquired 100% interests in both the Doubletree Guest Suites Times Square and BuyEfficient joint ventures. Post-acquisition, therefore, we present both of these investments on a consolidated basis. Prior to our January 14, 2011 acquisition date, we did not recognize any earnings on our Doubletree Guest Suites Times Square joint venture during either 2011 or 2010 because the joint venture had cumulative losses in excess of our investment, and we reduced our interest in this partnership to zero at December 31, 2009. The excess cumulative losses resulted primarily from the hotel’s fourth quarter 2009 impairment charge. Prior to our purchase of the outside 50.0% equity interest in the BuyEfficient joint venture on January 21, 2011, we recognized income of $21,000 in 2011 and $0.6 million in 2010 on our BuyEfficient joint venture.


  • Page 40

    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 38 Interest and other income. Interest and other income totaled $0.3 million for the year ended December 31, 2012, $3.1 million for the year ended December 31, 2011 and $0.1 million for the year ended December 31, 2010. In 2012, we recognized $0.2 million in interest income, and $0.1 million in other miscellaneous income. In 2011, we recognized $2.9 million in interest income, including $2.7 million related to the Royal Palm note. We sold this Royal Palm note in October 2011 for net proceeds of approximately $79.2 million. In anticipation of this sale, we recorded an impairment loss of $10.9 million in September 2011. In addition, during 2011, we recognized income of $0.1 million on sales and dispositions of surplus FF&E located in several of our hotels and $0.1 million in other miscellaneous income. In 2010, we recognized $0.3 million in interest income and $0.1 million in other miscellaneous income, partially offset by a loss of $0.3 million on sales and dispositions of surplus FF&E located in several of our hotels and in our corporate office. Interest expense. Interest expense is as follows (in thousands): Year Ended Year Ended Year Ended December 31, December 31, December 31, 2012 2011 2010 Interest expense $71,664 $67,319 $54,839 Loss on derivatives 406 2,655 — Accretion of Senior Notes 1,058 1,062 996 Amortization of deferred financing fees 3,690 3,138 1,457 Write-off of deferred financing fees 3 21 1,462 Loan penalties and fees — — 177 $76,821 $74,195 $58,931 Interest expense increased $2.6 million, or 3.5%, during the year ended December 31, 2012 as compared to the year ended December 31, 2011. Interest expense incurred on our debt and capital lease obligations increased $4.3 million during 2012 as compared to 2011 primarily due to increased loan balances as we assumed $270.0 million of non-recourse senior mortgage and mezzanine debt in connection with our acquisition of the outside 62.0% equity interests in our Doubletree Guest Suites Times Square joint venture in January 2011 (which loan we refinanced in October 2011 with a new $180.0 million non-recourse loan), and a $42.2 million loan in connection with our acquisition of the JW Marriott New Orleans. Our loan balances also increased due to a $240.0 million loan entered into by our Hilton San Diego Bayfront joint venture in April 2011. These increases in our loan balances were partially offset by our repayment in April 2012 of a $32.2 million loan secured by the Renaissance Long Beach. Interest expense on our debt obligations also increased due to increases in the variable interest rates on our non-recourse loans secured by the Doubletree Guest Suites Times Square and Hilton San Diego Bayfront. Interest expense on our capital lease obligation also increased during 2012 as compared to 2011 due to our acquisition of the Hyatt Chicago Magnificent Mile, which included the assumption of a building lease that we determined should be accounted for as a capital lease. In addition, interest expense increased during 2012 as compared to 2011 due to a $0.5 million increase in amortization of deferred financing fees related to additional fees paid in 2011 in association with our Doubletree Guest Suites Times Square, JW Marriott New Orleans and Hilton San Diego Bayfront acquisitions, as well as to fees incurred on our refinancing of the Doubletree Guest Suites Times Square and to amend our line of credit. These increases were partially offset during 2012 as compared to 2011 by a $2.2 million decrease in interest expense related to our interest rate cap and swap agreements due to a $1.8 million reduction in loss on our interest rate swap agreement combined with a $0.4 million decrease in losses on our interest rate cap agreements. Interest expense increased $15.3 million, or 25.9%, during the year ended December 31, 2011 as compared to the year ended December 31, 2010. Mortgage interest expense increased $12.5 million during 2011 as compared to 2010 due to increased loan balances as we assumed $270.0 million of non-recourse senior mortgage and mezzanine debt in connection with our acquisition of the outside 62.0% equity interests in our Doubletree Guest Suites Times Square joint venture in January 2011 (which loan we refinanced in October 2011 with a new $180.0 million non-recourse mortgage), and a $42.2 million loan in connection with our acquisition of the JW Marriott New Orleans in February 2011. Our loan balances also increased during 2011 as compared to 2010 due to a $240.0 million loan entered into by our Hilton San Diego Bayfront joint venture in April 2011. In addition, interest expense increased $2.7 million during 2011 as compared to 2010 related to losses recognized on interest rate cap agreements on the Doubletree Guest Suites Times Square and Hilton San Diego Bayfront loans, combined with a loss on an interest rate swap agreement on the JW Marriott New Orleans loan. Interest expense also increased during 2011 as compared to 2010 due to a $1.7 million increase in amortization of deferred financing fees related to additional fees paid in association with our Doubletree Guest Suites Times Square, JW Marriott New Orleans and Hilton San Diego Bayfront acquisitions, as well as to fees incurred on our line of credit and on our refinancing of the Doubletree Guest Suites Times Square in October 2011 and the Hilton Times Square in November 2010. Accretion of Senior Notes also caused interest expense to increase by $0.1 million in 2011 as compared to 2010. These increases were partially offset by additional interest expenses incurred in 2010 related to the termination of our credit facility in February 2010 and to our refinancing of the Hilton Times Square in November 2010, which caused an additional $0.2 million in penalties and fees during 2010. In addition, interest expense for 2011 decreased as compared to 2010 as we incurred $1.5 million in 2010 related to the write-off of deferred financing fees in conjunction with the termination of our credit facility in February 2010. Our weighted average interest rate per annum on debt included in our continuing operations, including our variable-rate debt obligations, was approximately 4.9% at December 31, 2012, 5.0% at December 31, 2011 and 5.5% at December 31, 2010. At December 31, 2012, approximately 69.6% of the outstanding notes payable included in our continuing operations had fixed interest rates. At December 31, 2011,


