Sunstone Hotel Investors Reports Results for Second Quarter 2009

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Shoprite Grp.	LSE:SHO	London	Ordinary Share	GB0004637772

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Increases cash to $240.0 million, including restricted cash Executes on broad finance plan aimed at improving liquidity and reducing leverage Sells three non-core assets for gross proceeds of $63.8 million SAN CLEMENTE, Calif., Aug. 5 /PRNewswire-FirstCall/ -- Sunstone Hotel Investors, Inc. (the "Company") (NYSE:SHO) today announced results for the second quarter ended June 30, 2009. Second Quarter 2009 Operational Results: -- Total revenue was $186.8 million. -- Total RevPAR was $101.03. -- Loss attributable to common stockholders was $135.4 million. -- Loss attributable to common stockholders per diluted share was $2.23. -- Adjusted EBITDA was $44.8 million. -- Adjusted FFO available to common stockholders was $13.7 million. -- Adjusted FFO available to common stockholders per diluted share was $0.22. -- Hotel operating margin was 25.7%. Art Buser, President and Chief Executive Officer, stated, "As expected, we faced continuing softness in demand for lodging in the second quarter. In this challenging operating environment, our focus is on maximizing the profitability of our portfolio and enhancing our liquidity and financial flexibility. With these goals in mind, we have executed on a number of finance transactions, divested several non-core hotels, and continued to direct our asset management efforts toward lasting efficiency measures, rather than short-term cost cuts." SELECTED FINANCIAL DATA ($ in millions, except RevPAR and per share amounts) (unaudited) Three Months Ended June 30, Six Months Ended June 30, 2009 2008 % Change 2009 2008 % Change ---- ---- -------- ---- ---- -------- Total Revenue $186.8 $241.9 (22.8)% $368.4 $455.1 (19.1)% Total RevPAR (1) $101.03 $132.28 (23.6)% $99.36 $123.66 (19.7)% Income available (loss attributable) to common stockholders $(135.4) $59.7 (326.8)% $(134.5) $56.3 (338.9)% Income available (loss attributable) to common stockholders per diluted share $(2.23) $1.02 (318.6)% $(2.38) $0.96 (347.9)% EBITDA $(73.6) $127.3 (157.8)% $(10.1) $188.7 (105.4)% Adjusted EBITDA $44.8 $85.2 (47.4)% $83.7 $146.6 (42.9)% FFO available to common stockholders $(92.0) $53.3 (272.6)% $(60.7) $82.6 (173.5)% Adjusted FFO available to common stockholders $13.7 $53.3 (74.3)% $20.7 $82.6 (74.9)% FFO available to common stockholders per diluted share (2) $(1.51) $0.85 (277.6)% $(1.07) $1.32 (181.1)% Adjusted FFO available to common stockholders per diluted share (2) $0.22 $0.85 (74.1)% $0.37 $1.32 (72.0)% Hotel operating margin (1) 25.7% 32.1% (640) bps 24.7% 29.4% (470) bps (1) Includes the 39 hotels we owned as of June 30, 2009, excluding the Hyatt Suites Atlanta Northwest reclassified as "Held for Sale," and the W San Diego Hotel reclassified as "Operations Held for Non-Sale Disposition." (2) Reflects Series C convertible preferred stock on an "as-converted" basis if such treatment is dilutive. Second quarter operating results were negatively impacted by $133.8 million of one-time and other items, which included (i) $131.9 million of goodwill and other impairment losses; (ii) $0.8 million of severance expense related to a corporate reorganization; and (iii) $1.1 million of hotel operating expense, comprised of a $0.9 million charge for supplemental tax assessments for tax years dating from 2004 through 2008, and $0.2 million of severance expense related to property level staffing reductions. Adjusted EBITDA and Adjusted FFO available to common stockholders were only affected by items (ii) and (iii) above. Contemporaneously with this press release, the Company has filed with the Securities and Exchange Commission its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009. Disclosure regarding the non-GAAP financial measures in this release is included on pages 4 and 5. Disclosure regarding the Hotel Operating Profit Margin is included on page 5 of this release. Reconciliations of non-GAAP financial measures to the most comparable GAAP measure for each of the periods presented are included on pages 9 and 10 of this release. Transactions Sales of Hotel Properties. In May 2009, the Company sold the 274-room Marriott Napa Valley for gross proceeds of $36.0 million. In June 2009, the Company sold the 292-room Marriott Riverside for gross proceeds of $19.3 million. On July 31, 2009, the Company sold the 202-room Hyatt Suites Atlanta Northwest for gross proceeds of $8.5 million, which equates to 22.7x projected 2009 EBITDA. The Company retained the proceeds from these sales as additional cash. Exchangeable Senior Notes Tender Offer. In May 2009, pursuant to a previously announced tender offer, the Company purchased a total of $123.5 million in principal amount of the 4.60% exchangeable senior notes due 2027 (the "Senior Notes") for $89.0 million, including $2.0 million in interest, $1.9 million in related consents and $0.6 million in fees and costs. The repurchased Senior Notes were cancelled. In addition, the Company paid $1.2 million, including $0.3 million in fees and costs, for consents related