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

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    stayin 2013 ANNUAL REPORT


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    ng the course Hyatt Regency San Fransisco — Acquired December 2013 802 Rooms


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    Our mission is simply to be the premier hotel owner. To some this may seem exceedingly lofty, but at Sunstone it defines who we are and crys- talizes the long-term goal we have committed to accomplish.


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    / 2013 ANNUAL REPORT / 03 C r e a t i n g s h a r e h o l d e r v a l u e — Our 2013 strategy focused on creating shareholder value through improvements in the quality and scale of our institutional-quality portfolio and gradually deleveraging our balance sheet. Our strategic initiatives in 2013 delivered a 4.5% growth in Adjusted 28 Hotel Comparable Portfolio RevPAR, a 5% increase in Pro Forma 29 Hotel Comparable Corporate Adjusted EBITDA and a 26.1% total shareholder return. We also continued to reduce our pro rata debt and preferred equity to total capitalization, which declined by 16.7 percentage points from 54.1% to 37.4%. Hyatt Regency San Francisco — Lobby SUNSTONE HOTEL INVESTORS, INC.


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    B VERA


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    / 2013 ANNUAL REPORT / 05 We completed three hotel acquisitions during 2013: Hilton New Orleans St. Charles (May 2013), Boston Park Plaza (July 2013) and Hyatt Regency San Francisco (December 2013). Each acquisition increased the quality and scale of our portfolio while also advancing our corporate objectives to improve financial flexibil- ity and reduce leverage. The acquisition of the Hyatt Regency San Francisco was highly consis- tent with our external growth strategy. Hyatt Regency San Francisco — Building Exterior SUNSTONE HOTEL INVESTORS, INC.


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    29 Institutional-quality, upper-upscale hotels CALIFORNIA OREGON UTAH TEXAS ILLINOIS LOUISIANA Courtyard by Marriott Los Angeles Marriott Portland Marriott Park City Hilton Houston–North Embassy Suites Chicago Hilton New Orleans St. Charles Embassy Suites La Jolla Marriott Houston Hilton Garden Inn Chicago Downtown/Magnificent Mile JW Marriott New Orleans Fairmont Newport Beach Hyatt Chicago Magnificent Mile Hilton San Diego Bayfront Hyatt Regency Newport Beach Hyatt Regency San Francisco Renaissance Long Beach Renaissance Los Angeles Airport Sheraton Cerritos


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    / 2013 ANNUAL REPORT / 07 Rooms with concentrations in top lodging markets across the country 13,744 FLOR IDA M A RY L A ND/D.C./V IRGINI A PE N N S Y LVA N I A NEW YORK M ASSACHUSETTS Renaissance Orlando at SeaWorld® Renaissance Baltimore— Marriott Philadelphia Doubletree Guest Suites Boston Park Plaza Harborplace Times Square Marriott Boston Long Wharf Renaissance Washington D.C. Hilton Times Square Marriott Quincy Marriott Tysons Corner Renaissance Westchester SUNSTONE HOTEL INVESTORS, INC.


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    / 2013 ANNUAL REPORT / 08 We have developed strategic concentrations of well-located, well-capitalized hotels in primary markets, such as Boston, New York, Washington D.C., Chicago, New Orleans, San Francisco, Los Angeles and San Diego. We anticipate each of these markets— collectively representing approximately two-thirds of our pro forma EBITDA—to generate superior RevPAR growth over the coming few years. Such concentrations also enable us to leverage our asset management efforts across multiple hotels. Boston Park Plaza — Acquired July 2013 1,053 Rooms SUNSTONE HOTEL INVESTORS, INC.


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    Hilton New Orleans St. Charles — Acquired May 2013 250 Rooms


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    / 2013 ANNUAL REPORT / 11 h i lt o n n e w o r l e a n s s t. C h a r l e s SUNSTONE HOTEL INVESTORS, INC.


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    We seek to improve the competitive positioning of our hotels through select renovations. In 2013, we invested $118 million into our portfolio. Focusing on our three hotels centrally- located near Chicago’s Magnificent Mile district, we completed transformative renovations at both the 419-room Hyatt Chicago Magnificent Mile and the 368-room Embassy Suites Chicago. We recently completed a full guestroom renovation at our 357-room Hilton Garden Inn Chicago Downtown/ Magnificent Mile. The following pages showcase some of the “Before”/“After” transformations.


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    / 2013 ANNUAL REPORT / 15 BE F OR E R E NOVAT ION Hyatt Chicago Magnificent Mile — Renovated Lobby SUNSTONE HOTEL INVESTORS, INC.


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    / 2013 ANNUAL REPORT / 16 BE F OR E R E NOVAT ION Hyatt Chicago Magnificent Mile — Renovated Great Room/Bar SUNSTONE HOTEL INVESTORS, INC.


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    / 2013 ANNUAL REPORT / 19 BE F OR E R E NOVAT ION Hyatt Chicago Magnificent Mile — Renovated Library & Computer Lounge SUNSTONE HOTEL INVESTORS, INC.


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    / 2013 ANNUAL REPORT / 20 BE F OR E R E NOVAT ION Embassy Suites Chicago — Renovated Lobby SUNSTONE HOTEL INVESTORS, INC.


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    Embassy Suites Chicago — Renovated Breakfast Buffet


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    / 2013 ANNUAL REPORT / 23 BE F OR E R E NOVAT ION SUNSTONE HOTEL INVESTORS, INC.


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    In a cyclical business such as lodging real estate, the most important and lasting opportunities to create value occur at the inflection points of our business cycle. We continued to execute on our stated plan in 2013, making appropriate tactical adjustments as the external environment changed. Our mid- term objective is to achieve low leverage and high financial flexibility by the time the current economic cycle peaks. Hilton San Diego Bayfront — Pool


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    / 2013 ANNUAL REPORT / 26 H I LTON SA N DI EGO BAY FRON T SUNSTONE HOTEL INVESTORS, INC.


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    Hilton San Diego Bayfront — Pool Club


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    / 2013 ANNUAL REPORT / 29 We plan to stay the course in 2014. We will continue to execute on our plan to carefully build shareholder value by improving the quality and scale of our portfolio while gradually deleveraging our balance sheet. Hilton San Diego Bayfront — Pool Club SUNSTONE HOTEL INVESTORS, INC.


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    we are staying the course. as we continue to navigate the middle years to refine revenue management strategies and develop new operating of what we believe will be a prolonged period of cyclical growth for efficiencies. examples of our 2013 asset management initiatives lodging companies, our long-term goal is unchanged: build share- include: holder value by improving the quality and scale of our portfolio while • Completed approximately $118 million of hotel-level capital gradually deleveraging our balance sheet. over the past several years, we invest ments, including major renovations of our hilton times have demonstrated that our long-term goal is not self-contradictory: square, hyatt Chicago Magnificent Mile, hyatt regency newport a lodging reit can create meaningful shareholder value while materi- Beach and renaissance westchester. ally deleveraging its balance sheet. • Created non-rooms revenue maximization plans for each hotel. Disciplined External Growth—we seek to invest in institutional-quality Dear Shareholders, w e m a d e s o l i d p r o g r e s s i n 2 013 hotels that generate returns in excess of our cost of capital, that are we’ve worked to achieve our long-term goal by executing on a strategic additive to the quality of our portfolio, that have attractive growth plan comprised of four pillars: proactive portfolio management, intensive potential and that may benefit from our asset management competen- asset management, disciplined external growth and measured balance cies. we seek to structure our acquisitions in ways that will not only sheet improvement. we are proud of the progress we made in each of create shareholder value but will also advance our other corporate these areas in 2013. objectives, such as improving our financial flexibility and reducing our leverage. in 2013, we acquired the following three hotels: Proactive Portfolio Management—we seek to maximize the long-term value of our investments by taking steps to enhance our portfolio • hilton new orleans st. Charles (250 rooms): acquired on May 1, 2013 for a net purchase price of $59 million. quality, increase our exposure to key markets, reduce our exposure to slower-growth markets and improve the effectiveness and efficiency of • Boston Park Plaza (1,053 rooms): acquired on July 2, 2013 for a our decision making. examples of our 2013 portfolio management net purchase price of $248 million. initiatives include: • hyatt regency san francisco (802 rooms): acquired on december 2, 2013 for a net purchase price of $263 million. • sold four, low revPar, low growth hotels and a commercial laundry in rochester, Minnesota for a gross sale price of $230 million (12.8x Measured Balance Sheet Improvement—we believe that a low overall trailing hotel eBitda on allocated hotel purchase price). cost of capital and significant financial flexibility are critical mid-term • Continued to implement a portfolio-wide energy efficiency program, objectives. accordingly, our long-term capital plan sets forth annual which helped reduce our overall energy costs per occupied room by credit milestones to be achieved in conjunction with our portfolio 5% in 2013 and 16% since 2012. management and growth objectives. our 2013 finance transactions • developed new proprietary decision support models supporting included: our asset management, acquisitions and finance disciplines. • in January 2013, we retired the remaining $58 million of our Intensive Asset Management—we work closely with our third-party 4.60% senior exchangeable notes. hotel operators to develop and implement long-term strategic plans for • in february 2013, we issued approximately $295 million of common each of our hotels, which seek to maximize both the competitiveness stock at an attractive price relative to our internally estimated net of our hotels and our returns on invested capital. on a day-to-day asset value. we used the proceeds to redeem all of our 8.0% series basis, our asset managers work directly with our third-party operators a Cumulative redeemable Preferred stock and all of our series C Cumulative Convertible redeemable Preferred stock, as well as to