  • Page 41

    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 39 approximately 70.5% of the outstanding notes payable included in our continuing operations had fixed interest rates. At December 31, 2010, all of the outstanding notes payable included in our continuing operations had fixed interest rates. Loss on extinguishment of debt. Loss on extinguishment of debt totaled $0.2 million for the year ended December 31, 2012, and zero for both the years ended December 31, 2011 and 2010. During 2012, we recognized a loss of $0.2 million due to the repurchase and cancellation of $4.5 million in aggregate principal amount of the Senior Notes. Gain on remeasurement of equity interests. Gain on remeasurement of equity interests totaled zero for the year ended December 31, 2012, $69.2 million for the year ended December 31, 2011, and zero for the year ended December 31, 2010. In January 2011, we purchased the outside interests in both our Doubletree Guest Suites Times Square joint venture and our BuyEfficient joint venture, and became the sole owner of both entities. Previously, our investment in the Doubletree Guest Suites Times Square joint venture consisted of a 38.0% equity interest in the hotel and a $30.0 million, 8.5% mezzanine loan maturing in January 2017 secured by the equity interests in the hotel. During the fourth quarter of 2009, the Doubletree Guest Suites Times Square recorded an impairment loss, effectively reducing our investment in the partnership to zero as of December 31, 2009. In conjunction with the acquisition of the outside 62.0% equity interests in the Doubletree Guest Suites Times Square in January 2011, we adjusted both our investment in the Doubletree Guest Suites Times Square joint venture and the mezzanine loan to their fair market values, and recorded gains totaling $60.5 million on the remeasurement. In addition, in conjunction with the acquisition of the outside 50.0% equity interest in the BuyEfficient joint venture in January 2011, we adjusted our investment up to its fair market value, and recorded a gain of $8.7 million on the remeasurement. Income tax provision. Income tax provision totaled $1.1 million for the year ended December 31, 2012, and zero for both the years ended December 31, 2011 and 2010. During 2012, our use of net operating loss carryforwards resulted in federal and state income tax expense totaling $1.1 million. Income from discontinued operations. As described under “—Investing Activities—Dispositions” and in accordance with the Property, Plant and Equipment Topic of the FASB ASC, income from discontinued operations included the results of operations, along with any gains on extinguishment of debt, gains or losses on sales and impairments recognized for the following properties: Properties: Rooms: Disposition Date: 2012: Kahler Grand(1) 660 Held for sale as of December 31, 2012 Kahler Inn & Suites 271 Held for sale as of December 31, 2012 Marriott Rochester(1) 202 Held for sale as of December 31, 2012 Residence Inn by Marriott Rochester 89 Held for sale as of December 31, 2012 Textile Care Services Rochester — Held for sale as of December 31, 2012 Doubletree Guest Suites Minneapolis 229 September 2012 Hilton Del Mar 257 September 2012 Marriott Troy 350 September 2012 Office building adjacent to the Marriott Troy — September 2012 Marriott Del Mar 284 August 2012 2011: Valley River Inn 257 October 2011 Textile Care Services Salt Lake City — July 2011 Royal Palm Miami Beach 409 April 2011 2010 2: Courtyard by Marriott, San Diego (Old Town) 176 November 2010 Hilton Huntington 302 November 2010 Holiday Inn Downtown San Diego 220 November 2010 Holiday Inn Express, San Diego (Old Town) 125 November 2010 Marriott Provo 330 November 2010 Marriott Salt Lake City (University Park) 218 November 2010 Renaissance Atlanta Concourse 387 November 2010 Residence Inn by Marriott Manhattan Beach 176 November 2010 Marriott Ontario Airport 299 August 2010 W Hotel San Diego 258 July 2010 Renaissance Westchester(3) 347 June 2010 Total rooms 5,846 (1) During 2011, the Company subtracted eight rooms from the Kahler Grand and one room from the Marriott Rochester, bringing the hotel room counts to 660 and 202, respectively. (2) Hotels deeded back to the lenders, or sold by the receiver, pursuant to our 2009 secured debt restructuring program. (3) Hotel reacquired by the Company in June 2010.


  • Page 42

    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 40 Income from discontinued operations for the year ended December 31, 2012 includes activity for the four hotels and one office building sold during 2012 and the four hotels and one commercial laundry facility classified as held for sale as of December 31, 2012 due to their sale in January 2013. Income from discontinued operations for the year ended December 31, 2011 includes activity for the four hotels and one office building sold during 2012, the four hotels and one commercial laundry facility classified as held for sale as of December 31, 2012 and the two hotels and one commercial laundry facility sold in 2011. Income from discontinued operations for the year ended December 31, 2010 includes activity for the four hotels and one office building sold during 2012, the four hotels and one commercial laundry facility held for sale as of December 31, 2012, the two hotels and one commercial laundry facility sold in 2011, and the 11 hotels disposed of during 2010 pursuant to our 2009 secured debt restructuring program. Income from discontinued operations for the years ended December 31, 2012, 2011 and 2010 is as follows (in thousands): Year Ended Year Ended Year Ended December 31, December 31, December 31, 2012 2011 2010 Operating revenues $100,861 $130,997 $ 198,595 Operating expenses (71,089) (96,581) (163,286) Interest expense (6,490) (9,337) (29,071) Depreciation and amortization expense (13,164) (16,188) (21,299) Impairment loss — (1,495) (1,943) Gain on extinguishment of debt — 18,145 86,235 Gain on sale of hotels and other assets, net 38,292 14,912 — Income from discontinued operations $ 48,410 $ 40,453 $ 69,231 Income from consolidated joint venture attributable to non-controlling interest. Income from consolidated joint venture attributable to non-controlling interest totaled $1.8 million for the year ended December 31, 2012, $0.3 million for the year ended December 31, 2011, and zero for the year ended December 31, 2010. In April 2011 we purchased a 75.0% majority interest in the entity that owns the Hilton San Diego Bayfront. Consistent with the Presentation Topic of the FASB ASC, our net income for the years ended December 31, 2012 and 2011 includes 100% of the net income generated during our ownership period by the entity that owns the Hilton San Diego Bayfront. The outside 25.0% interest in the entity that owns the Hilton San Diego Bayfront earned net income of $1.8 million and $0.3 million for the years ended December 31, 2012 and 2011, respectively. Distributions to non-controlling interest. Distributions to non-controlling interest totaled $31,000 for the year ended December 31, 2012, $30,000 for the year ended December 31, 2011, and zero for the year ended December 31, 2010. We purchased the outside 62.0% common stock equity interest in our Doubletree Guest Suites Times Square joint venture in January 2011, and, as a result, we became the sole common stockholder of the captive REIT that owns the hotel. Preferred dividends earned by investors from the entity that owns the Doubletree Guest Suites Times Square, net of related administrative fees totaled $31,000 and $30,000 for the years ended December 31, 2012 and 2011, respectively. Preferred stock dividends and accretion. Preferred stock dividends and accretion totaled $29.7 million for the year ended December 31, 2012, $27.3 million for the year ended December 31, 2011, and $20.7 million for the year ended December 31, 2010. In April 2011, we issued 4,600,000 shares of Series D preferred stock, causing us to incur an additional $2.4 million in dividends during 2012 as compared to 2011, and an additional $6.8 million in dividends during 2011 as compared to 2010. This increase in 2011 was slightly offset by a reduction in preferred stock accretion due to the initial carrying value of our Series C preferred stock being fully accreted to its redemption value during the third quarter of 2010. Undistributed income allocated to unvested restricted stock compensation. In accordance with the Earnings Per Share Topic of the FASB ASC, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. As such, undistributed income of $0.2 million for 2012, $0.6 million for 2011 and $0.1 million for 2010 were allocated to the participating securities. INVESTING ACTIVITIES Acquisitions. We believe we are in the first half of a potentially prolonged cyclical lodging industry recovery. Accordingly, we further believe that hotels acquired over the next several quarters are likely to benefit from a multi-year recovery in hotel profitability, and may create long-term value in excess of our investment hurdles. During 2010, 2011 and 2012, we made several selective acquisitions. The following table sets forth the hotels we have acquired or reacquired since January 1, 2010:


  • Page 43

    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 41 Hotels Rooms Acquisition Date 2012: Hyatt Chicago Magnificent Mile, Chicago, Illinois 417 June 4, 2012 Hilton Garden Inn Chicago Downtown/Magnificent Mile, Chicago, Illinois 357 July 19, 2012 2011: Doubletree Guest Suites Times Square, New York City, New York 460 January 14, 2011 JW Marriott New Orleans, New Orleans, Louisiana(1) 494 February 15, 2011 Hilton San Diego Bayfront, San Diego, California 1,190 April 15, 2011 2010: Renaissance Westchester, White Plains, New York(2) 347 June 14, 2010 Royal Palm Miami Beach, Miami Beach, Florida(3) 409 August 27, 2010 Total January 1, 2010 to December 31, 2012 3,674 (1) Subsequent to this acquisition, the Company added two additional rooms to this hotel, increasing the room count to 496. (2) Hotel deeded back to the lender and reacquired by the Company on June 14, 2010. (3) Hotel sold by the Company on April 8, 2011. The total cost for these seven hotel acquisitions was approximately $585.5 million, including shares of the Company’s common stock valued at $51.2 million for accounting purposes, or $159,400 per room. Each of these acquisitions is discussed below. In June 2012, we purchased the leasehold interest in the 417-room Wyndham Chicago located in Chicago, Illinois for a contractual purchase price of $88.425 million. The acquisition was funded with $29.7 million of cash on hand (including $0.3 million of proration credits) and the issuance of 5,454,164 shares of our common stock, the “Wyndham stock consideration.” The Wyndham stock consideration was determined by dividing $58.425 million by the product of (1) the closing price of $10.40 on the NYSE of our common stock on May 2, 2012 and (2) 1.03. In connection with this acquisition, we entered into a registration rights agreement requiring us to register the Wyndham stock consideration. We prepared the registration statement on Form S-3, which we filed with the SEC as required on the day we acquired the hotel, June 4, 2012. Based on the $9.38 closing price of the Company’s common stock on the NYSE on June 4, 2012, the date the acquisition closed, the total purchase price of the Wyndham Chicago hotel for accounting purposes was $81.16 million, excluding proration adjustments and closing costs. Upon closing, we terminated the existing management agreement and entered into a new management agreement with Davidson Hotels & Resorts. We rebranded the hotel the Hyatt Chicago Magnificent Mile and immediately commenced planning for a $25.0 million renovation program (a portion of which will be funded by Hyatt Corporation). In July 2012, we purchased the 357-room Hilton Garden Inn Chicago Downtown/Magnificent Mile located in Chicago, Illinois for a net purchase price of $90.3 million. The acquisition was funded with a portion of the $126.2 million net proceeds we received from the issuance of 12,143,273 shares of our common stock in June 2012. In January 2011, we purchased the outside 62.0% equity interests in our Doubletree Guest Suites Times Square joint venture for $37.5 million, and, as a result, became the sole owner of the entity that owns the 460-room Doubletree Guest Suites Times Square located in New York City, New York. The hotel was encumbered by $270.0 million of non-recourse senior mortgage and mezzanine debt which was to mature in January 2012, and which bore a blended interest rate of 3-month LIBOR plus 115 basis points. We refinanced this debt in October 2011 with a new $180.0 million non-recourse mortgage which matures in October 2018, and bears interest at a floating rate of 3-month LIBOR plus 325 basis points. We funded the remainder of the repayment of the prior loan with approximately $90.0 million of our unrestricted cash. The hotel was encumbered by an additional $30.0 million mezzanine loan that was owned by the Company, and, therefore, eliminated in consolidation on our balance sheets until the mezzanine loan was satisfied in conjunction with our refinancing of the debt secured by the Doubletree Guest Suites Times Square in October 2011. In conjunction with the purchase of the outside 62.0% equity interests in our Doubletree Guest Suites Times Square joint venture, we recognized a gain of $30.1 million on the remeasurement of our equity interest in this joint venture to its fair market value, and a gain of $30.4 million on the remeasurement of our investment in the $30.0 million mezzanine loan, which we purchased in April 2010 for $3.45 million, to its fair market value. In February 2011, we purchased the 494-room JW Marriott New Orleans located in New Orleans, Louisiana for approximately $51.6 million in cash and the assumption of a $42.2 million f loating-rate, non-recourse senior mortgage. The mortgage, which matures in September 2015, has been swapped to a fixed rate of 5.45%, and is subject to a 25-year amortization schedule. Subsequent to this acquisition, we added two additional rooms to this hotel, increasing the room count to 496. In April 2011, we paid $182.8 million to acquire a 75.0% majority interest in the joint venture that owns the 1,190-room Hilton San Diego Bayfront hotel located in San Diego, California, which implied a gross value of approximately $475.0 million. Concurrent with the acquisition, the joint venture entered into a new $240.0 million mortgage financing secured by the hotel. The mortgage bears a floating rate of interest of 3-month LIBOR plus 325 basis points, matures in April 2016 and is subject to a 30-year amortization schedule.


