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

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    ’14 BUILDING SHAREHOLDER VALUE THROUGH ALL PHASES OF THE LODGING CYCLE 2014 ANNUAL REPORT


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    ’14 BUILDING SHAREHOLDER VALUE THROUGH ALL PHASES OF THE LODGING CYCLE 2014 ANNUAL REPORT


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    30 Hotels INSTITUTIONAL-QUALITY, UPPER-UPSCALE


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    Hilton San Diego Bayfront — Building Exterior


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    Doubletree Guest Suites Times Square — Renovated Lobby / Bar


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    14,306 Rooms WITH CONCENTRATIONS IN TOP LODGING MARKETS


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    $5 Billion Value


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    EMPHASIZING LOW LEVERAGE AND HIGH FLEXIBILITY Marriott Wailea — Building Exterior


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    $16 $16 2/1/13 2/1/13 and and 2/15/13 2/15/13 Completion Completionof of follow-on follow-onequity equity offering offering with with $295 $295 million millionof of netnet proceeds proceeds 1/25/13 1/25/13 Sold Sold 1,222-room 1,222-room Rochester Rochester Portfolio Portfolio 14 14 1/22/13 1/22/13 Redeemed Redeemed allall $58$58 million million outstanding outstanding 4.6% 4.6% Senior Senior Exchangeable ExchangeableNotes Notes 9/14/12 9/14/12 Sold Sold 350-room 350-room Marriott Marriott Troy, Troy, 257-room 257-room Hilton Hilton Del Del Mar, Mar, 229-room 229-room DoubleTree DoubleTreeMinneapolis Minneapolis 12 12 6/4/12 6/4/12 Acquired Acquired 419-room 419-room Hyatt Hyatt Chicago Chicago Magnificent Magnificent Mile Mile 1010 8 8 3/1/13 3/1/13 7/19/12 7/19/12 Redemption Redemption of of allall $176 $176 Acquired Acquired 361-room 361-room million million outstanding outstanding 8.00% 8.00% Hilton Hilton Garden Garden Inn Inn Chicago Chicago Series Series AAPreferred PreferredStock Stock Downtown/Magnificent Downtown/Magnificent Mile Mile 8/23/12 8/23/12 Sold Sold 284-room 284-room Marriott Marriott Del Del Mar Mar 6 6 11/11 11/11 1/12 1/12 3/12 3/12 5/12 5/12 7/12 7/12 9/12 9/12 11/12 11/12 1/13 1/13 3/13 3/13


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    11/1/13 11/1/13 Completion Completionof of follow-on follow-onequity equity offering offering with with $271 $271 million millionof of netnet proceeds proceeds 5/1/13 5/1/13 12/2/13 12/2/13 Acquired Acquired 252-room 252-room Acquired Acquired 803-room 804-room Hilton Hilton New New Orleans Orleans St.St. Charles Charles Hyatt Hyatt Regency Regency San San Francisco Francisco 6/19/14 6/19/14 and and 7/17/14 7/17/14 Completion Completion of of follow-on follow-on equity equity offering offeringand anddirect direct placement placementwith with$322.5 $322.5million million of of netnet proceeds, proceeds,announced announced acquisition acquisition of of 541-room 541-room Marriott MarriottWailea Wailea AACOMMITMENT COMMITMENTTOTOOUR OURSTATED STATEDPLAN: PLAN: CAREFULLY CAREFULLYBUILD BUILDSHAREHOLDER SHAREHOLDERVALUE... VALUE... 7/2/13 7/2/13 Acquired Acquired 1,054-room 1,054-room Boston Boston Park Park Plaza Plaza Background PMS to 5/31/13 5/31/13 Redeemed Redeemedallall $100 $100million million outstanding outstanding be selected based 6.45% 6.45% Series SeriesCC Preferred Preferred Stock Stock off loose color 5/13 5/13 7/13 7/13 9/13 9/13 11/13 11/13 1/14 1/14 3/14 3/14 5/14 5/14 7/14 7/14 9/14 9/14 11/14 11/14


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    West West OREGON OREGON Marriott MarriottPortland Portland % %** 40 40 THROUGH THROUGHBROAD BROADAND ANDBALANCED BALANCED GEOGRAPHIC GEOGRAPHICDIVERSIFICATION... DIVERSIFICATION... CALIFORNIA CALIFORNIA Courtyard Courtyardbyby Marriott MarriottLosLos Angeles Angeles Airport Embassy EmbassySuites Suites LaLa Jolla Jolla Fairmont Fairmont Newport Newport Beach Beach Hilton Hilton San San Diego DiegoBayfront Bayfront Hyatt Hyatt Regency Regency Newport Newport Beach Beach Hyatt Hyatt Regency Regency SanSan Francisco Francisco Renaissance RenaissanceLong Long Beach Beach Renaissance RenaissanceLos LosAngeles Angeles Airport Airport Sheraton Sheraton Cerritos Cerritos UTAH UTAH Marriott MarriottPark Park City City HAWAII HAWAII Maui: Maui:Marriott MarriottWailea Wailea *2014 *2014 total total EBITDA EBITDA byby region region percentages percentages reflect reflect prior prior ownership ownership for for the the Marriott Marriott Wailea Wailea acquired acquired JulyJuly 17, 17, 20142014 andand 100% 100% ownership ownershipof the of the Hilton Hilton SanSan Diego Diego Bayfront Bayfront


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    Midwest ILLINOIS Embassy Suites Hotel Chicago Hilton Garden Inn Chicago Downtown/Magnificent Mile Hyatt Chicago Magnificent Mile Northeast MASSACHUSETTS %* 7 Boston Park Plaza Marriott Boston Long Wharf Marriott Quincy %* 39 NEW YORK Doubletree Guest Suites Times Square Hilton Times Square Renaissance Westchester PENNSYLVANIA Marriott Philadelphia %* 14 MD / DC / VA Marriott Tysons Corner Renaissance Baltimore—Harborplace Renaissance Washington, DC LOUISIANA FLORIDA JW Marriott New Orleans Hilton New Orleans St. Charles Renaissance Orlando at SeaWorld® TEXAS Hilton Houston—North Marriott Houston South


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    WE CONTINUE TO IMPROVE THE QUALITY AND SCALE OF OUR PORTFOLIO THROUGH ACQUISITIONS.


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    Marriott Wailea — Building Exterior


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    Marriott Wailea — Front Lobby Area


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    THE ACQUISITION OF THE 541-ROOM MARRIOTT WAILEA, LOCATED ON 22 OCEANFRONT ACRES, WAS HIGHLY CONSISTENT WITH OUR EXTERNAL GROWTH STRATEGY...