to non-tendered Senior Notes. The Company wrote off $2.7 million in deferred financing fees and $7.3 million of the Senior Note discount, and recognized a net gain of $26.6 million on this early extinguishment of debt. The Company initially used available cash to fund this repurchase of the Senior Notes, and subsequently replaced such cash with proceeds from its equity offering completed in May 2009. Equity Offering. In May 2009, the Company issued 20,700,000 shares of its common stock, including the underwriters' over-allotment of 2,700,000 shares, for net proceeds of $98.7 million. The Company used the net proceeds from this equity offering in part to replace cash used to repurchase its Senior Notes in May 2009, and to bolster its liquidity position. Credit Facility Restructure. In June 2009, the Company amended its credit facility (the "amended credit facility"), reducing the facility's size from $200.0 million to $85.0 million. In addition, the amendment reduced the facility's minimum fixed charge coverage covenant from 1.50:1.00 to 1.00:1.00, with added flexibility to drop to 0.90:1.00 for up to four quarters, and eliminated the facility's 65% maximum total leverage covenant, replacing it with a 9.50:1.00 maximum net debt to EBITDA covenant, which may be increased to 10.50:1.00 for up to four quarters. The borrowing base collateral was reduced from an equity pledge on 10 hotels to secured mortgages on five hotels. The amended credit facility, has an interest rate based on grid pricing ranging from 375 - 525 basis points over LIBOR, and matures in 2012, assuming the exercise of a one-year extension option. Secured Finance Initiatives. In June 2009, the Company ceased the subsidization of debt service on the $65.0 million non-recourse mortgage secured by its W San Diego hotel, which resulted in a default under the mortgage. The Company does not expect further negotiation with the special servicer, and the Company is prepared to convey the hotel to the lender in lieu of repayment of the debt. In conjunction with this expected conveyance, the Company has reclassified the assets, liabilities and results of operations of the W San Diego to "operations held for non-sale disposition" on its balance sheets, statements of operations and statements of cash flows. The W San Diego is expected to generate approximately $1.4 million of Hotel EBITDA in 2009, and 2009 scheduled debt service on the hotel's mortgage is $4.0 million. Subsequent to the end of the second quarter, the Company ceased the subsidization of debt service on the $29.5 million non-recourse mortgage for its Renaissance Westchester hotel. The Renaissance Westchester is expected to generate approximately $1.5 million of Hotel EBITDA in 2009, and 2009 scheduled debt service on the hotel's mortgage is $2.1 million. The Company has engaged lender's representatives for several of the Company's non-recourse loans, including the Westchester loan, in an effort to negotiate certain modifications to the loans rather than convey the subject hotels to the lenders, however no assurances can be given that such negotiations will be successful. Balance Sheet/Liquidity Update Ken Cruse, Chief Financial Officer, stated, "During the second quarter, we meaningfully improved our capital structure through a series of successful transactions, and as a result, we believe we maintain adequate liquidity and financial flexibility to emerge from the current downturn in a position of strength. We recognize that our ability to maintain continued access to the credit and equity markets is largely due to the strength of our lender and investor relationships." As of June 30, 2009, the Company had approximately $240.0 million of cash and cash equivalents, including restricted cash of $44.9 million. As of June 30, 2009, the Company had no outstanding indebtedness under its $85.0 million amended credit facility, and had $3.5 million in outstanding irrevocable letters of credit backed by the credit facility. The Company continues to maintain a higher than historical cash balance in light of the ongoing economic downturn. On June 30, 2009, excluding the W San Diego, total assets were $2.5 billion, including $2.2 billion of net investments in hotel properties, total debt was $1.5 billion and stockholders' equity was $0.9 billion. Financial Covenants The Company is subject to compliance with various covenants under both the amended credit facility and the terms of its outstanding Series C preferred stock. If the Company fails to meet certain of the amended credit facility's covenants (as described above), a default may occur, which may result in a reduction in, or the complete elimination of, funds available under the amended credit facility. If the Company fails to meet certain financial covenants for four consecutive quarters with respect to the Company's Series C preferred stock, a financial ratio violation will occur. If a financial ratio violation occurs, among other things, the Company would be restricted from paying dividends on its common stock, and may incur a 50 basis point per quarter dividend increase on the Series C preferred stock. Additionally, the Series C Preferred Stockholders would gain the