  • Page 44

    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 42 In June 2010, we reacquired the 347-room Renaissance Westchester in White Plains, New York. In 2009, we transferred possession and control of the hotel to a court-appointed receiver pursuant to our 2009 secured debt restructuring program. In connection with this transfer, we deconsolidated this hotel and reclassified the assets and liabilities, including the $25.2 million hotel net asset and the hotel’s $29.2 million 4.98% non-recourse mortgage, to discontinued operations on our balance sheets. Additionally, we reclassified the Renaissance Westchester’s results of operations and cash flows to discontinued operations on our statements of operations and cash flows. We reacquired the Renaissance Westchester in June 2010 for $26.0 million, including $1.2 million of restricted cash and related costs for a net purchase price of $24.8 million. In connection with the repurchase of the Renaissance Westchester, the $29.2 million non-recourse mortgage was cancelled. We recorded a $6.7 million gain on extinguishment of debt to discontinued operations in June 2010. In August 2010, we used available cash on hand to acquire the Royal Palm hotel in Miami Beach, Florida at a foreclosure auction for a gross purchase price of $126.1 million excluding transaction costs. Prior to the auction, we purchased a portion of the hotel’s outstanding debt at a discount to par resulting in a net purchase price of the Royal Palm hotel of approximately $117.6 million. In addition to the above noted hotels, we deployed a portion of our excess cash in 2011 and 2010 towards non-hotel investments. Each of these non-hotel investments is discussed below. In January 2011, we purchased the outside 50.0% equity interest in our BuyEfficient joint venture for a gross purchase price of $9.0 million. As a result, we are now the sole owner of BuyEfficient. In conjunction with this purchase, we recognized a gain of $8.7 million on the remeasurement of our equity interest in this joint venture to its fair market value. In April 2010, we purchased two hotel loans with a combined principal amount of $32.5 million for a total purchase price of $3.7 million. The loans included (i) a $30.0 million, 8.5% mezzanine loan maturing in January 2017 secured by the equity interests in our Doubletree Guest Suites Times Square joint venture, and (ii) one-half of a $5.0 million, 8.075% subordinate note maturing in November 2010 secured by the 101-room boutique hotel known as Twelve Atlantic Station in Atlanta, Georgia. We purchased the mezzanine loan for $3.45 million and half of the subordinate note for $250,000. After our acquisition of the remaining interests in the Doubletree Guest Suites Times Square joint venture in January 2011, the mezzanine loan was eliminated in consolidation on our balance sheet until the mezzanine loan was satisfied in conjunction with our refinancing of the debt secured by the Doubletree Guest Suites Times Square in October 2011. In November 2010, we purchased the remaining half of the Twelve Atlantic Station subordinate note for an additional $250,000. In November 2010, the subordinate note was modified to provide for monthly interest only payments of 3.5%, with the remaining interest due at maturity, and the maturity date was extended to November 2012. As the subordinate note was in default, the borrower was required to bring the subordinate note current. During 2012, we continued to account for the subordinate note using the cost recovery method as we did not consider the expected cash flows from the loan to be reasonably probable and estimable. As of December 31, 2012, the subordinate note secured by the Twelve Atlantic Station was again in default, and we recorded a reserve for the remaining $0.2 million balance to bad debt expense, which is included in corporate overhead on our consolidated statements of operations and comprehensive income. We are currently working with the borrower and the special servicer to bring the note current, at which time we may reverse the bad debt expense we recorded in 2012. While our primary focus is on acquiring branded, urban, upper upscale hotels, our acquisition program is aimed at generating attractive risk-adjusted returns on our investment dollars, and therefore we may target lodging assets outside of the typical branded, urban, upper upscale profile represented by our existing portfolio in order to capitalize on opportunities which may arise. We intend to select the brands and operators for our hotels that we believe will lead to the highest returns. Additionally, the scope of our acquisitions program may include large hotel portfolios or hotel loans. Future acquisitions may be funded by our issuance of additional debt or equity securities, including our common and preferred OP units, or by draws on our $150.0 million senior corporate credit facility entered into in November 2010 and amended in September 2012. However, in light of our current financial objectives, we expect to fund any near term acquisitions with a greater proportion of equity capital than debt capital. Dispositions. We have from time to time divested of assets that no longer fit our target profile, will not offer long-term returns in excess of our cost of capital, or that have high risk relative to their anticipated returns. The following table sets forth the hotels we have sold or disposed of since January 1, 2010:


  • Page 45

    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 43 Hotels Rooms Disposition Date 2012: Marriott Del Mar, San Diego, California 284 August 23, 2012 Doubletree Guest Suites, Minneapolis, Minnesota(1) 229 September 14, 2012 Hilton Del Mar, San Diego, California(1) 257 September 14, 2012 Marriott, Troy, Michigan(1) 350 September 14, 2012 2011: Royal Palm Miami Beach, Miami Beach, Florida 409 April 8, 2011 Valley River Inn, Eugene, Oregon 257 October 26, 2011 2010: Renaissance Westchester, White Plains, New York(2)(3) 347 June 14, 2010 W Hotel, San Diego, California(2) 258 July 2, 2010 Marriott, Ontario (Airport), California(2) 299 August 12, 2010 Courtyard by Marriott, San Diego (Old Town), California(2) 176 November 1, 2010 Hilton, Huntington, New York(2) 302 November 1, 2010 Holiday Inn Downtown, San Diego, California(2) 220 November 1, 2010 Holiday Inn Express, San Diego (Old Town), California(2) 125 November 1, 2010 Marriott, Provo, Utah(2) 330 November 1, 2010 Marriott, Salt Lake City (University Park), Utah(2) 218 November 1, 2010 Renaissance Atlanta Concourse, Atlanta, Georgia(2) 387 November 1, 2010 Residence Inn by Marriott, Manhattan Beach, California(2) 176 November 1, 2010 Total January 1, 2010 to December 31, 2012 4,624 (1) The portfolio sale of the Doubletree Guest Suites Minneapolis, the Hilton Del Mar, and the Marriott Troy also included an office building adjacent to the Marriott Troy. (2) Hotels deeded back to the lenders, or sold by the receiver, pursuant to our 2009 secured debt restructuring program. (3) Hotel reacquired by the Company on June 14, 2010. The aggregate net sale proceeds for the four hotels and office building sold in 2012 and the two hotels sold in 2011 was $192.2 million, including the Royal Palm note, or $107,600 per room. The 11 hotels disposed of in 2010 pursuant to our secured debt restructuring program eliminated $282.7 million of debt from our balance sheet. The results of operations of all of the properties identified above and the gains or losses on dispositions and extinguishments of debt through December 31, 2012 are included in discontinued operations for all periods presented through the time of sale. The cash proceeds from the sales are included in our cash flows from investing activities for the respective periods. Each of these dispositions is discussed below. We sold four hotels and an office building adjacent to one of the hotels in 2012. In August 2012, we sold the Marriott Del Mar located in San Diego, California for net proceeds of $17.7 million, including the assumption of the existing mortgage secured by the hotel which totaled $47.1 million on the date of sale, and recognized a gain on the sale of $25.5 million. In addition, we wrote off $48,000 in deferred financing fees in conjunction with the buyer’s assumption of the debt secured by the hotel. In September 2012, we sold a portfolio of assets that included the Doubletree Guest Suites Minneapolis, the Hilton Del Mar, the Marriott Troy (located in Minneapolis, Minnesota, San Diego, California, and Troy, Michigan, respectively) and an office building adjacent to the Marriott Troy for net proceeds of $28.6 million, including the assumptions of three separate mortgages secured by the hotels totaling $75.6 million, as well as a $2.2 million liability for deferred management fees payable to the Marriott Troy’s third-party manager. We recognized a gain on the sale of $12.7 million. In addition, we wrote off $0.1 million in deferred financing fees in conjunction with the buyer’s assumption of the debt secured by the three hotels. The mortgages secured by the Marriott Del Mar, Hilton Del Mar and Marriott Troy contain “cash trap” provisions that were triggered in prior years due to the decline in the performance of these hotels. Once triggered, substantially all of the excess cash flow from operations generated by the three hotels was deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of the lenders. Cash was distributed to us only after certain items were paid, including deposits into leasing and maintenance reserve accounts and the payment of debt service, insurance, taxes, operating expenses, and extraordinary capital expenditures and leasing expenses. As of December 31, 2012, a total of $8.2 million of our cash was held by the lenders of these three hotels. The cash will be returned to us once the lenders release the cash to the buyers, which is expected to occur within the near term.