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    AND REFINEMENT OF OUR PORTFOLIO QUALITY AND SCALE.


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    Marriott Wailea — Infinity Pool


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    aliPE I Ii) ESE 1A 1441 re ~ a = em ms, in at =~.


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    WE ALSO REMAIN FOCUSED ON MAXIMIZING OUR PORTFOLIO VALUE THROUGH WELL-TIMED, APPROPRIATELY SCOPED RENOVATIONS LIKE THE LOBBY AT THE DOUBLETREE GUEST SUITES TIMES SQUARE...


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    Before Doubletree Guest Suites Times Square — Front Desk


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    After Doubletree Guest Suites Times Square — Renovated Front Desk


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    AND OVER THE COMING YEAR,


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    WE WILL UNVEIL THE TRANSFORMATION OF THE BOSTON PARK PLAZA...


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    BASE: |ras aRa pr LI E n De


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    WITH OUR NEW LOBBY BAR...


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    HOTEL RESTAURANT...


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    AND GUESTROOMS.


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    SUNSTONE HOTEL INVESTORS, INC. MESSAGE TO SH AR EHOLDERS I am happy to report that 2014 marked another productive year in our Strong Internal Growth: In 2014, our portfolio of 30 hotels, in aggre- evolution here at Sunstone. In the past few years, we have taken an gate, generated a 14% increase in comparable portfolio EBITDA also-ran hotel owner haggard by over leverage and a poor investment (Earnings Before Interest, Taxes, Depreciation and Amortization) as a track record and made it a formidable and highly profitable contender result of a 6.8% increase in RevPAR (Revenue per Available Room) in the hotel ownership arena. Our evolution—which will never be and various cost control initiatives. Growth in revenues from group completed—has materially reduced unnecessary risk that we were not business has lagged revenue growth from individual corporate and leisure being rewarded to take and has produced strong returns for our share- travelers this cycle, but we have recently witnessed an increase in group holders. Those are good things. meeting activity and the amount of money these groups spend per event. This trend bodes well for our future growth, as does the fact that our high occupancy level (82.4% in 2014) leaves us with strong At the core of our evolution is our basic long-term strategy to create pricing power and the ability to be more selective in the groups we shareholder value. After all, creating shareholder value is the reason we take. Again, a good trend. are in business. As we have shared with you in the past, our strategy is quite simple and has remained consistent. Our strategy is this. First, we invest in high-quality and relevant hotel real estate at an antici- Attractive Earnings Growth: The internal growth in our portfolio pro- pated return premium to our cost of capital. Second, we actively asset duced a 29.9% increase in our corporate Adjusted EBITDA as well as manage and methodically re-invest capital into our portfolio to drive a 25.8% increase in our Adjusted Funds From Operations (Adjusted internal profit growth—simply, we try to extract more value from our FFO) per diluted share—a REIT measure of levered earnings. Both existing assets. Third, we adhere to a low levered balance sheet that our Adjusted EBITDA and Adjusted FFO per diluted share exceeded maximizes our financial flexibility and allows us to take advantage of our expectations for the year. attractive investment opportunities no matter the market conditions— through both thick and thin…and thin is generally when the most profitable deals are made. Fourth, we believe in transparency and Acquisition of a Diamond in the Rough: In July 2014, we continued to shareholder friendly corporate governance—after all, we know who we build on the quality and scale of our portfolio through the acquisition work for. And finally, we believe in fair and mutually beneficial of the 541-room Marriott Wailea—in Maui, Hawaii. The acquisition arrangements with our operating, brand and capital partners—we was funded entirely with equity and generated a 2014 property-level can’t do this alone, and life is more than just your next deal. We believe Net Operating Income (NOI) yield of 5.4%. While the going-in this strategy is simple, produces attractive long-term results, forges yield for this phenomenally located hotel is attractive, we have great lasting and meaningful relationships with our partners and minimizes expectations for the property once the existing pedestrian-quality unwarranted risks. offerings are elevated to the higher caliber of similarly located, yet far more expensive, resorts in the same neighborhood. We have a track record of successfully repositioning hotels that have lost their edge, THE YEAR AT SUNSTONE and we are excited about our repositioning plans and profit potential in Maui. To that end, most things turned out well for us in 2014, and we have set the stage for growth in years to come. Here are a few highlights: 30


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    2014 A N N UA L R E P ORT Reinvesting in Our Portfolio and Our Future: We invested $126 million additional four unsecured hotels. And finally, in December, we repaid, of capital back into our portfolio, not only to keep our hotels in great for a premium, the loan on our Embassy Suites La Jolla in north San shape and competitive, but also to reposition two of our recent value- Diego. The loan repayment, which was funded with a smaller loan on add acquisitions—the Boston Park Plaza and the Marriott Wailea. the same hotel, not only reduced our annual interest cost by approxi- These renovations are expected to pay rewards in the future. We are mately $1.6 million, but also provided us with a material return on the particularly excited about the completion of the first phase of the prepayment premium and allowed us to extend the maturity date of Boston Park Plaza renovation, which includes a transformation of the the loan by six years to 2025. Our balance sheet is in great shape, provides lobby, meeting space, street-level retail and a new 20,000 square foot us with significant flexibility to opportunistically pursue our long- health club. While this work will be completed by the end of the first term business strategy, reduces the risk of “going on defense” in quarter 2015, we have already started to witness the benefits, as our a downturn, and increases our “offensive capabilities” when such a group and catering bookings are up substantially as a result. When we downturn happens. are done with the renovation in early-to-mid 2016, we will own a high quality, well-appointed, large hotel in a great location in Boston for an all-in cost of approximately $330,000 per guestroom. Our all-in cost Material Increase in Our Common Dividend: Our total 2014 dividend basis is expected to be considerably less than the prices paid for recent of $0.51 per share represents a material increase over the $0.10 per hotel trades in the market. This provides us with a fairly sizable cush- share paid in 2013. Through mid-2013, we used tax losses to defer our ion for this investment to be successful. dividend payments to common shareholders and used all of our retained cash to pay down debt—a strategy that has left us in consid- erably better condition. We paid a small $0.05 per share quarterly Improving Our Financial Flexibility While Reducing Our Cost of Capital: dividend in the first three quarters of 2014, and then paid a far more We continued to strengthen our balance sheet in 2014, proactively significant $0.36 per share “catch-up” dividend in the fourth quarter, refinanced three loans, and have effectively raised all of the capital comprised of both cash and stock, in order to meet the distribution needed to fund all of our 2015 debt maturities. One of the primary guidelines set by Uncle Sam. Our dividend policy does not conform to leverage ratios to which we hold ourselves accountable—consolidated industry norms—as is the case with a few of the things we do here at debt and preferred equity to total capitalization—ended 2014 at Sunstone—but we believe it is the right dividend policy for the 31.2%, down 710 basis points from 38.3% at year end 2013, and Company and our shareholders. That is, paying a small quarterly div- vastly lower than the dangerously high 66.9% at year end 2011. More idend and a large catch-up dividend made up of cash and stock reduces specifically, in August, we refinanced the $229 million loan on our the risk that we will over distribute our earnings in any given year, and Hilton San Diego Bayfront, reducing the interest rate by 100 basis it allows us to retain incremental cash to further reduce debt, fund points and extending the maturity date by three years to 2019. Then value-add hotel repositionings and fund attractive investment oppor- in December, we refinanced the existing $39 million mortgage on our tunities. We are likely to maintain this somewhat unorthodox dividend JW Marriott New Orleans with a new $90 million, ten-year loan. The policy until we run out of attractive investment alternatives, at which extra proceeds from this loan will help us retire the remaining $99 time, we would expect to return our incremental retained earnings to million of loans that mature in June 2015 and provide us with an our shareholders. 31