right to appoint one board member. While a financial ratio violation does not currently exist, unless operations improve from current levels, the Company believes it may incur a financial ratio violation with respect to its Series C preferred stock during the second half of 2010. Goodwill and Other Impairment Losses During the second quarter of 2009, in light of the continuing decline in the economic environment, the Company determined that an intra-year impairment analysis should be performed as of June 30, 2009. In conjunction with this impairment evaluation and other analysis, the Company incurred a total of $131.9 million of goodwill and impairment losses. The goodwill and impairment losses included: (i) the write off of $1.1 million of goodwill associated with three hotels, including the Marriott Salt Lake City ($0.5 million), the Marriott Rochester Minnesota ($0.4 million), and the Holiday Inn Express San Diego ($0.2 million); (ii) a $64.5 million impairment loss on three hotels, including the Renaissance Westchester ($30.2 million), the Marriott Del Mar ($25.4 million) and the Marriott Ontario ($8.9 million); (iii) $64.9 million of impairment losses related to discontinued operations or operations held for non-sale disposition, including the Hyatt Suites Atlanta Northwest ($4.9 million) and the W San Diego ($60.0 million), respectively; and (iv) a $1.4 million impairment loss related to the write-off of costs associated with a potential timeshare development in Newport Beach, California. Corporate Overhead Expenses During the second quarter, the Company made certain changes to its corporate organizational structure, and as a result, the Company's corporate workforce was reduced by approximately 40%. As a result of the changes, the Company incurred one-time charges of approximately $0.8 million in its second quarter. The changes are expected to result in approximately $2.0 million to $3.0 million of annual reductions to corporate overhead expense. Hotel Renovations During the second quarter of 2009, the Company invested $12.3 million in capital projects. Dividend Update On August 5, 2009, the Company's board of directors declared a cash dividend of $0.50 per share payable to its Series A cumulative redeemable preferred stockholders and a cash dividend of $0.393 per share payable to its Series C cumulative convertible redeemable preferred stockholders. The dividends will be paid on October 15, 2009 to stockholders of record on September 30, 2009. No dividend was declared on the Company's common stock. The Company intends to make dividends on its common stock in amounts equivalent to 100% of its annual taxable income. The level of any future dividends will be determined by the Company's board of directors after considering taxable income projections, expected capital requirements, and risks affecting the Company's business. In light of the Company's intent to distribute 100% of its annual taxable income, future dividends may be reduced from past levels, or eliminated entirely. Dividends may be made in the form of cash or a combination of cash and stock consistent with Internal Revenue Code regulations. Earnings Call The Company will host a conference call to discuss second quarter results on August 5, 2009, at 2:00 p.m. PDT. A live web cast of the call will be available via the Investor Relations section of the Company's website at http://www.sunstonehotels.com/. Alternatively, investors may dial 1-888-549-7880 (for domestic callers) or 1-480-629-9869 (for international callers) with passcode #4125846. A replay of the web cast will also be archived on the website. About Sunstone Hotel Investors, Inc. Sunstone Hotel Investors, Inc. is a lodging real estate investment trust ("REIT") that, as of the date hereof, has interests in 41 hotels comprised of 14,264 rooms primarily in the upper-upscale segment operated under nationally recognized brands, such as Marriott, Hyatt, Fairmont, Hilton, and Starwood. For further information, please visit the Company's website at http://www.sunstonehotels.com/. This press release contains forward-looking statements within the meaning of federal securities laws and regulations. These forward-looking statements are identified by their use of terms and phrases such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "should," "will" and other similar terms and phrases, including references to assumptions and forecasts of future results. Forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from those anticipated at the time the forward-looking statements are made. These risks include, but are not limited to: volatility in the debt or equity markets affecting our ability to acquire or sell hotel assets; national and local economic and business conditions, including the likelihood of a prolonged U.S. recession; the ability to maintain sufficient liquidity and our access to capital markets; potential terrorist attacks, which would affect occupancy rates at our hotels and the demand for hotel products and services; operating risks associated with the hotel business; risks associated with the level of our indebtedness and our ability to meet covenants in our debt and equity agreements; relationships with