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    / 2013 ANNUAL REPORT / 31 partially fund our acquisitions of the hilton new orleans st. Charles c yclic a l str ategy and the Boston Park Plaza. following the last downturn we were faced with a clear choice: either learn to • in november 2013, we issued approximately $271 million of common ride the cyclical wave or eventually be crushed by it. we’ve now benefitted stock at an attractive price relative to our internally estimated net asset from four years of rising demand for lodging. our portfolio occupancy value. we used the proceeds from this offering to acquire the hyatt levels are above all-time highs, our average daily room rates are approach- regency san francisco and for general corporate purposes. ing (and in many cases exceeding) all-time highs, new hotel supply trends during 2013, our various strategic initiatives helped to drive a 4.5% in many of our markets remain muted, and capital costs remain low. times improvement in adjusted 28 hotel Comparable Portfolio revPar, a 5% are good and continue to improve. so why does our strategy call for contin- increase in Pro forma 29 hotel Comparable Corporate adjusted eBitda, ued deleveraging? why don’t we finance our growth with inexpensive and a 16.7 percentage point reduction in our pro rata debt and preferred equity increasingly borrower-friendly debt? simply put: while our industry is to total capitalization and a 26.1% total shareholder return. over the past currently healthy and fundamentals clearly point to continued growth, our two years, we have reduced our pro rata debt and preferred equity to total business remains inherently cyclical and highly sensitive to changes in the capitalization by 28.9 percentage points from 66.3% to 37.4% while gener- economy. additionally, our business carries substantial operating leverage. ating total shareholder returns of 66%. these qualities tend to intensify industry profit growth during periods of cyclical recovery such as the one we’ve experienced for the last four years. these same qualities tend to aggravate cash flow compression during o u r c o m m i t m e n t s f o r 2 01 4 periods of cyclical decline. we believe we are in the middle innings of a potentially prolonged growth phase. while we will make appropriate tactical adjustments based on while we see no signs of an impending cyclical peak or industry downturn, changes in our macro and competitive environments, we plan to stay the the lessons learned during the last cyclical downturn guide our current course in 2014. in other words, we will continue to execute on our stated strategy. we have taken and will continue to take proactive, methodical plan to carefully build shareholder value by improving the quality and scale steps toward achieving low leverage and high financial flexibility while the of our portfolio while gradually deleveraging our balance sheet. our cyclical wave continues to build over what we believe will be at least the business plan for 2014 encompasses the following: next several years. we expect this strategy will position us to capitalize on • we will carefully grow the quality and scale of our portfolio through opportunities to create significant value by acquiring distressed assets, select acquisitions where hotels can be acquired at attractive valuations securities and hotel portfolios at deep discounts when such opportunities relative to our cost of capital. arise following the next cyclical peak. • we will selectively deploy capital into our hotels in order to maximize the competitiveness of our hotels while generating strong returns on thank you again for your commitment to sunstone. our capital. sincerely, • we will evaluate selective divestitures of assets that no longer meet our investment criteria or which can be sold at material premiums to our hold values. • we will identify and implement new property-level efficiency measures and ancillary revenue sources. ken Cruse • and finally, we will look to further improve on our best-in-class investor Chief executive officer communications. SUNSTONE HOTEL INVESTORS, INC.


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    / 2013 ANNUAL REPORT / 32 Selected Financial Data / Financial Review 33 Management’s Discussion and Analysis of Financial Condition and Results of Operations / 34 Reports of Independent Registered Public Accounting Firm / 59 Consolidated Balance Sheets / 61 Consolidated Statements of Operations / 62 Consolidated Statements of Comprehensive Income / 63 Consolidated Statements of Equity / 64 Consolidated Statements of Cash Flows / 65 Notes to Consolidated Financial Statements / 67 Stock Information / 93 Corporate Information / 94 SUNSTONE HOTEL INVESTORS, INC.


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    / 2013 ANNUAL REPORT / 33 SELECTED FINA NCI A L 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, ($ in thousands) 2013 2012 2011 2010 2009 OPER ATING DATA: REVENUES Room $ 653,955 $ 576,146 $ 501,183 $ 351,039 $ 336,981 Food and beverage 213,346 200,810 175,103 138,188 134,319 Other operating 56,523 52,128 45,508 26,373 30,241 Total revenues 923,824 829,084 721,794 515,600 501,541 OPER ATING EXPENSES Room 170,361 147,932 128,225 92,101 85,879 Food and beverage 147,713 139,106 126,139 98,889 96,755 Other operating 16,819 16,162 14,004 11,535 11,786 Advertising and promotion 47,306 42,474 37,226 27,326 26,404 Repairs and maintenance 35,884 32,042 29,067 22,608 22,437 Utilities 27,006 25,596 25,537 19,117 18,879 Franchise costs 32,932 30,067 25,595 18,032 17,435 Property tax, ground lease and insurance 79,004 66,830 58,010 35,280 37,058 Property general and administrative 103,454 94,642 85,293 61,753 58,675 Corporate overhead 26,671 24,316 25,453 21,751 25,072 Depreciation and amortization 137,476 130,907 113,708 79,633 78,790 Impairment loss — — 10,862 — 2,823 Total operating expenses 824,626 750,074 679,119 488,025 481,993 Operating income 99,198 79,010 42,675 27,575 19,548 Equity in net earnings (losses) of unconsolidated joint ventures — — 21 555 (27,801) Interest and other income 2,821 297 3,115 112 1,378 Interest expense (72,239) (76,821) (74,195) (58,931) (62,137) Gain (loss) on extinguishment of debt (44) (191) — — 54,506 Gain on remeasurement of equity interests — — 69,230 — — Income (loss) before income taxes and discontinued operations 29,736 2,295 40,846 (30,689) (14,506) Income tax provision (8,145) (1,148) — — — Income (loss) from continuing operations 21,591 1,147 40,846 (30,689) (14,506) Income (loss) from discontinued operations 48,410 48,410 40,453 69,231 (255,102) NET INCOME (LOSS) 70,001 49,557 81,299 38,542 (269,608) Income from consolidated joint venture attributable to non-controlling interest (4,013) (1,761) (312) — — Distributions to non-controlling interest (32) (31) (30) — — Dividends paid on unvested restricted stock compensation (201) — — — (447) Preferred stock dividends, redemption charges and accretion (19,013) (29,748) (27,321) (20,652) (20,749) Undistributed income allocated to unvested restricted stock compensation (235) (203) (636) (102) — INCOME AVAILABLE (LOSS ATTRIBUTABLE) TO COMMON STOCKHOLDERS $ 46,507 $ 17,814 $ 53,000 $ 17,788 $ (290,804) Income (loss) from continuing operations available (attributable) to common stockholders per diluted common share $ (0.01) $ (0.24) $ 0.11 $ (0.52) $ (0.51) Cash dividends declared per common share $ 0.10 $ 0.00 $ 0.00 $ 0.00 $ 0.00 BA L A NCE SHEET DATA: Investment in hotel properties, net(1) $3,231,382 $2,681,877 $2,532,232 $1,666,180 $1,670,164 Total assets $3,508,798 $3,136,675 $3,101,240 $2,436,106 $2,513,530 Total debt(1) $1,404,075 $1,363,389 $1,416,890 $ 973,810 $ 968,816 Total liabilities $1,556,399 $1,517,362 $1,675,946 $1,236,807 $1,526,867 Equity $1,952,399 $1,519,313 $1,325,294 $1,099,299 $ 886,767 (1) 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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    M A NAGE M E N T’S DISCUSSION A N D A NA LYSIS OF FI NA NCI A L CON DI T ION A N D R E SU LTS OF OPE R AT IONS The following discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. OV ERV IEW 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 BuyEfficient, LLC (“BuyEfficient”), an electronic purchasing platform that allows members to procure food, operating supplies, furniture, fixtures and equipment. We own primarily upper upscale hotels in the United States. As of December 31, 2013, we had interests in 29 hotels, which are currently held for investment (the “29 hotels”). Of the 29 hotels, we classify 27 as upscale or upper upscale and two as luxury as defined by Smith Travel Research, Inc. All but one (the Boston Park Plaza) of our 29 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. While independent hotels may do well in strong market locations, 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 primarily in urban locations that benefit from significant barriers to entry by competitors. All of our 29 hotels are considered business, convention, or airport hotels, as opposed to resort or leisure hotels. The hotels comprising our 29 hotel portfolio average 474 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. 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. Our strategy over the next several years, during what we believe will be the middle/mature phase of the lodging cycle, is to improve the quality and scale of our portfolio while gradually deleveraging our balance sheet. Our goal is to achieve low leverage and high financial flexibility by the time the current cycle peaks. We believe if we are successful in executing on this strategy, we will position the Company to create value during the next successive cyclical trough by aggressively acquiring distressed assets or securities. Our strategic plan encompasses several elements, including proactive portfolio management, intensive asset management, disciplined external growth and measured balance sheet improvement as detailed below: » Proactive Portfolio Management. 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. » Intensive Asset Management. 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. » Disciplined External Growth. 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. » Measured Balance Sheet Improvement. We believe that a low overall cost of capital and significant financial flexibility 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 and the maintenance of appropriate levels of liquidity 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. 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.