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    SUNSTONE HOTEL INVESTORS, INC. Attractive Shareholder Returns: We generated a total shareholder return increased the value of the hotels we own—which is good—but has of 27.1% in 2014. This return was on pace with the 27.1% return of made it more difficult to compete for attractively priced acquisitions. the NAREIT All REIT Index, yet in all candor, fell at the lower end of In this competitive investment environment, we will refrain from the the range of 22% to 36% of a few of our most comparable lodging mistakes witnessed in previous cycles when so many companies REIT peers. We are not happy with this result. We believe the modest indiscriminately acquired hotels with unsustainable levels of debt. underperformance was largely the result of investor concerns that we Combining high levels of debt with the high levels of cyclicality would experience short-term profit disruption at properties undergo- inherent in our business is a dangerous combination that has proven ing renovation—Boston Park Plaza, Hyatt Regency San Francisco and time and time again to result in bad outcomes. Rather, we expect to the Marriott Wailea. We believe that these concerns will prove to be continue to methodically invest in quality hotel real estate—hotels we short lived as renovation disruption has proven to be modest, and believe are well positioned for the long term—when we are comfort- as investors come to appreciate that the long-term benefits of these able that our anticipated returns are expected to exceed our cost of value-add activities far outweigh the short-term cost of bringing them capital. Furthermore, we would expect to fund any such investments to fruition. largely with equity, or with proceeds from the sale of some of our existing hotels. While it may be a more difficult time to buy hotels, it is a fairly easy time to sell hotels. So we probably will do just that with WHAT’S NEXT… a few of the hotels that don’t fit our portfolio strategy going forward. The hotel operating environment remains positive for most of our hotels and for our portfolio in general. At current high occupancy levels, In closing, I would like to thank Sunstone’s Board of Directors and we expect to work with our operating partners to push room rates our 49 employees for their tireless efforts to build shareholder value higher; be more selective on the timing, quality and profitability of the through the mindful execution of their daily duties. I would also like group business we attract; and continue to control expenses where we to thank our brand, operating and capital partners for their ongoing can. Not all expenses are controllable, as costs such as property taxes support and collaboration—we could not be successful without them. continue to increase at a meaningful rate. However, our asset manage- And finally, I wish to thank our shareholders—the owners of our ment team and operating partners continue to focus on bringing a company—for investing with us and giving us the opportunity to run good portion of our increased revenues to the bottom line. this great business. On the investment front, we need to remain selective in the current Warmest Regards, environment. That is, the low-return world we find ourselves in has J O H N V. A R A B I A PRESIDENT AND CHIEF EXECUTIVE OFFICER 32


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    SELECTED Financial Data The following table sets forth selected financial information for the Company that has been derived from the consolidated financial statements and notes. This information should be read together 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, 2014 2013 2012 2011 2010 ($ in thousands) OPER ATING DATA REVENUES Room $ 811,709 $ 653,955 $ 576,146 $ 501,183 $ 351,039 Food and beverage 259,358 213,346 200,810 175,103 138,188 Other operating 70,931 56,523 52,128 45,508 26,373 Total revenues 1,141,998 923,824 829,084 721,794 515,600 OPER ATING EXPENSES Room 214,899 170,361 147,932 128,225 92,101 Food and beverage 180,053 147,713 139,106 126,139 98,889 Other operating 21,012 16,819 16,162 14,004 11,535 Advertising and promotion 54,992 47,306 42,474 37,226 27,326 Repairs and maintenance 45,901 35,884 32,042 29,067 22,608 Utilities 34,141 27,006 25,596 25,537 19,117 Franchise costs 38,271 32,932 30,067 25,595 18,032 Property tax, ground lease and insurance 84,665 79,004 66,830 58,010 35,280 Property general and administrative 126,737 103,454 94,642 85,293 61,753 Corporate overhead 28,739 26,671 24,316 25,453 21,751 Depreciation and amortization 155,845 137,476 130,907 113,708 79,633 Impairment loss — — — 10,862 — Total operating expenses 985,255 824,626 750,074 679,119 488,025 Operating income 156,743 99,198 79,010 42,675 27,575 Equity in net earnings of unconsolidated joint ventures — — — 21 555 Interest and other income 3,479 2,821 297 3,115 112 Interest expense (72,315) (72,239) (76,821) (74,195) (58,931) Loss on extinguishment of debt (4,638) (44) (191) — — Gain on remeasurement of equity interests — — — 69,230 — Income (loss) before income taxes and discontinued operations 83,269 29,736 2,295 40,846 (30,689) Income tax provision (179) (8,145) (1,148) — — Income (loss) from continuing operations 83,090 21,591 1,147 40,846 (30,689) Income from discontinued operations 4,849 48,410 48,410 40,453 69,231 Net income 87,939 70,001 49,557 81,299 38,542 Income from consolidated joint venture attributable to non-controlling interest (6,676) (4,013) (1,761) (312) — Distributions to non-controlling interest (32) (32) (31) (30) — Preferred stock dividends, redemption charges and accretion (9,200) (19,013) (29,748) (27,321) (20,652) Income available to common stockholders $ 72,031 $ 46,943 $ 18,017 $ 53,636 $ 17,890 Income (loss) from continuing operations available (attributable) to common stockholders per diluted common share $ 0.34 $ (0.01) $ (0.24) $ 0.11 $ (0.52) Dividends declared per common share $ 0.51 $ 0.10 $ — $ — $ — BALANCE SHEET DATA Investment in hotel properties, net(1) $3,538,129 $3,231,382 $2,681,877 $2,532,232 $1,666,180 Total assets $3,924,965 $3,508,798 $3,136,675 $3,101,240 $2,436,106 Total debt(1) $1,429,292 $1,404,075 $1,363,389 $1,416,890 $ 973,810 Total liabilities $1,656,131 $1,556,399 $1,517,362 $1,675,946 $1,236,807 Equity $2,268,834 $1,952,399 $1,519,313 $1,325,294 $1,099,299 (1) Does not include hotels or debt which have been reclassified to discontinued operations, or which have been classified as held for sale. 33