property managers and franchisors; our ability to maintain our properties in a first-class manner, including meeting capital expenditure requirements; our ability to compete effectively in areas such as access, location, quality of accommodations and room rate structures; changes in travel patterns, taxes and government regulations, which influence or determine wages, prices, construction procedures and costs; our ability to identify, successfully compete for and complete acquisitions; the performance of hotels after they are acquired; necessary capital expenditures and our ability to fund them and complete them with minimum disruption; our ability to continue to satisfy complex rules in order for us to qualify as a REIT for federal income tax purposes; and other risks and uncertainties associated with our business described in the Company's filings with the Securities and Exchange Commission. Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that the expectations will be attained or that any deviation will not be material. All forward-looking information in this release is as of August 5, 2009, and the Company undertakes no obligation to update any forward-looking statement to conform the statement to actual results or changes in the Company's expectations. This release should be read in conjunction with the consolidated financial statements and notes thereto included in our most recent reports on Form 10-K and Form 10-Q. Copies of these reports are available on our website at http://www.sunstonehotels.com/ and through the SEC's Electronic Data Gathering Analysis and Retrieval System ("EDGAR") at http://www.sec.gov/. Non-GAAP Financial Measures We present the following non-GAAP financial measures that we believe are useful to investors as key measures of our operating performance: (1) Earnings Before Interest Expense, Taxes, Depreciation and Amortization, or EBITDA; (2) Adjusted EBITDA (as defined below); (3) Funds From Operations, or FFO; (4) Adjusted FFO (as defined below); and (5) hotel operating income and hotel operating profit margin for the purpose of our operating margins. EBITDA represents income available to common stockholders excluding: (1) preferred stock dividends; (2) amortization of deferred stock compensation; (3) interest expense (including prepayment penalties, if any); (4) provision for income taxes, including income taxes applicable to sale of assets; and (5) depreciation and amortization. In addition, we have presented Adjusted EBITDA, which excludes: (1) the impact of any gain or loss from asset sales; (2) impairment charges; and (3) other adjustments we have identified in this release. We believe EBITDA and Adjusted EBITDA are useful to investors in evaluating our operating performance because these measures help investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest expense and preferred stock dividends) and our asset base (primarily depreciation and amortization) from our operating results. We also use EBITDA and Adjusted EBITDA as measures in determining the value of hotel acquisitions and dispositions. A reconciliation of income available to common stockholders to EBITDA and Adjusted EBITDA is set forth on page 9. A reconciliation and the components of hotel operating income and hotel operating profit margin are set forth on page 10. We believe hotel operating income and hotel operating profit margin are also useful to investors in evaluating our property-level operating performance. We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group. The Board of Governors of NAREIT in its March 1995 White Paper (as clarified in November 1999 and April 2002) defines FFO to mean net income (loss) (computed in accordance with GAAP), excluding gains and losses from sales of property, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs), and after adjustment for unconsolidated partnerships and joint ventures. We also present Adjusted FFO, which excludes prepayment penalties, written-off deferred financing costs, impairment losses and other adjustments we have identified in this release. We believe that the presentation of FFO and Adjusted FFO provide useful information to investors regarding our operating performance because they are measures of our operations without regard to specified non-cash items such as real estate depreciation and amortization, gain or loss on sale of assets and certain other items which we believe are not indicative of the performance of our underlying hotel properties. We believe that these items are more representative of our asset base and our acquisition and disposition activities than our ongoing operations. We also use FFO as one measure in determining our results after taking into account the impact of our capital structure. A reconciliation of income available to common stockholders to FFO and Adjusted FFO is set forth on page 9. We caution investors that amounts presented in accordance with our definitions of EBITDA, Adjusted EBITDA, FFO, Adjusted FFO, hotel operating income and hotel operating profit margin may not be comparable to similar measures disclosed by other companies, because not all companies calculate these non-GAAP measures in the same manner. EBITDA, Adjusted