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    / 2013 ANNUAL REPORT / 35 During the past four years, 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 currently in the middle phase of a cyclical lodging recovery. Hotels acquired during the early stages of past cyclical recoveries have benefited from multi-year increases in profitability. Accordingly, during the past three years, we selectively acquired interests in eight hotels: the Doubletree Guest Suites Times Square in January 2011; the JW Marriott New Orleans in February 2011; the Hilton San Diego Bayfront in April 2011; the Hyatt Chicago Magnificent Mile in June 2012; the Hilton Garden Inn Chicago Downtown/Magnificent Mile in July 2012; the Hilton New Orleans St. Charles in May 2013; the Boston Park Plaza in July 2013; and the Hyatt Regency San Francisco in December 2013. Based on our purchase prices, the combined asset value of these eight hotels totals $1.5 billion, or $299,000 per key. In addition, we purchased the outside 50.0% equity interest in our BuyEfficient joint venture in January 2011. Our acquisition program is aimed at generating attractive risk-adjusted returns on our investment dollars. We, therefore, 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 May 1, 2013, we purchased the 250-room Hilton New Orleans St. Charles for a net purchase price of $59.1 million, including $0.2 million of proration credits and unrestricted cash received from the seller. The acquisition was funded with $53.2 million of proceeds generated by our January 2013 sale of four hotels and a commercial laundry facility located in Rochester, Minnesota, as well as with proceeds received from our February 2013 issuance of common stock. On July 2, 2013, we purchased the 1,053-room Boston Park Plaza for a net purchase price of $248.0 million, including $2.0 million of proration credits, unrestricted and restricted cash and other adjustments received from the seller. The acquisition was funded with $92.3 million of proceeds generated by our January 2013 sale of four hotels and a commercial laundry facility located in Rochester, Minnesota, the assumption of a $119.2 million non-recourse loan secured by the hotel, as well as with proceeds received from the Company’s February 2013 issuance of common stock and with cash on hand. The mortgage we assumed in conjunction with our purchase of the Boston Park Plaza bears interest at a fixed rate of 4.4%, and matures in February 2018. On December 2, 2013, we purchased the 802-room Hyatt Regency San Francisco for a net purchase price of $262.5 million, including $5.5 million of purchase price adjustments comprised of restricted cash and other adjustments received from the seller. The acquisition was funded with proceeds generated by our November 2013 issuance of common stock. 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. However, in light of our long-term 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 high risk relative to their anticipated return expectations. In connection with this strategy, during the past three years, we sold 10 hotels: 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; the Doubletree Guest Suites Minneapolis, the Hilton Del Mar, and the Marriott Troy in September 2012; and the Kahler Grand, the Kahler Inn & Suites, the Marriott Rochester and the Residence Inn by Marriott Rochester (the “Rochester Hotels”) in January 2013. Based on our sales prices, the combined asset value of these 10 hotels totals $547.2 million, or $182,000 per key. In addition, during the past three years, we sold the following non-hotel assets: a commercial laundry facility located in Salt Lake City, Utah in July 2011; an office building adjacent to the Marriott Troy in September 2012; and a commercial laundry facility located in Rochester, Minnesota in January 2013. In January 2013, we sold the Rochester Hotels and a commercial laundry facility (together with the Rochester Hotels, the “Rochester Portfolio”) in Rochester, Minnesota, to an unaffiliated third party, for net proceeds of $195.6 million, of which $145.7 million was deposited with an accommodator in order to facilitate tax-deferred exchanges. During 2013, all of the cash held by an accommodator was utilized to partially fund the tax-deferred exchanges of the Hilton New Orleans St. Charles and the Boston Park Plaza. The Rochester Hotels include the 660-room Kahler Grand, the 271-room Kahler Inn & Suites, the 202-room Marriott Rochester and the 89-room Residence Inn by Marriott Rochester. We recognized a net gain on the sale of $51.6 million. We retained a $25.0 million preferred equity investment (the “Preferred Equity Investment”) in the Rochester Hotels that yields an 11% dividend, resulting in a deferred gain on the sale of $25.0 million. The $25.0 million gain will be deferred until the Preferred Equity Investment is repaid. We also provided a $3.7 million working cash advance to the buyer, resulting in a deferred gain on the sale of $3.7 million. The $3.7 million gain will be deferred until we are repaid from the Rochester Portfolio’s available cash flow. In addition, we retained a $14.0 million liability related to the Rochester Portfolio’s pension plan, which could be triggered in certain circumstances, including termination of the pension plan. The recognition of the $14.0 million pension plan liability reduced our gain on the sale of the Rochester Portfolio. The $14.0 million gain will be recognized, if at all, when and to the extent we are released from any potential liability related to the Rochester Portfolio’s pension plan. Concurrent with the Rochester Portfolio sale, we extinguished the outstanding $26.7 million mortgage secured by the Kahler Grand for a total cost of $29.8 million, prepaid the $0.4 million loan secured by the commercial laundry facility, and recorded a loss on extinguishment of debt of $3.1 million which is included in discontinued operations. In January 2013, we repurchased $42.0 million of our Operating Partnership’s 4.60% exchangeable senior notes (the “Senior Notes”) pursuant to a tender offer, and redeemed the remaining $16.0 million of the Senior Notes. We funded the total $58.0 million in Senior Note redemptions with available cash, leaving no future amounts outstanding related to the Senior Notes. We recognized a loss of $44,000 on this early extinguishment of debt. In February 2013, we issued 25,300,000 shares of our common stock, including the underwriters’ over-allotment of 3,300,000 shares, for net proceeds of $294.9 million. We used these proceeds to redeem all of our Series A preferred stock and all of our Series C preferred stock, as well as to partially fund our acquisitions of the Hilton New Orleans St. Charles and the Boston Park Plaza. In March 2013, we used a portion of the proceeds we received from our February 2013 common stock offering to redeem all 7,050,000 shares of our Series A preferred stock for an aggregate redemption price of $178.6 million, including $2.3 million in accrued dividends. An additional redemption charge of $4.6 million was recognized related to the original issuance costs of the