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    MANAGEMENT’S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations The following discussion should be read together with the consolidated financial statements and related notes included elsewhere in this report. OVERVIEW Sunstone Hotel Investors, Inc. is a Maryland corporation. We operate as a self-managed and self-administered real estate investment trust, or REIT. A REIT is a legal entity that directly or indirectly owns real estate assets. REITs generally are not subject to federal income taxes at the corporate level as long as they pay stockholder dividends equivalent to 100% of their taxable income. REITs are required to distribute to stockholders at least 90% of their taxable income. We own, directly or indirectly, 100% of the interests of Sunstone Hotel Partnership, LLC (the “Operating Partnership”), which is the entity that directly or indirectly owns our hotel properties. We also own 100% of the interests of our taxable REIT subsidiary, Sunstone Hotel TRS Lessee, Inc., which leases all of our hotels from the Operating Partnership, and engages independent third-parties to manage our hotels. In addition, we own 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, 2014, we had interests in 30 hotels, which are currently held for investment (the “30 hotels”). Of the 30 hotels, we classify 27 as upper upscale, two as luxury and one as upscale as defined by Smith Travel Research, Inc. All but one (the Boston Park Plaza) of our 30 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 and diverse economic drivers. As of December 31, 2014, all but one (the Marriott Wailea) of our 30 hotels are considered business, convention, or airport hotels, as opposed to resort or leisure hotels. The hotels comprising our 30 hotel portfolio average 477 rooms in size. Since the end of 2009, 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. Accordingly, during the past four years, we selectively acquired interests in nine 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; the Hyatt Regency San Francisco in December 2013; and the Marriott Wailea in July 2014. Based on our purchase prices, the combined asset value of these nine hotels totals $1.8 billion, or $329,000 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. 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 four 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 four 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 (together with the Rochester Hotels, the “Rochester Portfolio”). 2014 HIGHLIGHTS In February 2014, we entered into separate Equity Distribution Agreements with Wells Fargo Securities LLC and Merrill Lynch, Pierce Fenner & Smith Incorporated (the “Managers”). Under the terms of the agreements, we may issue and sell from time to time through or to the Managers, as sales agents and/or principals, shares of our common stock having an aggregate offering amount of up to $150.0 million. During 2014, we received $21.0 million in net proceeds from the issuance of 1,352,703 shares of our common stock pursuant to the agreements. 34


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    In June 2014, we acquired approximately seven acres of land underlying the Fairmont Newport Beach for $11.0 million. Prior to our acqui- sition, the land was leased to us by a third party. Also in June 2014, we issued 18,000,000 shares of our common stock in an underwritten public offering for net proceeds of approximately $262.5 million, which were used to acquire the Marriott Wailea in July 2014. In July 2014, we purchased the 544-room Marriott Wailea for a net purchase price of $325.6 million, which was comprised of $265.6 million in cash, including $4.4 million of proration credits and unrestricted and restricted cash received from the seller, and $60.0 million of our common stock issued directly to the seller. The acquisition was funded with proceeds received from our June 2014 common stock offering, and 4,034,970 shares of our common stock valued at $60.0 million ($14.87 per share). Subsequent to our acquisition, three rooms were temporarily taken out of service, leaving 541 rooms available to sell. In August 2014, we amended the non-recourse mortgage secured by the Hilton San Diego Bayfront. The loan amendment extends the maturity date from April 2016 to August 2019, and reduces the interest rate from three-month LIBOR plus 325 basis points to one-month LIBOR plus 225 basis points. The loan originally included a syndication of four lenders. One of the four lenders elected not to proceed with the amended loan, causing us to expense $0.5 million of the unamortized balance of the applicable deferred financing fees to loss on extinguishment of debt. In conjunction with the amendment, we paid additional deferred financing fees of $1.3 million to the three remaining lenders, which we are amortizing over the term of the refinanced debt. We also paid $0.1 million in loan fees to third parties, which we recorded as a component of interest expense. In December 2014, we repaid the $38.9 million mortgage secured by the JW Marriott New Orleans, using proceeds received from a new $90.0 million mortgage secured by the JW Marriott New Orleans. The new loan extends the maturity date from September 2015 to December 2024. The new loan is subject to a 30-year amortization schedule, and reduces the interest rate from 5.45% under a related interest rate swap agreement to a fixed rate of 4.15%. In conjunction with our repayment of the original mortgage, we wrote off $39,000 of unamortized deferred financing fees, which are included in loss on extinguishment of debt in our consolidated statements of operations, and we paid $0.6 million to terminate the related interest rate swap agreement. In addition, we paid deferred financing fees of $0.6 million related to the new loan, which we are amortizing over the term of the new loan. Also in December 2014, we extinguished the $67.1 million mortgage secured by the Embassy Suites La Jolla for a total cost of $71.1 million, and recorded a loss on extinguishment of debt of $4.0 million. The extinguishment was funded using proceeds received from a new $65.0 million mortgage secured by the Embassy Suites La Jolla, along with cash on hand. The new loan is subject to a 30-year amortization schedule, reduces the interest rate from a fixed rate of 6.6% to a fixed rate of 4.12%, and extends the maturity date from June 2019 to January 2025. In conjunction with our repayment of the original mortgage, we wrote off $43,000 of unamortized deferred financing fees, which are included in loss on extinguishment of debt in our consolidated statements of operations. In addition, we paid deferred financing fees of $0.4 million related to the new loan, which we are amortizing over the term of the new loan. As of December 31, 2014, the weighted average term to maturity of our debt is approximately four years, and 71.6% of our debt is fixed rate with a weighted average interest rate of 5.2%. The weighted average interest rate on all of our debt, which includes our variable-rate debt obligations based on variable rates at December 31, 2014, is 4.5%. OPER ATING ACTIVITIES Operating Performance Indicators. The following performance indicators are commonly used in the hotel industry: • Occupancy, which is the quotient of total rooms sold divided by total rooms available; • Average daily room rate, or ADR, which is the quotient of room revenue divided by total rooms sold; • 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, those hotels that are undergoing a material repositioning 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 30 hotels in which we have interests as of December 31, 2014. In addition, our Comparable Portfolio includes prior ownership results for the Hyatt Chicago Magnificent Mile, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hilton New Orleans St. Charles, the Boston Park Plaza, the Hyatt Regency San Francisco and the Marriott Wailea; 35