  • Page 46

    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 44 We sold two hotels in 2011. In April 2011, we sold the Royal Palm Miami Beach for net proceeds of $129.8 million, including $40.0 million in cash and the $90.0 million Royal Palm note, and recognized a gain on the sale of $14.0 million. We sold the Royal Palm note in October 2011 for net proceeds of approximately $79.2 million. In anticipation of this sale, we recorded an impairment loss of $10.9 million in September 2011. We retained an earn-out right on the Royal Palm hotel which will enable us to receive future payments of up to $20.0 million in the event that the hotel achieves certain return hurdles. In October 2011, we sold the Valley River Inn located in Eugene, Oregon for net proceeds of $16.1 million, including the assumption of the existing mortgage secured by the hotel which totaled $11.5 million on the date of sale, and recognized a gain on the sale of $0.9 million. We did not sell any hotels during 2010. We did, however, complete the disposal of 11 hotels pursuant to our secured debt restructuring program, which we initiated in 2009. In June 2010, we disposed of the Renaissance Westchester, and subsequently reacquired the hotel from the lender during the same month. We completed the deed back of the W San Diego in July 2010, and title to the hotel was trans- ferred to the lender. In August 2010, the Marriott Ontario Airport was sold by the receiver, and title to the hotel was transferred to the third party purchaser. In November 2010, we completed the deed back of eight hotels which secured a non-recourse mortgage, and titles to the hotels were transferred to the lender. As of December 31, 2010, five of the eight hotels remained subject to franchise agreements which contained corporate guaranties. If the franchise agreements on these five hotels were to be terminated, we were potentially liable for up to $19.6 million in termination fees. In June 2011, we paid termination fees of $1.5 million related to one of these five hotels, and the franchise agreements on the remaining four hotels were transferred to new owners, resulting in our recording $18.1 million to gain on extinguish- ment of debt in June 2011, which is included in discontinued operations. The following table summarizes our portfolio and room data from January 1, 2010 through December 31, 2012, adjusted for the hotels acquired, reacquired, disposed through non-sale disposition and sold during the respective periods. 2012 2011 2010 PORTFOLIO DATAHOTELS Number of hotels—beginning of period 32 31 40 Add: Acquisitions 2 3 1 Add: Reacquisitions — — 1 Less: Dispositions (4) (2) — Less: Non-sale dispositions — — (11) Number of hotels—end of period(1) 30 32 31 2012 2011 2010 PORTFOLIO DATAROOMS Number of rooms—beginning of period 13,208 11,722 13,804 Add: Acquisitions 774 2,144 409 Add: Reacquisitions — — 347 Add: Room (conversions) expansions (8) 8 — Less: Dispositions (1,120) (666) — Less: Non-sale dispositions — — (2,838) Number of rooms—end of period(1) 12,854 13,208 11,722 Average rooms per hotel—end of period(1) 428 413 378 (1) Both the number of hotels and number of rooms as of December 31, 2012 include four hotels which we have classified as held for sale as of December 31, 2012 due to their sale in January 2013: the Kahler Grand; the Kahler Inn & Suites; the Marriott Rochester; and the Residence Inn by Marriott Rochester. Without these four hotels, we had 26 hotels held for investment as of December 31, 2012, comprised of 11,632 rooms for an average of 447 rooms per hotel. The details of this sale are discussed below. In addition to the above noted hotel dispositions, in July 2011, we sold our commercial laundry facility located in Salt Lake City, Utah for net proceeds of $0.1 million, and recognized a loss on the sale of $0.1 million. In anticipation of this sale, we recorded an impairment loss of $1.5 million in June 2011, which is included in discontinued operations. In January 2013, we sold the Kahler Grand, the Kahler Inn & Suites, the Marriott Rochester, and the Residence Inn by Marriott Rochester in a portfolio sale that also included our commercial laundry facility in Rochester, Minnesota for a gross sales price of $230.0 million. In conjunction with the sale, we defeased the outstanding $26.7 million mortgage secured by the Kahler Grand for a total cost of approximately $30.0 million, prepaid the $0.4 million loan secured by the commercial laundry facility, and wrote off $51,000 in deferred financing fees. Renovations. During 2012, we invested $109.3 million in capital improvements to our hotel and other real estate portfolio. Consistent with our cycle-appropriate strategy, this investment in capital improvements to our portfolio was $8.9 million more than the amount we invested in 2011 and $52.3 million more than the amount we invested in 2010.