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    Series A preferred stock, which were previously included in additional paid in capital. After the redemption date, we have no outstanding shares of Series A preferred stock, and all rights of the holders of such shares were terminated. Because we redeemed the Series A preferred stock in full, trading of the Series A preferred stock on the New York Stock Exchange ceased after the redemption date. In May 2013, in anticipation of our acquisition of the Boston Park Plaza and the $119.2 million mortgage debt we assumed, we used a portion of the proceeds we received from our February 2013 common stock offering to redeem all 4,102,564 shares of our Series C preferred stock for an aggregate redemption price of $101.1 million, including $1.1 million in accrued dividends. An additional redemption charge of $0.1 million was recognized related to the original issuance costs of the Series C preferred stock, which were previously included in additional paid in capital. After the redemption date, we have no outstanding shares of Series C preferred stock, and all rights of the holders of such shares were terminated. In November 2013, we issued 20,000,000 shares of our common stock for net proceeds of $270.9 million. We used a portion of the net proceeds from this offering to purchase the Hyatt Regency San Francisco, and intend to use the remaining proceeds for potential future acquisitions, capital investment in our portfolio and other general corporate purposes, including working capital. As of December 31, 2013, the weighted average term to maturity of our debt is approximately four years, and 70.7% of our debt is fixed rate with a weighted average interest rate of 5.4%. The weighted average interest rate on all of our debt, which includes our variable-rate debt obligations based on variable rates at December 31, 2013, is 4.9%. OPER ATING ACTIV ITIES Operating Performance Indicators. The following performance indicators are commonly used in the hotel industry: » Occupancy; » Average daily room rate, or ADR; » Revenue per available room, or RevPAR, which is the product of occupancy and ADR, and does not include food and beverage revenue, or other operating revenue; » Comparable RevPAR, which we define as the RevPAR generated by hotels we owned as of the end of the reporting period, but excluding those hotels that we classified as held for sale and those hotels whose room counts have materially changed during either the current or prior year. 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 hotels in which we have interests as of December 31, 2013, excluding the Boston Park Plaza due to the hotel adding 12 rooms in September 2012, and an additional 100 rooms in January 2013. 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, the Hilton Garden Inn Chicago Downtown/Magnificent Mile and the Hyatt Regency San Francisco; » RevPAR index, which is the quotient of a hotel’s RevPAR divided by the average RevPAR of its competitors, multiplied by 100. A RevPAR index in excess of 100 indicates a hotel is achieving higher RevPAR than the average of its competitors. In addition to absolute RevPAR index, we monitor changes in RevPAR index; » Operating flow through, which is the comparison between reporting periods of the change in hotel EBITDA divided by the change in hotel revenues; » EBITDA, 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; » 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 assessments or credits; and any other identified adjustments; » Funds from operations, or FFO, which includes net income (loss), excluding non-controlling interests, gains and losses from sales of property, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs) and real estate-related impairment losses, and after adjustment for unconsolidated partnerships and joint ventures; and » Adjusted FFO, which includes FFO but excludes penalties, written-off deferred financing costs, non-real estate-related impairment losses 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: » Room revenue, which is the product of the number of rooms sold and the ADR; » Food and beverage revenue, which is comprised of revenue realized in the hotel food and beverage outlets as well as banquet and catering events; and » Other operating revenue, which includes ancillary hotel revenue and other items primarily driven by occupancy such as telephone, 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: » Room expense, which is primarily driven by occupancy and, therefore, has a significant correlation with room revenue; » Food and beverage expense, which is primarily driven by food and beverage sales and banquet and catering bookings and, therefore, has a significant correlation with food and beverage revenue; » Other operating expense, which includes the corresponding expense of other operating revenue, advertising and promotion, repairs and maintenance, utilities, and franchise costs; » Property tax, ground lease and insurance expense, which includes the expenses associated with property tax, ground lease and insurance 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; » 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 for BuyEfficient (subsequent to our purchase of the outside 50.0% equity interest in January 2011);


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    / 2013 ANNUAL REPORT / 37 » 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 taxes, travel expenses and office rent; » 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 » Impairment loss, which includes the charges we have recognized to reduce the carrying value of assets on our balance sheets to their fair value. Other Revenue and Expense. Other revenue and expense consists of the following: » Equity 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; » Interest and other income, which includes interest we have earned on our restricted and unrestricted cash accounts, the Preferred Equity Investment, and the Royal Palm note (which was sold in 2011), as well as any gains or losses we have recognized on sales of assets other than real estate investments; » Interest 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; » Loss on extinguishment of debt, which includes the loss we recognized on the repurchase and cancellation of the Senior Notes; » 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; » Income tax provision, which includes federal and state income taxes charged to the Company, and any adjustments to unrecognized tax positions, along with any related interest and penalties incurred; » Income from discontinued operations, which includes the results of operations for any hotels or other real estate investments sold during the reporting period, along with the gain or loss realized on the sale of these assets and any extinguishments of related debt; » 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; » Distributions to non-controlling interest, which includes preferred dividends earned by investors from an entity that owns the Doubletree Guest Suites Times Square, including related adminis- trative fees; » Dividends paid on unvested restricted stock compensation, which includes dividends earned on our unvested restricted stock awards; » Preferred stock dividends and redemption charges, which includes dividends earned on our Series A preferred stock and Series C preferred stock up until their redemptions in March 2013 and May 2013, respectively, and 8.0% Series D Cumulative Redeemable Preferred Stock (“Series D preferred stock”), as well as redemption charges for preferred stock redemptions made in excess of net carrying values; and » Undistributed 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, the effectiveness of our operators in increasing revenue and controlling hotel operating expenses and the timing and scope of renovations. » Demand. The demand for lodging generally fluctuates with the overall economy. Demand for our hotels has improved each year since 2010. In 2011, our Comparable Portfolio RevPAR increased 8.2% as compared to 2010, with a 290 basis point increase in portfolio occupancy. Demand continued to improve in 2012 and 2013. As a result, our Comparable Portfolio RevPAR increased 5.6% in 2012 as compared to 2011, and 4.3% in 2013 as compared to 2012. Comparable Portfolio occupancy increased 240 basis points in 2012 as compared to 2011, and increased an additional 80 basis points in 2013 as compared to 2012. Our operating statistics improved in 2013 as compared to both 2012 and 2011, even as several of our hotels were under major room renovations during 2013. 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 years if the U.S. economy continues to grow and employment levels continue to improve. » 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 several 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, Washington, D.C. and Chicago where there are currently higher-than-average supplies 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. » Revenues 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.


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    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 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 111.0 in 2011, decreasing approximately 10 basis points in 2012 to 110.9 due to several capital investment programs at our hotels. Our 2013 Comparable Portfolio RevPAR index, which was also negatively impacted by several capital investment programs at our hotels, decreased 60 basis points to 110.3. 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 48% in 2012 as compared to 2011, and 39% in 2013 as compared to 2012. Operating Results. The following table presents our operating results for our total portfolio for the years ended December 31, 2013 and 2012, 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 29 hotels (13,744 rooms) as of December 31, 2013 and 26 hotels (11,632 rooms) as of December 31, 2012, as well as discontinued operations for 4 hotels (1,222 rooms) as of December 31, 2013 and 8 hotels (2,342 rooms) as of December 31, 2012. These amounts can be found in our consolidated financial statements and related notes included elsewhere in this Annual Report. 2013 2012 Change $ Change % (dollars in thousands, except statistical data) REVENUES Room $653,955 $576,146 $ 77,809 13.5% Food and beverage 213,346 200,810 12,536 6.2% Other operating 56,523 52,128 4,395 8.4% Total revenues 923,824 829,084 94,740 11.4% OPER ATING EXPENSES Hotel operating 557,025 500,209 56,816 11.4% Property general and administrative 103,454 94,642 8,812 9.3% Corporate overhead 26,671 24,316 2,355 9.7% Depreciation and amortization 137,476 130,907 6,569 5.0% Total operating expenses 824,626 750,074 74,552 9.9% OPER ATING INCOME 99,198 79,010 20,188 25.6% Interest and other income 2,821 297 2,524 849.8% Interest expense (72,239) (76,821) 4,582 6.0% Loss on extinguishment of debt (44) (191) 147 77.0% Income before income taxes and discontinued operations 29,736 2,295 27,441 1,195.7% Income tax provision (8,145) (1,148) (6,997) (609.5)% INCOME FROM CONTINUING OPER ATIONS 21,591 1,147 20,444 1,782.4% Income from discontinued operations 48,410 48,410 — 0.0% NET INCOME 70,001 49,557 20,444 41.3% Income from consolidated joint venture attributable to non-controlling interest (4,013) (1,761) (2,252) (127.9)% Distributions to non-controlling interest (32) (31) (1) (3.2)% Dividends paid on unvested restricted stock compensation (201) — (201) (100.0)% Preferred stock dividends and redemption charges (19,013) (29,748) 10,735 36.1% Undistributed income allocated to unvested restricted stock compensation (235) (203) (32) (15.8)% I N C O M E AVA I L A B L E T O C O M M O N S T O C K H O L D E R S $ 46,507 $ 17,814 $ 28,693 161.1%