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    • 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; • 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 available to common stockholders, which includes FFO but excludes preferred stock dividends and redemption charges, penalties, written-off deferred financing costs, non-real estate-related impairment losses, income tax benefits or (provisions) associated with the application of net operating loss carryforwards, 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/internet, parking, spa, resort and other facility fees, entertainment and other guest services. Additionally, this category includes, among other things, operating revenue from BuyEfficient, 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, however 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, management fees and other costs. Additionally, this category includes general and administrative expenses from BuyEfficient; • 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, relocation, entity-level state franchise and minimum taxes, travel expenses, office rent and other costs; and • 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 furniture, fixtures, equipment and intangibles. Other Revenue and Expense. Other revenue and expense consists of the following: • Interest and other income, which includes interest we have earned on our restricted and unrestricted cash accounts and the Preferred Equity Investment, as well as any energy rebates we have received or 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 and capital lease obligation, accretion of our Operating Partnership’s 4.6% exchangeable senior notes (the “Senior Notes”) that were repurchased in 2013, amortization 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 losses we recognized on amendments or early repayments of mortgages or other debt obligations; • Income tax provision, which includes federal and state income taxes charged to the Company net of any refunds received, and any adjustments to unrecognized tax positions, along with any related interest and penalties incurred; 36


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    • 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 administrative fees; and • Preferred stock dividends and redemption charges, which includes dividends earned on our 8.0% Series A Cumulative Redeemable Preferred Stock (“Series A preferred stock”) until their redemption in March 2013, Series C Cumulative Convertible Redeemable Preferred Stock (“Series C preferred stock”) until their redemption in May 2013, 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. Factors Affecting Our Operating Results. The primary factors affecting our operating results include overall demand for hotel rooms, the pace of new hotel development, or supply, and the relative performance of our operators in increasing revenue and controlling hotel operating expenses. • Demand. The demand for lodging generally fluctuates with the overall economy. In aggregate, demand for our hotels has improved each year since 2010. In 2012, our Comparable Portfolio RevPAR increased 6.2% as compared to 2011, with a 260 basis point increase in portfolio occupancy. These improving demand trends continued in 2013 and 2014. As a result, our Comparable Portfolio RevPAR increased 3.3% in 2013 as compared to 2012, and 6.9% in 2014 as compared to 2013. Comparable Portfolio occupancy increased 40 basis points in 2013 as compared to 2012, and increased an additional 190 basis points in 2014 as compared to 2013. Our operating statistics improved in 2013 as compared to 2012, even as four of our hotels were under major renovations during the first half of 2013, causing limited occupancy. These major renovations were substantially completed during the third quarter of 2013. While a portion of the improvement in our operating statistics in 2014 as compared to 2013 was due to occupancy improvements at the four hotels under renovation during 2013, this improvement was muted by the negative impact of renovations at four of our hotels during 2014. 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 absorb demand for lodging and therefore drive RevPAR and profits. The development of new hotels is largely driven by construction costs and expected performance of existing hotels. The recession and financial 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. In aggregate, we expect the U.S. hotel supply will remain slightly below historic levels over the next few years. 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 DC 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. 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 occu- pancy 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 housekeep- ing, labor and utilities expense. In 2013, our Comparable Portfolio RevPAR index decreased 60 basis points as compared to the same period in 2012 due to several capital investment programs at our hotels. In 2014, our Comparable Portfolio RevPAR index increased by 120 basis points as compared to the same period in 2013 due in part to a reduction in renovation displacement and the effect of newly-implemented resort fees in 2014. 37


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    We continue to work with our operators to identify operational efficiencies designed to reduce expenses while maintaining guest experience and hotel employee satisfaction. 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. Operating Results. The following table presents our operating results for our total portfolio for the years ended December 31, 2014 and 2013, 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 30 hotels (14,303 rooms) as of December 31, 2014 and 29 hotels (13,744 rooms) as of December 31, 2013. No hotels were classified as discontinued operations during 2014, however, adjustments were recognized during 2014 related to hotels sold during 2004 through 2013. Discontinued Operations for 2013 includes the Rochester Portfolio (1,222 rooms). 2014 2013 Change $ Change % (dollars in thousands, except statistical data) REVENUES Room $ 811,709 $653,955 $157,754 24.1% Food and beverage 259,358 213,346 46,012 21.6% Other operating 70,931 56,523 14,408 25.5% Total revenues 1,141,998 923,824 218,174 23.6% OPER ATING EXPENSES Hotel operating 673,934 557,025 116,909 21.0% Property general and administrative 126,737 103,454 23,283 22.5% Corporate overhead 28,739 26,671 2,068 7.8% Depreciation and amortization 155,845 137,476 18,369 13.4% Total operating expenses 985,255 824,626 160,629 19.5% OPER ATING INCOME 156,743 99,198 57,545 58.0% Interest and other income 3,479 2,821 658 23.3% Interest expense (72,315) (72,239) (76) (0.1)% Loss on extinguishment of debt (4,638) (44) (4,594) (10,440.9)% Income before income taxes and discontinued operations 83,269 29,736 53,533 180.0% Income tax provision (179) (8,145) 7,966 97.8% INCOME FROM CONTINUING OPER ATIONS 83,090 21,591 61,499 284.8% Income from discontinued operations 4,849 48,410 (43,561) (90.0)% NET INCOME 87,939 70,001 17,938 25.6% Income from consolidated joint venture attributable to non-controlling interest (6,676) (4,013) (2,663) (66.4)% Distributions to non-controlling interest (32) (32) — —% Preferred stock dividends and redemption charges (9,200) (19,013) 9,813 51.6% INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 72,031 $ 46,943 $ 25,088 53.4% 38