EBITDA, FFO, Adjusted FFO, hotel operating income and hotel operating profit margin should not be considered as an alternative measure of our net income (loss), operating performance, cash flow or liquidity. EBITDA, Adjusted EBITDA, FFO, Adjusted FFO, hotel operating income and hotel operating profit margin may include funds that may not be available for our discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions and other commitments and uncertainties. Although we believe that EBITDA, Adjusted EBITDA, FFO, Adjusted FFO, hotel operating income and hotel operating profit margin can enhance an investor's understanding of our results of operations, these non-GAAP financial measures, when viewed individually, are not necessarily a better indicator of any trend as compared to GAAP measures such as net income (loss) or cash flow from operations. In addition, you should be aware that adverse economic and market conditions may harm our cash flow. Hotel Operating Margin Information The revenue and expense items associated with the Company's two commercial laundry facilities and the one hotel property held for non-sale disposition, any guaranty payments, and other miscellaneous non-hotel items have been shown below the adjusted hotel EBITDA line in presenting hotel operating margins. Management believes the calculation of adjusted hotel EBITDA results in a more accurate presentation of hotel operating margins of the Company's portfolio of hotels. See page 10 for a reconciliation of adjusted hotel EBITDA to the comparable GAAP measure. Hyatt Suites Atlanta Northwest Hyatt Suites Atlanta Northwest Reconciliation of Net Income Reconciliation of Net Income to EBITDA - Full Year 2009 to EBITDA - Full Year 2009 Forecast - Low Forecast - High (in millions) (in millions) Net Income ($0.6) Net Income ($0.5) Depreciation expense $0.9 Depreciation expense $0.9 ---- ---- EBITDA $0.3 EBITDA $0.4 W San Diego Hotel W San Diego Hotel Reconciliation of Net Income Reconciliation of Net Income to EBITDA - Full Year 2009 to EBITDA - Full Year 2009 Forecast - Low Forecast - High (in millions) (in millions) Net Income ($6.9) Net Income ($6.5) Interest Expense $4.0 Interest Expense $4.0 Depreciation expense $4.0 Depreciation expense $4.0 ---- ---- EBITDA $1.1 EBITDA $1.5 Renaissance Westchester Renaissance Westchester Reconciliation of Net Income Reconciliation of Net Income to EBITDA - Full Year 2009 to EBITDA - Full Year 2009 Forecast - Low Forecast - High (in millions) (in millions) Net Income ($2.5) Net Income ($2.1) Interest Expense $1.5 Interest Expense $1.5 Depreciation expense $2.3 Depreciation expense $2.3 ---- ---- EBITDA $1.3 EBITDA $1.7 **Tables to Follow*** For Additional Information: Bryan Giglia Vice President - Corporate Finance Sunstone Hotel Investors, Inc. (949) 369-4236 Sunstone Hotel Investors, Inc. Consolidated Balance Sheets (In thousands, except share data) June 30, December 31, 2009 2008 ---- ---- (unaudited) Assets Current assets: Cash and cash equivalents $195,073 $176,898 Restricted cash 44,925 40,536 Accounts receivable, net 29,475 34,198 Due from affiliates 92 109 Inventories 2,553 2,781 Prepaid expenses 6,436 7,245 Investment in hotel properties of discontinued operations, net 7,745 78,646 Investment in hotel property of operations held for non-sale disposition, net 29,303 - Other current assets of discontinued operations, net 870 2,000 Other current assets of operations held for non-sale disposition, net 3,620 2,790 ----- ----- Total current assets 320,092 345,203 Investment in hotel properties, net 2,190,619 2,282,963 Investment in hotel property of operations held for non-sale disposition, net - 91,202 Other real estate, net 14,176 14,640 Investments in unconsolidated joint ventures 26,693 28,770 Deferred financing costs, net 9,153 11,291 Goodwill 8,659 13,404 Other assets, net 12,833 18,138 ------ ------ Total assets $2,582,225 $2,805,611 ========== ========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses $20,936 $17,104 Accrued payroll and employee benefits 7,382 7,472 Due to Interstate SHP 14,876 16,088 Dividends payable 5,138 12,499 Other current liabilities 27,722 30,194 Current portion of notes payable 18,668 13,002 Current portion of note payable of operations held for non-sale disposition 65,000 - Other current liabilities of discontinued operations 564 2,980 Other current liabilities of operations held for non-sale disposition 2,504 2,120 ----- ----- Total current liabilities 162,790 101,459 Notes payable, less current portion 1,431,149 1,618,256 Note payable, less current portion of operations held for non-sale disposition - 65,000 Other liabilities 6,562 6,388 ----- ----- Total liabilities 1,600,501 1,791,103 Commitments and contingencies - - Preferred stock, Series C Cumulative Convertible Redeemable Preferred Stock, $0.01 par value, 4,102,564 shares authorized, issued and outstanding at June 30, 2009 and December 31, 2008, liquidation preference of $24.375 per share 99,796 99,696 Stockholders' equity: Preferred stock, $0.01 par value, 100,000,000 shares authorized. 