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    / 2013 ANNUAL REPORT / 39 The following table presents our operating results for our total portfolio for the years ended December 31, 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 continuing operations for 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 and redemption charges (29,748) (27,321) (2,427) (8.9)% Undistributed income allocated to unvested restricted stock compensation (203) (636) 433 68.1% I N C O M E AVA I L A B L E T O C O M M O N S T O C K H O L D E R S $ 17,814 $ 53,000 $ (35,186) (66.4)% Operating Statistics. The following tables include comparisons of the key operating metrics for our portfolio, including prior ownership results as applicable for the Doubletree Guest Suites Times Square, the JW Marriott New Orleans, the Hilton San Diego Bayfront, the Hyatt Chicago Magnificent Mile, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hilton New Orleans St. Charles, the Boston Park Plaza and the Hyatt Regency San Francisco. 2013 2012 Change Occ% ADR RevPAR Occ% ADR RevPAR Occ% ADR RevPAR Total Hotel Portfolio (29 hotels) 80.5% $183.05 $147.36 79.8% $178.04 $142.08 70 bps 2.8% 3.7% Comparable Hotel Portfolio (28 hotels)(1) 80.2% $184.65 $148.09 79.4% $178.75 $141.93 80 bps 3.3% 4.3% Comparable Hotel Portfolio adjusted for change in Marriott calendar (28 hotels)(2) 80.2% $184.79 $148.20 79.4% $178.64 $141.84 80 bps 3.4% 4.5%


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    2012 2011 Change Occ% ADR RevPAR Occ% ADR RevPAR Occ% ADR RevPAR Total Hotel Portfolio (29 hotels) 79.8% $178.04 $142.08 77.2% $173.26 $133.76 260 bps 2.8% 6.2% Comparable Hotel Portfolio (28 hotels)(1) 79.4% $178.75 $141.93 77.0% $174.51 $134.37 240 bps 2.4% 5.6% Comparable Hotel Portfolio adjusted for change in Marriott calendar (28 hotels)(2) 79.4% $178.64 $141.84 77.0% $174.49 $134.36 240 bps 2.4% 5.6% (1) Includes all the hotels in which we have interests as of December 31, 2013, except the Boston Park Plaza due to the hotel adding 12 rooms in September 2012, and an additional 100 rooms in January 2013. (2) Includes the 28 hotel Comparable Portfolio adjusted for the effects of converting the operating statistics for our ten Marriott-managed hotels from a 13-period basis as reported in 2012 and 2011 to a standard 12-month calendar basis. Non-GAAP Financial Measures. We use the following “non-GAAP financial measures” that we believe are useful to investors as key supplemental measures of our operating performance: EBITDA, Adjusted EBITDA, FFO and Adjusted FFO. These measures should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP. EBITDA, Adjusted EBITDA, FFO and Adjusted FFO, as calculated by us, may not be comparable to other companies that do not define such terms exactly as the Company. These non-GAAP measures are used in addition to and in conjunction with results presented in accordance with GAAP. They should not be considered as alternatives to operating profit, cash flow from operations, or any other operating performance measure prescribed by GAAP. These non-GAAP financial measures reflect additional ways of viewing our operations that we believe, when viewed with our GAAP results and the reconciliations to the corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business than could be obtained absent this disclosure. We strongly encourage investors to review our financial information in its entirety and not to rely on a single financial measure. EBITDA is a commonly used measure of performance in many industries. We believe EBITDA is useful to investors in evaluating our operating performance because this measure helps 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 believe the use of EBITDA facilitates comparisons between us and other lodging REITs, hotel owners who are not REITs and other capital-intensive companies. In addition, certain covenants included in our indebtedness use EBITDA as a measure of financial compliance. We also use EBITDA as a measure in determining the value of hotel acquisitions and dispositions. Historically, we have adjusted EBITDA when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful information to investors regarding our operating performance and that the presentation of Adjusted EBITDA, when combined with the primary GAAP presentation of net income, is beneficial to an investor’s complete understanding of our operating performance. We adjust EBITDA for the following items, which may occur in any period, and refer to this measure as Adjusted EBITDA: » Amortization of deferred stock compensation: we exclude the non-cash expense incurred with the amortization of deferred stock compensation as this expense does not reflect the underlying performance of our hotels. » Amortization of favorable and unfavorable contracts: we exclude the non-cash amortization of the favorable management contract asset recorded in conjunction with our acquisition of the Hilton Garden Inn Chicago Downtown/Magnificent Mile, along with the favorable tenant lease assets recorded in conjunction with our acquisitions of the Hilton New Orleans St. Charles and the Hyatt Regency San Francisco, and the unfavorable tenant lease liabilities recorded in conjunction with our acquisitions of the Boston Park Plaza, the Hilton Garden Inn Chicago Downtown/ Magnificent Mile and the Hyatt Regency San Francisco. The amortization of favorable and unfavorable contracts does not reflect the underlying performance of our hotels. » Ground rent adjustments: we exclude the non-cash expense incurred from straightlining our ground lease obligations as this expense does not reflect the underlying performance of our hotels. We do, however, include an adjustment for the cash ground lease expense recorded on the Hyatt Chicago Magnificent Mile’s building lease. Upon acquisition of this hotel, we determined that the building lease was a capital lease, and, therefore, we include a portion of the capital lease payment each month in interest expense. We include an adjustment for ground lease expense on capital leases in order to more accurately reflect the operating performance of the Hyatt Chicago Magnificent Mile. » Real estate transactions: we exclude the effect of gains and losses on the disposition of depreciable assets because we believe that including them in Adjusted EBITDA is not consistent with reflecting the ongoing performance of our assets. In addition, material gains or losses from the depreciated value of the disposed assets could be less important to investors given that the depreciated asset value often does not reflect its market value. » Gains or losses from debt transactions: we exclude the effect of finance charges and premiums associated with the extinguishment of debt, including the acceleration of deferred financing costs from the original issuance of the debt being redeemed or retired because, like interest expense, their removal helps investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure. » Acquisition costs: under GAAP, costs associated with completed acquisitions are expensed in the year incurred. We exclude the effect of these costs because we believe they are not reflective of the ongoing performance of the Company. » Consolidated partnership adjustments: we deduct the non-controlling partner’s pro rata share of any EBITDA adjustments related to our consolidated Hilton San Diego Bayfront partnership. » Cumulative effect of a change in accounting principle: from time to time, the FASB promulgates new accounting standards that require the consolidated statement of operations to reflect the cumulative effect of a change in accounting principle. We exclude these one-time adjustments because they do not reflect our actual performance for that period. » Impairment losses: we exclude the effect of impairment losses because we believe that including them in Adjusted EBITDA is not consistent with reflecting the ongoing performance of our remaining assets. In addition, we believe that impairment charges, which are based off of historical cost account values, are similar to gains (losses) on dispositions and depreciation expense, both of which are also excluded from Adjusted EBITDA. » Other adjustments: we exclude other adjustments such as lawsuit settlement costs (or the reversal of these costs), prior year property tax assessments and/or credits, management company transition costs, and departmental closing costs, including severance, because we do not believe these costs reflect our actual performance for that period and/or the ongoing operations of our hotels.