  • Page 47

    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 45 LIQUIDITY AND CAPITAL RESOURCES Historical. During the periods presented, our sources of cash included our operating activities, working capital, sales of hotel properties and other assets, distributions received from our unconsolidated joint ventures, proceeds from issuance of notes payable and our credit facility, and proceeds from our offerings of common and preferred stock. Our primary uses of cash were for acquisitions of hotel properties and other assets, capital expenditures for hotels, operating expenses, purchases of notes receivable, repayment of notes payable (including repurchases of Senior Notes) and our credit facility, dividends on our preferred stock and distributions to our joint venture partners. We cannot be certain that traditional sources of funds will be available in the future. Operating activities. Our net cash provided by or used in operating activities fluctuates primarily as a result of changes in RevPAR and operating cash flow of our hotels. Our net cash provided by or used in operating activities may also be affected by changes in our portfolio resulting from hotel acquisitions, dispositions or renovations. Net cash provided by operating activities was $171.5 million for 2012 compared to $155.2 million for 2011, and $44.3 million for 2010. The increases in 2012 as compared to 2011 and 2011 as compared to 2010 were primarily due to our acquisitions of new hotels, combined with increased earnings at our existing hotels. Investing activities. Our net cash provided by or used in investing activities fluctuates primarily as a result of acquisitions, dispositions and renovations of hotels. Net cash used in investing activities in 2012, 2011 and 2010 was as follows (in thousands): Year Ended Year Ended Year Ended December 31, December 31, December 31, 2012 2011 2010 Proceeds from sales of hotel properties and other assets $ 46,367 $ 44,576 $ 63 Cash received from unconsolidated joint venture — — 900 Restricted cash—replacement reserve (10,743) (8,143) (931) Acquisitions of notes receivable — — (3,950) Proceeds received from sale of note receivable — 79,194 — Acquisitions of hotel properties and other assets (120,003) (263,264) (142,410) Renovations and additions to hotel properties and other real estate (109,321) (100,400) (56,984) Payments for interest rate derivatives — (1,082) — Net cash used in investing activities $(193,700) $(249,119) $(203,312) Net cash used in investing activities was $193.7 million in 2012, as compared to $249.1 million in 2011, and $203.3 million in 2010. During 2012, we received total proceeds of $46.4 million from the sales of four hotels and an office building adjacent to one of the sold hotels, including $17.7 million for the Marriott Del Mar, $28.6 million from the portfolio sale of the Doubletree Guest Suites Minneapolis, the Hilton Del Mar, the Marriott Troy, and an office building adjacent to the Marriott Troy, and an additional $37,000 from the sale of surplus FF&E. This cash inflow was offset by the following cash outflows: $10.7 million as we increased the balance in our restricted cash replacement reserve accounts; $120.0 million to acquire two hotels, including $29.7 million paid to acquire the Hyatt Chicago Magnificent Mile, partially offset by $21,000 of unrestricted cash received upon acquisition and $90.3 million paid to acquire the Hilton Garden Inn Downtown/Magnificent Mile, partially offset by $11,000 of unrestricted cash received upon acquisition; and $109.3 million for renovations and additions to our portfolio. During 2011, we received net proceeds of $39.8 million from our sale of the Royal Palm Miami Beach, $0.1 million from our sale of the commercial laundry facility located in Salt Lake City, Utah, $16.1 million from our sale of the Valley River Inn partially offset by $11.5 million of debt assigned to the buyer of the hotel and an additional $0.1 million from the sale of surplus FF&E, for a total cash inflow of $44.6 million. In addition, during 2011, we received net proceeds of $79.2 million from the sale of the Royal Palm note. These cash inflows were offset as we increased the balance in our restricted cash replacement reserve accounts by $8.1 million, paid cash of $263.3 million to acquire hotel properties and other assets, paid cash of $100.4 million for renovations and additions to our portfolio, and paid cash of $1.1 million for interest rate derivative agreements. The $263.3 million total cash paid for acquisitions during 2011 is comprised of the following: $37.5 million for the outside 62.0% equity interests in our Doubletree Guest Suites Times Square, partially offset by $13.0 million of unrestricted cash acquired upon acquisition; $51.6 million for the JW Marriott New Orleans; $182.8 million for the 75.0% majority interest in the entity that owns the Hilton San Diego Bayfront, partially offset by $3.7 million of unrestricted cash acquired upon acquisition; and $9.0 million for the outside 50.0% equity interest in our BuyEfficient joint venture, partially offset by $0.9 million of unrestricted cash acquired upon acquisition. During 2010, we paid $117.6 million to acquire the Royal Palm Miami Beach and $24.8 million to reacquire the Renaissance Westchester, for a total cash outlay of $142.4 million. In addition, we increased the balance in our restricted cash replacement reserve accounts by $0.9 million, and we paid $4.0 million for the purchase of two notes receivable and $57.0 million for renovations and additions to our portfolio. These cash outflows were partially offset by $0.1 million of proceeds received from the sale of surplus FF&E at several of our hotels and our corporate office and distributions of $0.9 million received from our BuyEfficient joint venture.