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    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 continuing operations for 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 the Rochester portfolio (1,222 rooms) as of December 31, 2013 and 8 hotels (2,342 rooms) as of December 31, 2012. 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 — —% 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)% Preferred stock dividends and redemption charges (19,013) (29,748) 10,735 36.1% INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 46,943 $ 18,017 $ 28,926 160.5% Operating Statistics. The following tables include comparisons of the key operating metrics for our Comparable Portfolio, including prior ownership results as applicable for the Hyatt Chicago Magnificent Mile, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hilton New Orleans St. Charles, the Boston Park Plaza, the Hyatt Regency San Francisco and the Marriott Wailea. 2014 2013 Change Occ% ADR RevPAR Occ% ADR RevPAR Occ% ADR RevPAR Comparable Portfolio 82.4% $194.31 $160.11 80.5% $186.11 $149.82 190 bps 4.4% 6.9% Marriott Adjusted Comparable Portfolio(1) 82.4% $194.31 $160.11 80.5% $186.24 $149.92 190 bps 4.3% 6.8% 2013 2012 Change Occ% ADR RevPAR Occ% ADR RevPAR Occ% ADR RevPAR Comparable Portfolio 80.5% $186.11 $149.82 80.1% $181.12 $145.08 40 bps 2.8% 3.3% Marriott Adjusted Comparable Portfolio(1) 80.5% $186.24 $149.92 80.1% $181.02 $145.00 40 bps 2.9% 3.4% Marriott Adjusted Comparable Portfolio excluding Boston Park Plaza(2) 80.2% $188.03 $150.80 79.8% $181.93 $145.18 40 bps 3.4% 3.9% (1) Includes the Comparable Portfolio adjusted for the effects of converting the operating statistics for ten of our Marriott-managed hotels from a 13-period basis as reported in 2012 to a standard 12-month calendar basis. (2) Includes the Comparable Portfolio adjusted for the change in Marriott’s calendar as noted in the above footnote, and adjusted to exclude the Boston Park Plaza due to the hotel adding 12 rooms in September 2012, and an additional 100 rooms in January 2013. 39


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    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 available to common stockholders. 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 available to common stockholders, 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 f low 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 and unfavorable tenant lease contracts, as applicable, recorded in conjunction with our acquisitions of the Boston Park Plaza, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hilton New Orleans St. Charles, the Hyatt Regency San Francisco and the Marriott Wailea. 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. 40


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    • 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, 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. The following table reconciles our net income to EBITDA and Adjusted EBITDA for our hotel portfolio for the years ended December 31, 2014, 2013 and 2012 (in thousands): 2014 2013 2012 Net income $ 87,939 $ 70,001 $ 49,557 Operations held for investment: Depreciation and amortization 155,845 137,476 130,907 Amortization of lease intangibles 4,113 4,112 4,113 Interest expense 72,315 72,239 76,821 Income tax provision 179 8,145 1,148 Non-controlling interests: Income from consolidated joint venture attributable to non-controlling interest (6,676) (4,013) (1,761) Depreciation and amortization (3,335) (3,956) (5,685) Interest expense (2,020) (2,341) (2,477) Discontinued operations: Depreciation and amortization — — 13,164 Amortization of lease intangibles — — 14 Interest expense — 99 6,490 EBITDA 308,360 281,762 272,291 Operations held for investment: Amortization of deferred stock compensation 6,221 4,858 3,466 Amortization of favorable and unfavorable contracts, net 166 320 206 Non-cash straightline lease expense 2,021 2,055 2,777 Capital lease obligation interest—cash ground rent (1,404) (1,404) (819) (Gain) loss on sale of assets, net (93) (12) 18 Loss on extinguishment of debt 4,638 44 191 Closing costs—completed acquisitions 541 1,678 1,965 Lawsuit settlement costs, net — 358 158 Prior year property tax and CAM adjustments, net (3,305) 106 621 Property-level restructuring costs 675 — 623 Non-controlling interests: Non-cash straightline lease expense (450) (450) (450) Prior year property tax adjustments, net 696 — (202) Loss on extinguishment of debt (133) — — Discontinued operations: Gain on sale of assets, net (5,199) (51,620) (38,292) Loss on extinguishment of debt — 3,115 — Lawsuit reversal costs — — (48) 4,374 (40,952) (29,786) Adjusted EBITDA $312,734 $240,810 $242,505 41


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    Adjusted EBITDA was $312.7 million in 2014 as compared to $240.8 million in 2013 and $242.5 million in 2012. Adjusted EBITDA increased $71.9 million in 2014 as compared to 2013 in part due to additional earnings generated by the three hotels we acquired in 2013 and the one hotel we acquired in 2014 (the Hilton New Orleans St. Charles in May 2013, the Boston Park Plaza in July 2013, the Hyatt Regency San Francisco in December 2013 and the Marriott Wailea in July 2014, together the “four 2013–2014 acquired hotels”), combined with an increase in earnings at four of our hotels which were undergoing major renovations during the first half of 2013 (the Hilton Times Square, the Hyatt Chicago Magnificent Mile, the Hyatt Regency Newport Beach and the Renaissance Westchester, together the “four 2013 renovation hotels”). These increases were partially offset by a decrease in earnings at two of our hotels which were undergoing major renovations during the first quarter of 2014 (the Hilton Garden Inn Chicago Downtown/Magnificent Mile and the Renaissance Long Beach, together the “two 2014 renovation hotels”), combined with decreases in earnings at the Hyatt Regency San Francisco and the Boston Park Plaza, which were undergoing major renovations during the first half and fourth quarter of 2014, respectively. Adjusted EBITDA decreased $1.7 million in 2013 as compared to 2012 as additional earnings generated by the two hotels we acquired in 2012 and the three hotels we acquired in 2013 (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, together the “five 2012–2013 acquired hotels”) were mostly offset by a decrease in earnings caused by major renovations at the four 2013 renovation hotels. These renovations were substantially completed by June 30, 2013. 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. Our presentation of FFO conforms to the National Association of Real Estate Investment Trusts’ (“NAREIT”) definition of FFO. This may not be comparable to FFO reported by other REITs that do not define the terms in accordance with the current NAREIT definition, or that interpret the current NAREIT definition differently than we do. We also present Adjusted FFO available to common stockholders 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 available to common stockholders: • Preferred stock dividends and redemption charges: we deduct preferred stock dividends and exclude redemption charges in order to facilitate comparisons between us and the majority of other lodging REITs who either have no preferred stock dividends or who also present Adjusted FFO available to common stockholders. • 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 and unfavorable tenant lease contracts, as applicable, recorded in conjunction with our acquisitions of the Boston Park Plaza, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hilton New Orleans St. Charles, the Hyatt Regency San Francisco and the Marriott Wailea. 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, as well as the non-cash gains or losses on our derivatives. 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 available to common stockholders 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 consol- idated Hilton San Diego Bayfront partnership. • Other adjustments: we exclude other adjustments such as lawsuit settlement costs, prior year property tax assessments and/or credits, management company transition costs, departmental closing costs, including severance, and income tax benefits or 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. 42