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    / 2013 ANNUAL REPORT / 41 The following table reconciles our net income to EBITDA and Adjusted EBITDA for our hotel portfolio for the years ended December 31, 2013, 2012 and 2011 (in thousands): 2013 2012 2011 Net income $ 70,001 $ 49,557 $ 81,299 Operations held for investment: Depreciation and amortization 137,476 130,907 113,708 Amortization of lease intangibles 4,112 4,113 3,979 Interest expense 72,239 76,821 74,195 Income tax provision 8,145 1,148 — Non-controlling interests: Income from consolidated joint venture attributable to non-controlling interest (4,013) (1,761) (312) Depreciation and amortization (3,956) (5,685) (4,014) Interest expense (2,341) (2,477) (1,753) Unconsolidated joint ventures: Depreciation and amortization — — 3 Discontinued operations: Depreciation and amortization — 13,164 16,188 Amortization of lease intangibles — 14 28 Interest expense 99 6,490 9,337 EBITDA 281,762 272,291 292,658 Operations held for investment: Amortization of deferred stock compensation 4,858 3,466 2,745 Amortization of favorable and unfavorable contracts, net 320 206 — Non-cash straightline lease expense 2,055 2,777 2,398 Capital lease obligation interest—cash ground rent (1,404) (819) — (Gain) loss on sale of other assets, net (12) 18 (83) Gain on remeasurement of equity interests — — (69,230) Loss on extinguishment of debt 44 191 — Closing costs—completed acquisitions 1,678 1,965 3,403 Impairment loss — — 10,862 Lawsuit settlement costs, net 358 158 1,553 Prior year property tax and CAM adjustments, net 106 621 — Hotel laundry closing costs — 623 — Non-controlling interests: Non-cash straightline lease expense (450) (450) (354) Prior year property tax adjustments, net — (202) — Unconsolidated joint ventures: Amortization of deferred stock compensation — — 2 Discontinued operations: Gain on sale of assets, net (51,620) (38,292) (14,912) Impairment loss — — 1,495 (Gain) loss on extinguishment of debt 3,115 — (18,145) Lawsuit settlement (reversal) costs — (48) 67 (40,952) (29,786) (80,199) Adjusted EBITDA $240,810 $242,505 $212,459


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    Adjusted EBITDA was $240.8 million in 2013 as compared to $242.5 million in 2012 and $212.5 million in 2011. Adjusted EBITDA decreased $1.7 million in 2013 as compared to 2012 as additional earnings generated by the three hotels we acquired during 2013 (the Hilton New Orleans St. Charles, the Boston Park Plaza and the Hyatt Regency San Francisco), and the two hotels we acquired in 2012 (the Hyatt Chicago Magnificent Mile and the Hilton Garden Inn Chicago Downtown/Magnificent Mile) were mostly offset by a decrease in earnings caused by major room renovations at four of our hotels: the Hilton Times Square; the Hyatt Chicago Magnificent Mile; the Hyatt Regency Newport Beach; and the Renaissance Westchester. These renovations were substantially completed by June 30, 2013. 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 Chicago 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. We believe that the presentation of FFO provides useful information to investors regarding our operating performance because it is a measure of our operations without regard to specified non-cash items such as real estate depreciation and amortization, amortization of lease intangibles, any real estate impairment loss and any gain or loss on sale of real estate assets, all of which are based on historical cost accounting and may be of lesser significance in evaluating our current performance. We believe the use of FFO facilitates comparisons between us and other lodging REITs. We also present Adjusted FFO when evaluating our operating performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance, and may facilitate comparisons of operating performance between periods and our peer companies. We adjust FFO for the following items, which may occur in any period, and refer to this measure as Adjusted FFO: » Amortization of favorable and unfavorable contracts: we exclude the non-cash amortization of the favorable management contract asset recorded in conjunction with our acquisition of the Hilton Garden Inn Chicago Downtown/Magnificent Mile, along with the favorable tenant lease assets recorded in conjunction with our acquisitions of the Hilton New Orleans St. Charles and the Hyatt Regency San Francisco, and the unfavorable tenant lease liabilities recorded in conjunction with our acquisitions of the Boston Park Plaza, the Hilton Garden Inn Chicago Downtown/ Magnificent Mile and the Hyatt Regency San Francisco. The amortization of favorable and unfavorable contracts does not reflect the underlying performance of our hotels. » Non-cash ground rent adjustments: we exclude the non-cash expense incurred from straightlining our ground lease obligations as this expense does not reflect the underlying performance of our hotels. » Gains or losses from debt transactions: we exclude the effect of finance charges and premiums associated with the extinguishment of debt, including the acceleration of deferred financing costs from the original issuance of the debt being redeemed or retired. We also exclude the non-cash gains or losses on our derivatives, as well as the original issuance costs associated with the redemption of preferred stock. We believe that these items are not reflective of our ongoing finance costs. » Acquisition costs: under GAAP, costs associated with completed acquisitions are expensed in the year incurred. We exclude the effect of these costs because we believe they are not reflective of the ongoing performance of the Company. » Impairment losses: we exclude the effect of non-real estate impairment losses because we believe that including them in Adjusted FFO is not consistent with reflecting the ongoing performance of our remaining assets. » Consolidated partnership adjustments: we deduct the non-controlling partner’s pro rata share of any FFO adjustments related to our consolidated Hilton San Diego Bayfront partnership. » Other adjustments: we exclude other adjustments such as lawsuit settlement costs (or the reversal of these costs), prior year property tax assessments and/or credits, management company transition costs, departmental closing costs, including severance, and income tax provisions associated with the application of net operating loss carryforwards because we do not believe these costs reflect our actual performance for that period and/or the ongoing operations of our hotels.


  • Page 45

    / 2013 ANNUAL REPORT / 43 The following table reconciles our net income to FFO and Adjusted FFO for our hotel portfolio for the years ended December 31, 2013, 2012 and 2011 (in thousands): 2013 2012 2011 Net income $ 70,001 $ 49,557 $ 81,299 Preferred stock dividends and redemption charges (19,013) (29,748) (27,321) Operations held for investment: Real estate depreciation and amortization 136,047 129,668 112,539 Amortization of lease intangibles 4,112 4,113 3,979 (Gain) loss on sale of other assets, net (12) 18 (83) Non-controlling interests: Income from consolidated joint venture attributable to non-controlling interest (4,013) (1,761) (312) Real estate depreciation and amortization (3,956) (5,685) (4,014) Discontinued operations: Real estate depreciation and amortization — 13,164 16,188 Amortization of lease intangibles — 14 28 Gain on sale of assets, net (51,620) (38,292) (14,912) FFO 131,546 121,048 167,391 Operations held for investment: Amortization of favorable and unfavorable contracts, net 320 206 — Non-cash straightline lease expense 2,055 2,777 2,398 Write-off of deferred financing fees — 3 21 Non-cash interest related to (gain) loss on derivatives, net (525) 406 2,655 Gain on remeasurement of equity interests — — (69,230) Loss on extinguishment of debt 44 191 — Closing costs—completed acquisitions 1,678 1,965 3,403 Lawsuit settlement costs, net 358 158 1,553 Prior year property tax and CAM adjustments, net 106 621 — Hotel laundry closing costs — 623 — Impairment loss — — 10,862 Income tax provision 8,145 1,148 — Preferred stock redemption charges 4,770 — — Non-controlling interests: Non-cash straightline lease expense (450) (450) (354) Non-cash interest related to loss on derivative, net (3) (1) (31) Prior year property tax adjustments, net — (202) Discontinued operations: (Gain) loss on extinguishment of debt 3,115 — (18,145) Write-off of deferred financing fees — 185 42 Impairment loss — — 1,495 Lawsuit settlement (reversal) costs — (48) 67 19,613 7,582 (65,264) Adjusted FFO $151,159 $128,630 $102,127