  • Page 48

    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 46 Financing activities. Our net cash provided by or used in financing activities fluctuates primarily as a result of our issuance of common stock and our issuance and repayment of notes payable (including the repurchase of Senior Notes) and our credit facility, and our issuance and repurchase of other forms of capital, including preferred equity. Net cash provided by financing activities was $30.2 million in 2012, as compared to net cash used of $32.8 million in 2011, and net cash provided of $82.6 million in 2010. Net cash provided by financing activities for 2012 consisted of $126.1 million in net proceeds received from the issuance of common stock, including $126.2 million in net proceeds received from our common stock offering offset by $0.1 million in fees related to shares issued to the seller of the Hyatt Chicago Magnificent Mile, and $15.0 million in proceeds received from a draw on our credit facility. These cash inflows were partially offset by $68.8 million in principal payments on our notes payable and credit facility, including $32.2 million to repay the existing mortgage secured by the Renaissance Long Beach, $15.0 million to repay a draw on our credit facility and $21.6 million of principal payments on our notes payable. In addition, we paid $4.6 million to repurchase a portion of our Senior Notes, $1.3 million in deferred financing costs to amend our credit facility, $29.7 million in preferred dividends to our stockholders, and $6.4 million in distributions to the non-controlling interests in our hotels. Net cash used in financing activities for 2011 consisted of $568.3 million in principal payments on notes payable and our credit facility, including $233.8 million to repay an existing mortgage upon the acquisition of our Hilton San Diego Bayfront joint venture, $270.0 million to repay non-recourse senior mortgage and mezzanine debt upon our refinancing of the Doubletree Guest Suites Times Square, $40.0 million to repay a draw on our credit facility and $24.5 million of principal payments on our notes payable. In addition, we paid $9.0 million in deferred financing costs related to our assumptions of debt on the Doubletree Guest Suites Times Square and the JW Marriott New Orleans in connection with the acquisitions of these two hotels, the issuance of a note payable to our Hilton San Diego Bayfront joint venture, the refinancing of debt secured by the Doubletree Guest Suites Times Square, as well as costs related to our credit facility. We also paid dividends totaling $25.0 million to our stockholders and distributions totaling $1.3 million to partners in our joint ventures. These cash outflows were partially offset during 2011 by the receipt of $110.9 million in net proceeds from the issuance of our Series D preferred stock, and $460.0 million in proceeds from the issuance of notes payable and a draw on our credit facility. The $460.0 million includes $240.0 million received from the issuance of a note payable to our Hilton San Diego Bayfront joint venture, $180.0 million received from the refinancing of debt on our Doubletree Guest Suites Times Square and $40.0 million received from a draw on our credit facility. Net cash provided by financing activities for 2010 consisted primarily of $190.6 million in net proceeds received from the issuance of common stock and $92.5 million in proceeds received from the new loan on the Hilton Times Square. These cash inflows were partially offset by $175.2 million of principal payments on our notes payable, including $83.0 million paid to release three hotels from a loan, $81.0 million to pay off the loan on the Hilton Times Square in connection with the refinance of the loan and $11.2 million of principal amortization. In addition, net cash provided by financing activities for 2010 includes $20.5 million of dividends paid to our stockholders, and $4.8 million in deferred financing costs paid in connection with our new credit facility and the refinancing of the Hilton Times Square loan. Future. We expect our primary uses of cash to be for acquisitions of hotels, including possibly hotel portfolios, capital investments in our hotels, operating expenses, repayment of principal on our notes payable and credit facility, interest expense and dividends. We expect our primary sources of cash will continue to be our operating activities, working capital, notes payable, dispositions of hotel properties, and proceeds from public and private offerings of debt securities and common and preferred stock. Our financial objectives include the measured improvement of our credit ratios, maintenance of appropriate levels of liquidity, and a gradual reduction in our financial leverage. In light of our leverage objectives, in the near-term, we expect to fund acquisitions largely through the issuance of equity in order to grow the quality and scale of our portfolio while reducing our leverage. Our acquisitions of the Hyatt Chicago Magnificent Mile and the Hilton Garden Inn Chicago Downtown/Magnificent Mile in June 2012 and July 2012, respectively, were consistent with this strategy. Our ability to raise funds through the issuance of equity securities depends on, among other things, general market conditions for hotel companies and REITs and market perceptions about us. We will continue to analyze alternate sources of capital in an effort to minimize our capital costs and maximize our financial flexibility. However, when needed, the capital markets may not be available to us on favorable terms or at all. We believe that our current cash balance, our cash flow from operations, our access to capital markets and our unencumbered properties will provide us with sufficient liquidity to meet our current operating expenses and other expenses directly associated with our business (including payment of dividends on our capital stock, if declared) for the foreseeable future, and in any event for at least the next 12 months. Debt. In February 2012, we repurchased $4.5 million in aggregate principal amount of our Senior Notes for $4.57 million, including $13,000 in interest, using our existing cash. After the repurchase, such Senior Notes were cancelled. We wrote off $47,000 in deferred financing fees and $0.1 million of the Senior Notes discount, and recognized a loss of $0.2 million on this early extinguishment of debt. We repurchased the remaining $58.0 million balance of the Senior Notes at the first put date in January 2013 for $58.0 million plus $23,000 in accrued interest using our existing cash. After the repurchase, such Senior Notes were cancelled, leaving no amounts outstanding for the Senior Notes.


  • Page 49

    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 47 In April 2012, we used existing cash to repay the remaining $32.2 million balance of the non-recourse mortgage secured by the Renaissance Long Beach. In connection with this repayment, we wrote off $3,000 in deferred financing fees. In August 2012, we completed the sale of the Marriott Del Mar for a gross sales price of $66.0 million, including the buyer’s assumption of the $47.1 million mortgage secured by the hotel, and wrote off $48,000 in related deferred financing fees. In September 2012, we completed the portfolio sale of the Doubletree Guest Suites Minneapolis, the Hilton Del Mar, the Marriott Troy and an office building adjacent to the Marriott Troy for a gross sales price of $105.0 million, including the buyer’s assumption of the three mortgages secured by the hotels totaling $75.6 million, and wrote off $0.1 million in related deferred financing fees. In September 2012, we amended and restated our $150.0 million senior unsecured revolving credit facility, which was scheduled to mature in November 2013. The pricing on the amended revolving credit facility was reduced and the 1% LIBOR floor was eliminated. The maturity of the credit facility was extended to November 2015 with an option to extend to November 2016. The amended credit facility’s interest rate is based on a pricing grid with a range of 175 to 350 basis points, which represents a reduction from the previous grid that ranged from 325 to 425 basis points over LIBOR depending on our leverage ratio. The credit facility also includes an accordion option that allows us to request additional lender commitments up to a total of $350.0 million. We paid $1.3 million in deferred financing fees in conjunction with this amendment, which will be amortized over the term of the amended credit facility. The credit facility currently has no outstanding borrowings; however, as of December 31, 2012, we have $3.8 million in outstanding irrevocable letters of credit backed by the credit facility. In January 2013, we completed the portfolio sale of the Kahler Grand, the Kahler Inn & Suites, the Marriott Rochester, the Residence Inn by Marriott Rochester and a commercial laundry facility located in Rochester, Minnesota for a gross sales price of $230.0 million. Concurrent with the portfolio sale, we defeased the outstanding $26.7 million mortgage secured by the Kahler Grand for a total cost of approximately $30.0 million, prepaid the $0.4 million loan secured by the commercial laundry facility, and wrote off $51,000 in related deferred financing fees. Our 2011 debt activities involved our acquisitions of the outside 62.0% equity interests in our Doubletree Guest Suites Times Square joint venture in January 2011, the JW Marriott New Orleans in February 2011, and a 75.0% majority interest in the joint venture that owns the Hilton San Diego Bayfront in April 2011. In connection with our purchase of the outside 62.0% equity interests in our Doubletree Guest Suites Times Square in January 2011, we assumed $270.0 million of non-recourse senior mortgage and mezzanine debt which was scheduled to mature in January 2012, and which bore a blended interest rate of 3-month LIBOR plus 115 basis points. We refinanced this debt in October 2011 with a new $180.0 million non-recourse mortgage which matures in October 2018, and bears interest at a floating rate of 3-month LIBOR plus 325 basis points. The new mortgage requires payments of interest only for the first 24 months of the term, and is subject to a 30-year amortization schedule. In conjunction with this refinancing, we entered into an interest rate protection agreement which caps the 3-month LIBOR rate on the new mortgage at 4.0% until October 2015. We funded the remainder of the repayment of the prior loan with approximately $90.0 million of our unrestricted cash. Our purchase of the JW Marriott New Orleans in February 2011 included the assumption of a $42.2 million floating-rate, non-recourse senior mortgage. The mortgage, which matures in September 2015, has been swapped to a fixed rate of 5.45%, and is subject to a 25-year amortization schedule. Concurrent with our acquisition in April 2011 of a 75.0% majority interest in the joint venture that owns the Hilton San Diego Bayfront, the joint venture entered into a new $240.0 million mortgage secured by the hotel. The mortgage bears a floating rate of interest of 3-month LIBOR plus 325 basis points, matures in April 2016 and is subject to a 30-year amortization schedule. The joint venture also entered into an interest rate protection agreement which caps the 3-month LIBOR rate on the mortgage at 3.75% until April 2013. Regarding our 2010 debt activities, in February 2010, we elected to terminate our existing $80.0 million credit facility, and we wrote off $1.5 million in related deferred financing costs. The termination of the facility eliminated approximately $0.6 million in fees and associated costs per annum. In November 2010, we entered into a new $150.0 million senior corporate credit facility, which we later amended in September 2012. In November 2010, we entered into a new $92.5 million non-recourse mortgage on our Hilton Times Square. The new mortgage matures in 2020 and bears a fixed interest rate of 4.97%, with scheduled monthly principal and interest amounts based on a 30-year amortization. The proceeds from the new mortgage were used in part to repay the maturing $81.0 million mortgage on our Hilton Times Square, which bore an interest rate of 5.915%. Excess proceeds were retained for general corporate purposes. The new mortgage contains customary events of default relating to payments and breaches of representations and warranties.