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    The following table reconciles our net income to FFO and Adjusted FFO available to common stockholders for our hotel portfolio for the years ended December 31, 2014, 2013 and 2012 (in thousands): 2014 2013 2012 Net income $ 87,939 $ 70,001 $ 49,557 Operations held for investment: Real estate depreciation and amortization 154,253 136,047 129,668 Amortization of lease intangibles 4,113 4,112 4,113 (Gain) loss on sale of assets, net (93) (12) 18 Non-controlling interests: Income from consolidated joint venture attributable to non-controlling interest (6,676) (4,013) (1,761) Real estate depreciation and amortization (3,335) (3,956) (5,685) Discontinued operations: Real estate depreciation and amortization — — 13,164 Amortization of lease intangibles — — 14 Gain on sale of assets, net (5,199) (51,620) (38,292) FFO 231,002 150,559 150,796 Operations held for investment: Preferred stock dividends and redemption charges (9,200) (19,013) (29,748) Amortization of favorable and unfavorable contracts, net 166 320 206 Non-cash straightline lease expense 2,021 2,055 2,777 Write-off of deferred financing fees — — 3 Non-cash interest related to (gain) loss on derivatives, net (529) (525) 406 Loss on extinguishment of debt 4,638 44 191 Closing costs—completed acquisitions 541 1,678 1,965 Lawsuit settlement costs, net — 358 158 Prior year property tax and CAM adjustments, net (3,305) 106 621 Property-level restructuring costs 675 — 623 Income tax (benefit) provision related to prior years (762) 8,145 1,148 Preferred stock redemption charges — 4,770 — Non-controlling interests: Non-cash straightline lease expense (450) (450) (450) Non-cash interest related to loss on derivative — (3) (1) Prior year property tax adjustments, net 696 — (202) Loss on extinguishment of debt (133) — — Discontinued operations: Loss on extinguishment of debt — 3,115 — Write-off of deferred financing fees — — 185 Lawsuit reversal costs — — (48) (5,642) 600 (22,166) Adjusted FFO available to common stockholders $225,360 $151,159 $128,630 Adjusted FFO available to common stockholders was $225.4 million in 2014 as compared to $151.2 million in 2013 and $128.6 million in 2012. Adjusted FFO available to common stockholders increased $74.2 million in 2014 as compared to 2013 in part due to additional earnings generated by the four 2013–2014 acquired hotels, combined with an increase in earnings at the four 2013 renovation hotels. In addition, Adjusted FFO available to common stockholders increased during 2014 as compared to 2013 due to a decrease in preferred stock dividends and redemption charges. These increases were partially offset by a decrease in earnings at the two 2014 renovation hotels, combined with decreases in earnings at the Hyatt Regency San Francisco and the Boston Park Plaza, which were undergoing major renovations during the first half and fourth quarter of 2014, respectively. Adjusted FFO available to common stockholders increased $22.5 million in 2013 as compared to 2012 due to additional earnings generated by the five 2012–2013 acquired hotels, combined with a decrease in preferred stock dividends and interest expense. These increases to Adjusted FFO available to common stockholders were partially offset by a decrease in earnings caused by major renovations at the four 2013 renovation hotels. These renovations were substantially completed by June 30, 2013. 43


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    Room revenue. Room revenue increased $157.8 million, or 24.1%, in 2014 as compared to 2013. The four 2013–2014 acquired hotels contributed additional room revenue of $113.8 million during 2014. Room revenues at both the Boston Park Plaza and the Hyatt Regency San Francisco were negatively impacted during 2014 by major renovations, which caused 9,080 room nights to be out of service, displacing approximately $2.6 million in room revenue based on the hotels achieving a combined potential 80.8% occupancy rate and RevPAR of $187.97 without the renovations. Room revenue generated by the 26 hotels we owned prior to January 1, 2013 (our “existing portfolio”) increased $45.5 million during 2014 as compared to 2013 due to increases in both occupancy ($19.2 million) and ADR ($26.3 million). The increases in occupancy and ADR were driven by an additional 68,236 group room nights, combined with an additional 39,230 transient room nights. Room revenue in our existing portfolio was negatively impacted during 2014 by major renovations at the two 2014 renovation hotels. These major renovations caused a total of 5,141 room nights to be out of service during the first quarter of 2014, displacing approximately $0.5 million in room revenue based on the hotels achieving a combined potential 69.5% occupancy rate and RevPAR of $90.00 without the renovations. In comparison, the 2013 displacement experienced by the four 2013 renovation hotels caused a total of 40,287 room nights to be out of service during 2013, displacing approximately $7.7 million in room revenue based on the hotels achieving a combined potential 79.9% occupancy rate and RevPAR of $159.02 without the renovations. Partially offsetting the increase in our existing portfolio’s room revenue during 2014 as compared to 2013, room revenue decreased as a result of a change in the financial reporting calendar used by Marriott, one of our third-party managers. Beginning in 2013, Marriott switched from using a 13-fiscal period accounting calendar to a standard 12-month calendar. However, due to the timing of Marriott’s fiscal 2012 year-end of December 28, 2012, Marriott’s fiscal 2013 includes three additional days, December 29, 2012 through December 31, 2012. These three additional days in fiscal 2013 generated approximately $1.6 million more in room revenue for ten of our Marriott- managed hotels during 2013 as compared to 2014. Room revenue increased $77.8 million, or 13.5%, in 2013 as compared to 2012. The five 2012–2013 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 increased during 2013 as compared to the same period in 2012 due to a change in the financial reporting calendar used by Marriott. 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 ten of our Marriott-managed hotels during 2013 as compared to 2012. Room revenue generated by the 24 hotels we owned prior to January 1, 2012 (our “prior year 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 prior year existing portfolio was negatively impacted during 2013 by major renovations at three hotels in our prior year existing portfolio: the Hilton Times Square; the Hyatt Regency Newport Beach; and the Renaissance Westchester. These major 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 these three 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 renovations at the Renaissance Washington DC and the Hyatt Regency Newport Beach. The major 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 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. Food and beverage revenue. Food and beverage revenue increased $46.0 million, or 21.6%, in 2014 as compared to 2013. Our four 2013–2014 acquired hotels contributed an additional $29.0 million to food and beverage revenue during 2014. Food and beverage revenue in our existing portfolio increased $17.6 million in 2014 as compared to 2013, primarily due to increased banquet and outlet revenue at the majority of our hotels due to the increases in occupancy and group room nights. In addition, food and beverage revenue increased in our existing portfolio during 2014 as the negative impact from the two 2014 renovation hotels during 2014 was much less than the negative impact from the four 2013 renovation hotels during 2013. These increases in food and beverage revenue during 2014 as compared to 2013 were partially offset by Marriott’s additional three days in the first quarter 2013, which generated approximately $0.6 million in food and beverage revenue for ten of our Marriott-managed hotels during 2013 as compared to 2014. Food and beverage revenue increased $12.5 million, or 6.2%, in 2013 as compared to 2012. The five 2012–2013 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 ten of our Marriott-managed hotels during 2013 as compared to 2012. Food and beverage revenue in our prior year 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 44