  • Page 46

    Adjusted FFO was $151.2 million in 2013 as compared to $128.6 million in 2012 and $102.1 million in 2011. Adjusted FFO increased $22.5 million in 2013 as compared to 2012 due to additional earnings generated by the three hotels we acquired during 2013 (the Hilton New Orleans St. Charles, the Boston Park Plaza and the Hyatt Regency San Francisco), and the two hotels we acquired in 2012 (the Hyatt Chicago Magnificent Mile and the Hilton Garden Inn Chicago Downtown/Magnificent Mile), combined with a decrease in preferred stock dividends and interest expense. These increases to Adjusted FFO were partially offset by a decrease in earnings caused by major room renovations at four of our hotels: the Hilton Times Square; the Hyatt Chicago Magnificent Mile; the Hyatt Regency Newport Beach; and the Renaissance Westchester. These renovations were substantially completed by June 30, 2013. 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 Chicago 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. Room revenue. Room revenue increased $77.8 million, or 13.5%, for the year ended December 31, 2013 as compared to the year ended December 31, 2012. We acquired the Hilton New Orleans St. Charles in May 2013, the Boston Park Plaza in July 2013, the Hyatt Regency San Francisco in December 2013, the Hyatt Chicago Magnificent Mile in June 2012, and the Hilton Garden Inn Chicago Downtown/Magnificent Mile in July 2012. These five hotels acquired in 2013 and 2012 (the “five 2013–2012 acquired hotels”) contributed additional room revenue of $54.3 million during 2013. Room revenue at the Hyatt Chicago Magnificent Mile was negatively impacted during 2013 by a major renovation, which caused 13,601 room nights to be out of service, displacing approximately $2.4 million in room revenue based on the hotel achieving a potential 74.9% occupancy rate and RevPAR of $127.70 without the renovation. In addition, room revenue during 2013 increased as compared to the same period in 2012 due to a change in the financial reporting calendar used by one of our third-party managers, subsidiaries of Marriott International, Inc. or Marriott Hotel Services, Inc. (collectively, “Marriott”), who manage 10 of our 29 hotels. Beginning in 2013, Marriott switched from using a 13-fiscal period accounting calendar to a standard 12-month calendar, which caused there to be an additional three days and approximately $1.6 million more in room revenue for the Marriott-managed hotels during 2013 as compared to 2012. Room revenue generated by the 24 hotels we owned prior to January 1, 2012 (our “existing portfolio”) increased $21.9 million during 2013 as compared to 2012 due to increases in both occupancy ($7.7 million) and ADR ($14.2 million). The increases in occupancy and ADR were driven by an additional 58,248 transient room nights, partially offset by 14,435 fewer group room nights. Room revenue in our existing portfolio was negatively impacted during 2013 by major room renovations at three hotels in our existing portfolio (the “three renovation hotels”): the Hilton Times Square; the Hyatt Regency Newport Beach; and the Renaissance Westchester. These major room renovations caused a total of 26,686 room nights to be out of service during 2013, displacing approximately $5.2 million in room revenue based on the three renovation hotels achieving a combined potential 81.6% occupancy rate and RevPAR of $169.76 without the renovations. This 2013 displacement compares to our 2012 displacement caused by major room renovations at 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 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 Chicago 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 hotels acquired in 2012 and 2011 (the “five 2012–2011 acquired hotels”) contributed additional room revenue of $57.4 million during the year ended December 31, 2012. Room revenue in our five 2012–2011 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 “prior year 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. As discussed above in the discussion regarding 2013 and 2012, room revenue in our prior year existing portfolio was impacted during 2012 by major room renovations at both the Renaissance Washington DC and the Hyatt Regency Newport Beach. Room revenue in our prior year existing portfolio was also negatively impacted in 2012 by Hurricane Sandy, which caused a loss in room revenue of approximately $1.4 million. Food and beverage revenue. Food and beverage revenue increased $12.5 million, or 6.2%, for the year ended December 31, 2013 as compared to the year ended December 31, 2012. The five 2013–2012 acquired hotels contributed an additional $11.3 million to food and beverage revenue during 2013, though food and beverage revenue generated by the Hyatt Chicago Magnificent Mile was negatively affected by the hotel’s major renovation. Marriott’s additional three days in 2013 generated approximately $0.6 million in food and beverage revenue for the Marriott- managed hotels during 2013 as compared to 2012. Food and beverage revenue in our existing portfolio increased $0.6 million during 2013 as compared to 2012, due to increased outlet and room service revenue caused by the increase in occupancy, partially offset by decreased banquet revenue at several of our hotels caused by 14,435 fewer group room nights, as well as the negative impact of the three renovation hotels. The decrease in group room nights during 2013 as compared to 2012 was further exaggerated by the fact that the type of group shifted from corporate and citywide business with a higher number of banquet functions during the first few months of 2012 to associations with fewer banquet functions during the first few months of 2013. The decrease in food and beverage revenue in our existing portfolio was partially offset by increased revenue generated during 2013 by the Renaissance Washington DC, which was under a major room renovation during 2012, causing revenue to decrease in outlets, banquets and room service during 2012.


  • Page 47

    / 2013 ANNUAL REPORT / 45 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. The five 2012–2011 acquired hotels contributed an additional $17.5 million to food and beverage revenue during 2012. Food and beverage revenue in our prior year 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 prior year 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 prior year 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. Other operating revenue. Other operating revenue increased $4.4 million, or 8.4%, for the year ended December 31, 2013 as compared to the year ended December 31, 2012. Our five 2013–2012 acquired hotels contributed an additional $3.5 million to other operating revenue during 2013. In addition, BuyEfficient’s revenue increased $0.5 million during 2013 as compared to 2012 due to increased transaction and development fees. Other operating revenue in our existing portfolio increased $0.4 million during 2013 as compared to 2012, due to Marriott’s three additional days during 2013, combined with increased parking and spa revenue. These increases were partially offset by decreased telephone/internet revenue, cancellation, attrition, and third-party lease 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 2012–2011 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 prior year existing portfolio increased $1.2 million during 2012 as compared to 2011, due to increased cancellation, attrition, parking, spa and third-party lease revenue at our hotels, partially offset by decreased telephone/internet revenue. Hotel operating expenses. Hotel operating expenses increased $56.8 million, or 11.4%, during the year ended December 31, 2013 as compared to the year ended December 31, 2012. The five 2013–2012 acquired hotels contributed $46.3 million to hotel operating expenses during 2013. Hotel operating expenses in our existing portfolio increased $10.5 million during 2013 as compared to 2012, primarily related to the corresponding increase in room revenue, combined with the Marriott-managed hotels’ three additional days in 2013 as compared to 2012. In addition, hotel operating expenses in our existing portfolio increased during 2013 as compared to 2012 due to increases in property taxes, property and liability insurance premiums and ground lease expense. 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 2012–2011 acquired hotels contributed an additional $45.0 million to hotel operating expenses during 2012. Hotel operating expenses in our prior year 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 prior year 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. Property general and administrative expense. Property general and administrative expense increased $8.8 million, or 9.3%, during the year ended December 31, 2013 as compared to the year ended December 31, 2012. The five 2013–2012 acquired hotels contributed $7.6 million to property general and administrative expense during 2013. In addition, BuyEfficient contributed an additional $0.2 million in property general and administrative expense during 2013 as compared to 2012 due to increases in payroll and related expenses, including deferred stock compensation expense. Property general and administrative expense in our existing portfolio increased $1.0 million during 2013 as compared to 2012, primarily due to the Marriott-managed hotels’ three additional days in 2013 as compared to 2012, combined with increased management fees, and credit and collection expenses due to the increase in revenue. Property general and administrative expenses also increased due to higher costs related to licenses and permits, and security expenses, partially offset by decreased payroll and related costs, contract and professional fees, employee relations, recruitment, training, sales tax audit fees, operating supplies and travel. 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 2012–2011 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 prior year 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 48