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    SUNSTONE HOTEL INVESTORS, INC. 2012 A N N UA L R E PORT / PAGE 48 As of December 31, 2012, we had $1.4 billion of debt, including $27.3 million in debt associated with our held for sale properties, $235.6 million of cash and cash equivalents, including restricted cash, and total assets of $3.1 billion. We believe that by controlling debt levels, staggering maturity dates and maintaining a highly flexible capital structure, we can maintain lower capital costs than more highly leveraged companies, or companies with limited flexibility due to restrictive corporate-level financial covenants. As of December 31, 2012, all of our outstanding debt had fixed interest rates, except the $234.7 million non-recourse mortgage on the Hilton San Diego Bayfront and the $180.0 million non-recourse mortgage on the Doubletree Guest Suites Times Square, both of which are subject to interest rate cap agreements. The interest rate cap agreement on the Hilton San Diego Bayfront mortgage matures in April 2013, and caps the 3-month LIBOR rate at 3.75%. We plan to purchase a new interest rate cap agreement on the Hilton San Diego Bayfront mortgage in April upon the expiration of the current agreement. The interest rate cap agreement on the Doubletree Guest Suites Times Square mortgage matures in October 2015, and caps the 3-month LIBOR rate at 4.0%. The majority of our mortgage debt is in the form of single asset loans. We currently believe this structure is appropriate for the operating characteristics of our business and provides flexibility for assets to be sold subject to the existing debt, and as evidenced by our 2009 secured debt restructuring program, in instances where asset values have declined to levels below the principal amount of the associated mortgage, non-recourse single asset mortgages may limit the degradation in value experienced by our stockholders by shifting a portion of asset risk to our secured lenders. As of December 31, 2012, excluding debt on assets held for sale and the Senior Notes which were repurchased in January 2013, the weighted average term to maturity of our debt is approximately 5 years, and 68.2% of this debt is fixed rate with a weighted average interest rate of 5.6%. Including our variable-rate debt obligations based on the variable rates at December 31, 2012, the weighted average interest rate on this debt is 4.9%. Financial Covenants. We are subject to compliance with various covenants under the Series C preferred stock and the Senior Notes. With respect to our Series C preferred stock, if we fail to meet certain financial ratios for four consecutive quarters, a financial ratio violation will occur. During the continuation of a financial ratio violation, among other things, we would be restricted from paying dividends on our common stock, and may incur a 50 basis point per quarter dividend increase on the Series C preferred stock. Additionally, the Series C preferred stockholders would gain the right to appoint one board member. We do not currently expect to incur a financial ratio violation. With respect to our Senior Notes, if the maturity dates of more than $300.0 million of our indebtedness were to be accelerated as the result of uncured defaults, either the trustee or the holders of not less than 25% in principal amount of the outstanding Senior Notes would have the right to declare the Senior Notes and any unpaid interest immediately due and payable. As of December 31, 2012, none of the maturity dates have been accelerated for any of our indebtedness. In January 2013, we repurchased the remaining $58.0 million balance of the Senior Notes at the first put date in January 2013. After the repurchase, such Senior Notes were cancelled, leaving no amounts outstanding for the Senior Notes. Additionally, we may in the future seek to obtain mortgages on one or all of our unencumbered hotels which totaled 11 as of January 31, 2013 after our portfolio sale of four hotels in January 2013. All but two of the 11 unencumbered hotels are currently held by subsidiaries whose interests are pledged to our credit facility at December 31, 2012: Courtyard by Marriott Los Angeles, Fairmont Newport Beach, Hilton Garden Inn Chicago Downtown/Magnificent Mile (not pledged to our credit facility), Hyatt Chicago Magnificent Mile (not pledged to our credit facility), Hyatt Regency Newport Beach, Marriott Quincy, Marriott Portland, Renaissance Long Beach, Renaissance Los Angeles Airport, Renaissance Westchester and Sheraton Cerritos. These 11 hotels had an aggregate of 4,299 rooms as of December 31, 2012, and generated $247.1 million in revenue during 2012, including revenue generated prior to our ownership as applicable. Should we obtain secured financing on any or all of our 11 unencumbered hotels, the amount of capital available through our credit facility may be reduced. Cash Balance. As of December 31, 2012, our unrestricted cash balance of $157.2 million exceeds all of our pending maturities through April 2015. By minimizing our need to access external capital by maintaining higher than typical cash balances, our financial security and flexibility are meaningfully enhanced because we are able to fund our business needs and debt maturities partially with our cash. As we believe the lodging cycle is in the first half of a potentially prolonged cyclical recovery, we may deploy a portion of our excess cash balance in 2013 towards debt repayments and repurchases, selective acquisitions and capital investments in our portfolio. Our repurchase of the remaining $58.0 million balance of our Senior Notes in January 2013 is consistent with this strategy. While our primary focus is on acquiring branded, urban, upper upscale hotels, our acquisition program is aimed at generating attractive risk-adjusted returns on our investment dollars, and therefore we may target lodging assets outside of the typical branded, urban, upper upscale profile represented by our existing portfolio in order to capitalize on opportunities which may arise. Additionally, the scope of our acquisitions program may include large hotel portfolios or hotel loans.

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