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    fewer group room nights, as well as the negative impact of the renovations at the Hilton Times Square, the Hyatt Regency Newport Beach and the Renaissance Westchester. 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 renovation during 2012, causing revenue to decrease in outlets, banquets and room service during 2012. Other operating revenue. Other operating revenue increased $14.4 million, or 25.5%, in 2014 as compared to 2013. Our four 2013–2014 acquired hotels contributed an additional $9.3 million to other operating revenue during 2014. In addition, BuyEfficient’s revenue increased $0.4 million during 2014 as compared to 2013 due to increased transaction fees. Other operating revenue in our existing portfolio increased $4.7 million in 2014 as compared to 2013, primarily due to our resort fee charges beginning in 2014 at two of our existing hotels, which generated $2.5 million during 2014. In addition, other operating revenue grew in our existing portfolio as increased parking, spa and third- party lease revenue was only partially offset by decreased telephone/internet revenue, cancellation and attrition revenue. Other operating revenue increased $4.4 million, or 8.4%, in 2013 as compared to 2012. Our five 2012–2013 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 prior year 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. Hotel operating expenses. Hotel operating expenses increased $116.9 million, or 21.0%, in 2014 as compared to 2013. The four 2013–2014 acquired hotels contributed an additional $96.7 million to hotel operating expenses during 2014. Hotel operating expenses in our existing portfolio increased $20.2 million during 2014 as compared to 2013, primarily due to the corresponding increases in room, food and beverage and parking revenue. In addition, hotel operating expenses in our existing portfolio increased in 2014 as compared to 2013 due to the following increased expenses: franchise costs due to the increase in revenues; advertising and promotion and repairs and maintenance due to increased payroll and related expenses; utility expense due to increased rates at several of our hotels, combined with increased usage due to the extremely cold winter in the Midwest and East; and ground lease expense due to higher percentage rent at several of our hotels caused by the increase in revenue. The increases in our existing portfolio’s hotel operating expenses during 2014 as compared to 2013 were slightly offset by lower property taxes, which decreased due to appeal refunds received at several of our hotels, as well as by the inclusion of three additional days of expense for ten of the Marriott-managed hotels during 2013 as compared to 2014. Hotel operating expenses increased $56.8 million, or 11.4%, in 2013 as compared to 2012. The five 2012–2013 acquired hotels contributed $46.3 million to hotel operating expenses during 2013. Hotel operating expenses in our prior year 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 prior year existing portfolio increased during 2013 as compared to 2012 due to increases in property taxes, property and liability insurance premiums and ground lease expense. Property general and administrative expense. Property general and administrative expense increased $23.3 million, or 22.5% in 2014 as compared to 2013. The four 2013–2014 acquired hotels contributed an additional $16.2 million to property general and administrative expense during 2014. Property general and administrative expense in our existing portfolio increased $7.1 million during 2014 as compared to 2013, primarily due to increased management fees, credit and collection expenses, payroll and related expenses, contract and professional fees, and licenses and permits expenses due to the increase in revenue, partially offset by decreased security and sales tax audit expenses. In addition, property general and administrative expenses in our existing portfolio decreased during 2014 as compared to 2013 due to the Marriott-managed hotels’ three additional days in 2013 as compared to 2014. Property general and administrative expense increased $8.8 million, or 9.3%, in 2013 as compared to 2012. The five 2012–2013 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 prior year 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. 45


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    Corporate overhead expense. Corporate overhead expense increased $2.1 million, or 7.8%, in 2014 as compared to 2013, primarily due to increased payroll and related expenses ($1.8 million), deferred stock compensation expense ($1.5 million), and legal, employee relations and donations expenses ($0.4 million), partially offset by decreased due diligence expense ($1.1 million), entity-level state franchise and minimum taxes ($0.3 million) and contract and professional fees ($0.2 million). Due diligence expense decreased during 2014 versus 2013 as we recognized $0.6 million of due diligence costs related to our completed acquisitions and an additional $0.1 million related to in-process or abandoned projects during 2014, whereas during 2013 we recognized $1.7 million of due diligence costs related to our completed acquisitions, and an additional $0.1 million related to in-process or abandoned projects. Corporate overhead expense increased $2.4 million, or 9.7%, in 2013 as compared to 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); and legal, conferences, travel and entity-level state franchise and minimum taxes ($0.7 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. Depreciation and amortization expense. Depreciation and amortization increased $18.4 million, or 13.4%, in 2014 as compared to 2013. The four 2013–2014 acquired hotels contributed an additional $21.7 million to depreciation and amortization during 2014. Depreciation and amortization expense in our existing portfolio decreased $3.3 million during 2014 as compared to 2013 primarily due to advanced bookings recorded in conjunction with our purchases of the JW Marriott New Orleans, the Hilton San Diego Bayfront and the Hilton Garden Inn Chicago Downtown/Magnificent Mile that were fully amortized as of February 2013, April 2013 and December 2013, respectively. In addition the furniture, fixtures and equipment (“FF&E”) at some of our hotels was fully depreciated as of the end of 2013. These decreases in expense were partially offset by additional depreciation recognized on hotel renovations and purchases of FF&E for our existing portfolio. Depreciation and amortization increased $6.6 million, or 5.0%, in 2013 as compared to 2012. The five 2012–2013 acquired hotels contrib- uted $11.3 million to depreciation and amortization during 2013. Depreciation and amortization expense in our prior year existing portfo- lio 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 FF&E for our prior year existing portfolio. Interest and other income. Interest and other income totaled $3.5 million in 2014, $2.8 million in 2013, and $0.3 million in 2012. In 2014, we recognized $2.8 million in interest income on the Preferred Equity Investment, $0.4 million in energy rebates due to energy efficient renovations at our hotels, and $0.3 million in other interest and miscellaneous income. 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. Interest expense. Interest expense is as follows (in thousands): Year Ended Year Ended Year Ended December 31, December 31, December 31, 2014 2013 2012 Interest expense on debt and capital lease obligations $70,067 $69,806 $71,664 (Gain) loss on derivatives, net (529) (525) 406 Accretion of Senior Notes — 3 1,058 Amortization of deferred financing fees 2,777 2,955 3,690 Write-off of deferred financing fees — — 3 $72,315 $72,239 $76,821 46

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