    Corporate overhead expense. Corporate overhead expense increased $2.4 million, or 9.7%, during the year ended December 31, 2013 as compared to the year ended December 31, 2012, primarily due to the following increases: payroll and related expenses ($1.0 million); deferred stock compensation ($1.3 million); contract and professional fees ($0.6 million); legal ($0.3 million); conferences and travel ($0.2 million); and entity-level state franchise and minimum taxes ($0.2 million). These increases were partially offset by a $1.1 million decrease in acquisition and due diligence costs and a $0.1 million decrease in donations. During 2013, we incurred acquisition and due diligence costs of $1.7 million related to our completed acquisitions, and an additional $0.1 million related to in-process-or-abandoned projects. During 2012, we incurred acquisition and 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. 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. 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. Depreciation and amortization expense. Depreciation and amortization increased $6.6 million, or 5.0%, for the year ended December 31, 2013 as compared to the year ended December 31, 2012. The five 2013–2012 acquired hotels contributed $11.3 million to depreciation and amortization during 2013. Depreciation and amortization expense in our existing portfolio decreased $4.7 million during 2013 as compared to 2012 primarily due to advanced bookings recorded in conjunction with our purchases of the JW Marriott New Orleans and the Hilton San Diego Bayfront that were fully amortized as of February 2013 and April 2013, respectively. This decrease in amortization was partially offset by additional depreciation recognized on hotel renovations and purchases of furniture, fixtures and equipment (“FF&E”) for our existing portfolio. 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 2012–2011 acquired hotels contributed an additional $15.2 million to depreciation and amortization expense during 2012. Depreciation and amortization expense in our prior year existing portfolio increased $2.0 million during 2012 as compared to 2011 due to additional depreciation recognized on hotel renovations and purchases of FF&E for our prior year existing portfolio. Impairment loss. Impairment loss totaled zero for both of the years ended December 31, 2013 and 2012, and $10.9 million for the year ended December 31, 2011. 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 both of the years ended December 31, 2013 and 2012, and $21,000 for the year ended December 31, 2011. 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 2011 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 on our BuyEfficient joint venture. Interest and other income. Interest and other income totaled $2.8 million for the year ended December 31, 2013, $0.3 million for the year ended December 31, 2012, and $3.1 million for the year ended December 31, 2011. In 2013, we recognized $2.8 million in interest income, including $2.6 million on the Preferred Equity Investment. 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. Interest expense. Interest expense is as follows (in thousands): Year Ended Year Ended Year Ended December 31, December 31, December 31, 2013 2012 2011 Interest expense $69,806 $71,664 $67,319 (Gain) loss on derivatives, net (525) 406 2,655 Accretion of Senior Notes 3 1,058 1,062 Amortization of deferred financing fees 2,955 3,690 3,138 Write-off of deferred financing fees — 3 21 $72,239 $76,821 $74,195


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    / 2013 ANNUAL REPORT / 47 Interest expense decreased $4.6 million, or 6.0%, during the year ended December 31, 2013 as compared to the year ended December 31, 2012. The decrease in interest expense in 2013 as compared to 2012 is comprised of the following: a decrease in expense on our debt and capital lease obligations ($1.9 million); a decrease in expense related to our derivatives ($0.9 million); a decrease in accretion of Senior Notes ($1.1 million); and a decrease in amortization of deferred financing fees ($0.7 million). Interest expense on our debt and capital lease obligations decreased $1.9 million during 2013 as compared to 2012 due to reduced loan balances related to scheduled amortization, a repayment of debt in April 2012 and a repurchase of debt in January 2013. In April 2012, we repaid a $32.2 million loan secured by the Renaissance Long Beach, and in January 2013, we repurchased $58.0 million of our Senior Notes. These decreases in our debt obligations and related decreases in interest expense were partially offset by an increase in capital lease obligations and related interest expense due to our acquisition of the Hyatt Chicago Magnificent Mile in June 2012, which included the assumption of a building lease that we determined should be accounted for as a capital lease. Interest expense on our debt and capital lease obligations also increased during 2013 as compared to 2012 due to our assumption of a $119.2 million loan in conjunction with our purchase of the Boston Park Plaza in July 2013. Interest expense related to our derivatives decreased $0.9 million during 2013 as compared to 2012 due to our recording a net gain on our interest rate cap and swap agreements in 2013 as compared to a loss during 2012. Interest expense related to the accretion of our Senior Notes decreased $1.1 million during 2013 as compared to 2012 due to the fact that the Senior Notes were fully accreted to their face value as of the first put date in January 2013. Interest expense related to amortization of deferred financing fees decreased $0.7 million during 2013 as compared to 2012 due to the repayment of the loan secured by the Renaissance Long Beach in April 2012, combined with the fact that the deferred financing fees related to the Senior Notes were fully amortized as of the first put date in January 2013, partially offset by an increase in deferred financing fees incurred to amend our line of credit in September 2012 and to assume the Boston Park Plaza debt. 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. 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 both December 31, 2013 and 2012, and 5.0% at December 31, 2011. At December 31, 2013, approximately 70.7% of the outstanding notes payable included in our continuing operations had fixed interest rates. 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, approximately 70.5% 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 $44,000 for the year ended December 31, 2013, $0.2 million for the year ended December 31, 2012, and zero for the year ended December 31, 2011. During 2013, we recognized a loss of $44,000 due to the repurchase and redemption of the remaining $58.0 million aggregate principal amount of the Senior Notes. 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 both the years ended December 31, 2013 and 2012, and $69.2 million for the year ended December 31, 2011. 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 $8.1 million for the year ended December 31, 2013, $1.1 million for the year ended December 31, 2012, and zero for the year ended December 31, 2011. During 2013, we recognized income tax expense of $4.7 million due to a resolution reached with the Internal Revenue Service (“IRS”). The Company leases its hotels to the TRS Lessee and its subsidiaries, which are subject to federal and state income taxes. In the first quarter of 2013, the IRS issued a notice of proposed adjustment to us, challenging certain aspects of our leases with our TRS Lessee and its subsidiaries. Though we believe our leases comply with all Code requirements, we determined that the costs associated with defending our position were greater than the benefits that might result therefrom. As such, we accrued $4.7 million in 2013 related to the IRS’s audit of tax years 2008, 2009 and 2010, including $0.6 million in accrued interest. We recorded additional income tax expense of $1.5 million during 2013 based on the ongoing evaluations of our uncertain tax positions related to the year ended December 31, 2012, and as a result of our recent resolution of outstanding issues with the IRS. During 2013, we recorded additional tax expense of $1.9 million related to estimated 2013 federal alternative minimum tax resulting from our use of net operating loss carryforwards, as well as state income tax where our use of net operating loss carryforwards was either limited or unavailable. During 2012, our federal alternative minimum tax resulting from our use of net operating loss carryforwards combined with our state income tax expense where the use of net operating loss carryforwards was either limited or unavailable to total $1.1 million of income tax expense.


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    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: Hotels and Other Assets Rooms Disposition Date 2013: Kahler Grand, Minnesota(1) 660 January 25, 2013 Kahler Inn & Suites, Minnesota 271 January 25, 2013 Marriott Rochester, Minnesota(1) 202 January 25, 2013 Residence Inn by Marriott Rochester, Minnesota 89 January 25, 2013 Textile Care Services Rochester, Minnesota — January 25, 2013 2012: Marriott Del Mar, California 284 August 23, 2012 Doubletree Guest Suites Minneapolis, Minnesota 229 September 14, 2012 Hilton Del Mar, California 257 September 14, 2012 Marriott Troy, Michigan 350 September 14, 2012 Office building adjacent to the Marriott Troy, Michigan — September 14, 2012 2 011: Royal Palm Miami Beach, Florida 409 April 8, 2011 Textile Care Services Salt Lake City, Utah — July 8, 2011 Valley River Inn, Oregon 257 October 26, 2011 Total rooms 3,008 (1) During 2012, 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. Income from discontinued operations for the year ended December 31, 2013 includes activity for the four hotels and one commercial laundry facility sold in 2013. Income from discontinued operations for the year ended December 31, 2012 includes activity for the four hotels and one commercial laundry facility sold in 2013, and the four hotels and one office building sold in 2012. Income from discontinued operations for 2012 also includes property tax refunds and reimbursements for certain transaction related invoices for the Royal Palm Miami Beach, which we sold in April 2011. Income from discontinued operations for the year ended December 31, 2011 includes activity for the four hotels and one commercial laundry facility sold in 2013, the four hotels and one office building sold in 2012, and the two hotels and one commercial laundry facility sold in 2011. Income from discontinued operations for the years ended December 31, 2013, 2012 and 2011 is as follows (in thousands): Year Ended Year Ended Year Ended December 31, December 31, December 31, 2013 2012 2011 Operating revenues $ 3,690 $100,861 $130,997 Operating expenses (3,686) (71,089) (96,581) Interest expense (99) (6,490) (9,337) Depreciation and amortization expense — (13,164) (16,188) Impairment loss — — (1,495) Gain (loss) on extinguishment of debt (3,115) — 18,145 Gain on sale of hotels and other assets, net 51,620 38,292 14,912 Income from discontinued operations $48,410 $ 48,410 $ 40,453 Income from consolidated joint venture attributable to non-controlling interest. Income from consolidated joint venture attributable to non-controlling interest totaled $4.0 million for the year ended December 31, 2013, $1.8 million for the year ended December 31, 2012, and $0.3 million for the year ended December 31, 2011. 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, 2013, 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 $4.0 million, $1.8 million and $0.3 million for the years ended December 31, 2013, 2012 and 2011, respectively.

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