8.0% Series A Cumulative Redeemable Preferred Stock, 7,050,000 shares issued and outstanding at June 30, 2009 and December 31, 2008, stated at liquidation preference of $25.00 per share 176,250 176,250 Common stock, $0.01 par value, 500,000,000 shares authorized, 73,841,451 shares issued and outstanding at June 30, 2009 and 47,864,654 shares issued and outstanding at December 31, 2008 738 479 Additional paid in capital 959,157 829,274 Retained earnings 136,964 260,659 Cumulative dividends (387,253) (347,922) Accumulated other comprehensive loss (3,928) (3,928) ------ ------ Total stockholders' equity 881,928 914,812 ------- ------- Total liabilities and stockholders' equity $2,582,225 $2,805,611 ========== ========== Sunstone Hotel Investors, Inc. Unaudited Consolidated Statements of Operations (In thousands, except per share data) Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 2009 2008 2009 2008 ---- ---- ---- ---- Revenues Room $120,325 $157,589 $235,898 $294,272 Food and beverage 48,173 62,882 97,046 118,838 Other operating 14,303 14,736 27,772 29,720 Total revenues of operations held for non-sale disposition 4,013 6,644 7,703 12,247 ----- ----- ----- ------ Total revenues 186,814 241,851 368,419 455,077 ------- ------- ------- ------- Operating expenses Room 28,614 33,038 55,760 63,807 Food and beverage 34,871 42,984 69,793 84,566 Other operating 7,066 8,159 14,779 16,502 Advertising and promotion 10,841 11,975 22,136 23,776 Repairs and maintenance 7,849 8,485 15,796 16,881 Utilities 6,995 8,188 15,179 16,532 Franchise costs 6,759 8,788 13,081 15,785 Property tax, ground lease and insurance 12,784 12,818 24,127 25,704 Property general and administrative 21,129 25,472 42,421 49,932 Corporate overhead 4,849 5,244 10,608 11,929 Depreciation and amortization 27,377 26,602 54,492 53,932 Total operating expenses of operations held for non-sale disposition 4,660 5,786 9,350 11,512 Goodwill and other impairment losses 66,977 - 70,693 - Impairment loss of operations held for non-sale disposition 60,046 - 60,046 - ------ --- ------ --- Total operating expenses 300,817 197,539 478,261 390,858 ------- ------- ------- ------- Operating income (loss) (114,003) 44,312 (109,842) 64,219 Equity in net losses of unconsolidated joint ventures (584) (56) (2,101) (1,522) Interest and other income 254 1,101 876 1,679 Interest expense (23,116) (24,429) (46,748) (48,761) Interest expense of operations held for non-sale disposition (1,011) (1,012) (2,012) (2,024) Gain on extinguishment of debt 26,559 - 54,579 - ------ --- ------ --- Income (loss) from continuing operations (111,901) 19,916 (105,248) 13,591 Income (loss) from discontinued operations (18,304) 48,439 (18,447) 54,957 ------- ------ ------- ------ Net income (loss) (130,205) 68,355 (123,695) 68,548 Dividends paid on unvested restricted stock compensation - (224) (447) (463) Preferred stock dividends and accretion (5,188) (5,232) (10,375) (10,464) Undistributed income allocated to unvested restricted stock compensation - (433) - (172) Undistributed income allocated to Series C preferred stock - (2,772) - (1,101) --- ------ --- ------ Income available (loss attributable) to common stockholders $(135,393) $59,694 $(134,517) $56,348 ========= ======= ========= ======= Basic per share amounts: Income (loss) from continuing operations available (attributable) to common stockholders $(1.92) $0.19 $(2.05) $0.02 Income (loss) from discontinued operations (0.31) 0.84 (0.33) 0.94 ----- ---- ----- ---- Basic income available (loss attributable) to common stockholders per common share $(2.23) $1.03 $(2.38) $0.96 ====== ===== ====== ===== Diluted per share amounts: Income (loss) from continuing operations available (attributable) to common stockholders $(1.92) $0.19 $(2.05) $0.02 Income (loss) from discontinued operations (0.31) 0.83 (0.33) 0.94 ----- ---- ----- ---- Diluted income available (loss attributable) to common stockholders per common share $(2.23) $1.02 $(2.38) $0.96 ====== ===== ====== ===== Weighted average common shares outstanding: Basic 60,845 58,186 56,549 58,452 ====== ====== ====== ====== Diluted 60,845 58,276 56,549 58,546 ====== ====== ====== ====== Dividends declared per common share $- $0.35 $- $0.70 === ===== === ===== Sunstone Hotel Investors, Inc. Reconciliation of Income Available (Loss Attributable) to Common Stockholders to Non-GAAP Financial Measures (Unaudited and in thousands except per share amounts) Reconciliation of Income Available (Loss Attributable) to Common Stockholders to EBITDA and Adjusted EBITDA Three Months Ended Six Months Ended June 30, June 30, -------- -------- 2009 2008 2009 2008 ---- ---- ---- ---- Income available (loss attributable) to common stockholders $(135,393) $59,694 $(134,517) $56,348 Dividends paid on unvested restricted stock compensation - 224 447 463 Series A and C preferred stock dividends 5,188 5,232 10,375 10,464 Undistributed income allocated to unvested restricted stock compensation - 433 - 172 Undistributed income allocated to Series C preferred stock - 2,772 - 1,101 Amortization of deferred stock compensation 1,220 1,089 2,348 2,138 Continuing operations: Depreciation and amortization 27,377 26,602 54,492 53,932 Interest expense 21,676 23,150 44,210 46,203 Amortization of deferred financing fees 501 416 915 833 Write-off of deferred financing fees 284 - 284 - Non-cash interest related to discount on Senior Notes 655 863 1,339 1,725 Unconsolidated joint ventures: Depreciation and amortization 1,282 1,263 2,554 2,537 Interest expense 663 1,236 1,348 2,757 Amortization of deferred financing fees 46 327 92 725 Amortization of deferred stock compensation 11 64 16 64 Operations held for non-sale disposition: Depreciation and amortization 1,011 960 2,020 1,914 Interest expense 1,009 1,009 2,007 2,019 Amortization of deferred financing fees 2 3 5 5 Discontinued operations: Depreciation and amortization 874 2,010 1,964 5,301 ------- ------- ------- ------- EBITDA (73,594) 127,347 (10,101) 188,701 ------- ------- ------- ------- (Gain) loss on sale of assets 13,035 (42,108) 12,716 (42,108) Gain on extinguishment of debt (26,559) - (54,579) - Impairment loss - continuing operations 66,977 - 70,693 - Impairment loss - operations held for non-sale disposition 60,046 - 60,046 - Impairment loss - discontinued operations 4,918 - 4,918 - ----- --- ----- --- 118,417 (42,108) 93,794 (42,108) ------- ------- ------ ------- Adjusted EBITDA $44,823 $85,239 $83,693 $146,593 ======= ======= ======= ======== Reconciliation of Income Available (Loss Attributable) to Common Stockholders to FFO and Adjusted FFO Income available (loss attributable) to common stockholders $(135,393) $59,694 $(134,517) $56,348 Dividends paid on unvested restricted stock compensation - 224 447 463 Series C preferred stock dividends - 1,707 - 3,414 Undistributed income allocated to unvested restricted stock compensation - 433 - 172 Undistributed income allocated to Series C preferred stock - 2,772 - 1,101 Real estate depreciation and amortization - continuing operations 27,223 26,327 54,175 53,484 Real estate depreciation and amortization - operations held for non-sale disposition 1,011 960 2,020 1,914 Real estate depreciation and amortization - unconsolidated joint ventures 1,264 1,251 2,518 2,525 Real estate depreciation and amortization - discontinued operations 874 2,010 1,964 5,301 (Gain) loss on sale of assets 13,035 (42,108) 12,716 (42,108) ------ ------- ------ ------- FFO available to common stockholders (91,986) 53,270 (60,677) 82,614 ------- ------ ------- ------ Continuing operations: Write-off of deferred financing fees 284 - 284 - Gain on extinguishment of debt (26,559) - (54,579) - Impairment loss - continuing operations 66,977 - 70,693 - Impairment loss - operations held for non-sale disposition 60,046 - 60,046 - Impairment loss - discontinued operations 4,918 - 4,918 - ----- --- ----- --- 105,666 - 81,362 - ------- --- ------ --- Adjusted FFO available to common stockholders $13,680 $53,270 $20,685 $82,614 ======= ======= ======= ======= FFO available to common stockholders per diluted share $(1.51) $0.85 $(1.07) $1.32 ====== ===== ====== ===== Adjusted FFO available to common stockholders per diluted share $0.22 $0.85 $0.37 $1.32 ===== ===== ===== ===== Diluted weighted average shares outstanding before adjustments for Series C 60,845 58,276 56,549 58,546 Shares associated with Series C preferred stock - 4,103 - 4,103 Diluted weighted average shares outstanding (1) 60,845 62,379 56,549 62,649 ====== ====== ====== ====== 2008 restated due to stock dividend (2): FFO available to common stockholders per diluted share $0.79 $1.22 ===== ===== Adjusted FFO available to common stockholders per diluted share $0.79 $1.22 ===== ===== Diluted weighted average shares outstanding 67,823 67,705 ====== ====== (1) Diluted weighted average shares outstanding includes the Series C convertible preferred stock on an "as-converted" basis if such treatment is dilutive. (2) Diluted weighted average common shares and per share FFO and Adjusted FFO for the three and six months ended June 30, 2008 have been retroactively adjusted for the effect of shares of common stock issued pursuant to the stock dividend paid in January 2009 on an "as-converted" basis for the Series C convertible preferred stock. Sunstone Hotel Investors, Inc. Hotel Operating Margins (Unaudited and in thousands except hotels and rooms) Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 2009 (1) 2008 (1) 2009 (1) 2008 (1) -------- -------- -------- -------- Number of Hotels 39 39 39 39 Number of Rooms 13,546 13,546 13,546 13,546 ---- ---- ---- ---- Hotel operating margin (2) 25.7% 32.1% 24.7% 29.4% ==== ==== ==== ==== Hotel Revenues Room revenue $120,325 $157,589 $235,898 $294,272 Food and beverage revenue 48,173 62,882 97,046 118,838 Other operating revenue 10,440 10,863 19,939 21,906 ------ ------ ------ ------ Total Hotel Revenues 178,938 231,334 352,883 435,016 Hotel Expenses Room expense 28,854 33,286 56,213 64,288 Food and beverage expense 34,882 42,996 69,815 84,591 Other hotel expense 48,465 55,724 98,095 109,227 General and administrative expense 20,685 25,024 41,536 49,056 ------ ------ ------ ------ Total Hotel Expenses 132,886 157,030 265,659 307,162 Adjusted Hotel EBITDA 46,052 74,304 87,224 127,854 W San Diego Hotel: Total revenues of operations held for non-sale disposition 4,013 6,644 7,703 12,247 Total operating expenses of operations held for non-sale disposition (4,660) (5,786) (9,350) (11,512) Impairment loss of operations held for non-sale disposition (60,046) - (60,046) - Non-hotel operating income 715 527 1,294 1,022 Prior year property tax supplementals and credits, net (874) 469 (874) 469 Corporate overhead (4,849) (5,244) (10,608) (11,929) Depreciation and amortization (27,377) (26,602) (54,492) (53,932) Goodwill and other impairment losses (66,977) - (70,693) - ------- --- ------- --- Operating Income (Loss) (114,003) 44,312 (109,842) 64,219 Equity in net losses of unconsolidated joint ventures (584) (56) (2,101) (1,522) Interest and other income 254 1,101 876 1,679 Interest expense (23,116) (24,429) (46,748) (48,761) Interest expense of hotel properties to be disposed of other than by sale (1,011) (1,012) (2,012) (2,024) Gain on extinguishment of debt 26,559 - 54,579 - Income (loss) from discontinued operations (18,304) 48,439 (18,447) 54,957 ------- ------ ------- ------ Net Income (Loss) $(130,205) $68,355 $(123,695) $68,548 ========= ======= ========= ======= (1) Represents our ownership results for the 39 hotels we owned as of the end of the period, excluding the Hyatt Suites Atlanta Northwest reclassified as "Held for Sale" and the W San Diego Hotel reclassified as "Operations Held for Non-Sale Disposition." (2) Hotel operating margin is calculated as adjusted hotel EBITDA divided by total hotel revenues. Sunstone Hotel Investors, Inc. Operating Statistics by Region (Unaudited) Three Months Ended June 30, 2009 -------------------------------- Number Number Occupancy Average Comparable Region of Hotels of Rooms Percentages Daily Rate RevPAR ------ --------- -------- ----------- ---------- ------ California (1) 14 3,979 73.2% $120.93 $88.52 Other West (2) 7 2,123 61.0% 109.49 66.79 Midwest (3) 7 2,177 64.3% 133.91 86.10 Middle Atlantic (4) 9 4,099 76.1% 187.59 142.76 South (5) 2 1,168 74.7% 127.54 95.27 --- ----- ---- ------ ----- Total 39 13,546 70.7% $142.90 $101.03 === ====== ==== ======= ======= Three Months Ended June 30, 2008 Percent -------------------------------- Change in Occupancy Average Comparable Comparable Region Percentages Daily Rate RevPAR RevPAR ------ ----------- ---------- ------ ------ California (1) 81.6% $148.60 $121.26 -27.0% Other West (2) 77.6% 116.98 90.78 -26.4% Midwest (3) 70.4% 152.27 107.20 -19.7% Middle Atlantic (4) 83.3% 220.47 183.65 -22.3% South (5) 80.9% 150.73 121.94 -21.9% ---- ------ ------ ----- Total 79.5% $166.39 $132.28 -23.6% ==== ======= ======= ===== Six Months Ended June 30, 2009 ------------------------------ Number Number Occupancy Average Comparable Region of Hotels of Rooms Percentages Daily Rate RevPAR ------ --------- -------- ----------- ---------- ------ California (1) 14 3,979 71.8% $126.19 $90.60 Other West (2) 7 2,123 66.2% 117.68 77.90 Midwest (3) 7 2,177 60.5% 129.36 78.26 Middle Atlantic (4) 9 4,099 70.0% 188.95 132.27 South (5) 2 1,168 70.7% 138.57 97.97 --- ----- ---- ------ ----- Total 39 13,546 68.4% $145.27 $99.36 === ====== ==== ======= ====== Six Months Ended June 30, 2008 Percent ------------------------------ Change in Occupancy Average Comparable Comparable Region Percentages Daily Rate RevPAR RevPAR ------ ----------- ---------- ------ ------ California (1) 80.5% $147.79 $118.97 -23.8% Other West (2) 77.1% 122.22 94.23 -17.3% Midwest (3) 66.6% 144.95 96.54 -18.9% Middle Atlantic (4) 74.7% 212.36 158.63 -16.6% South (5) 79.4% 160.69 127.59 -23.2% ---- ------ ------ ----- Total 75.9% $162.92 $123.66 -19.7% ==== ======= ======= ===== (1) Does not include the W San Diego Hotel, reclassifed as "Operations Held for Non-Sale Disposition" at June 30, 2009. (2) Includes Oregon, Texas and Utah. (3) Includes Illinois, Michigan and Minnesota. (4) Includes Maryland, Massachusetts, New York, Pennsylvania, Virginia and District of Columbia. (5) Includes Florida and Georgia. Does not include the Hyatt Suites Atlanta Northwest, reclassified as "Held for Sale" at June 30, 2009. Sunstone Hotel Investors, Inc. Operating Statistics by Brand (Unaudited) Three Months Ended June 30, 2009 -------------------------------- Number Number Occupancy Average Comparable Brand of Hotels of Rooms Percentages Daily Rate RevPAR ----- --------- -------- ----------- ---------- ------ Marriott 24 8,520 70.9% $144.98 $102.79 Hilton 7 2,435 71.9% 168.46 121.12 InterContinental 2 345 72.2% 102.17 73.77 Hyatt (1) 1 403 75.9% 121.27 92.04 Other Brand Affiliations (2) 2 647 74.7% 121.76 90.95 Independent 3 1,196 62.8% 103.42 64.95 --- ----- ---- ------ ----- Total 39 13,546 70.7% $142.90 $101.03 === ====== ==== ======= ======= Three Months Ended June 30, 2008 Percent -------------------------------- Change in Occupancy Average Comparable Comparable Brand Percentages Daily Rate RevPAR RevPAR ----- ----------- ---------- ------ ------ Marriott 79.9% $166.33 $132.90 -22.7% Hilton 83.5% 203.94 170.29 -28.9% InterContinental 77.8% 139.68 108.67 -32.1% Hyatt (1) 76.2% 147.94 112.73 -18.4% Other Brand Affiliations (2) 82.9% 147.59 122.35 -25.7% Independent 69.1% 102.40 70.76 -8.2% ---- ------ ----- ---- Total 79.5% $166.39 $132.28 -23.6% ==== ======= ======= ===== Six Months Ended June 30, 2009 ------------------------------ Number Number Occupancy Average Comparable Brand of Hotels of Rooms Percentages Daily Rate RevPAR ----- --------- -------- ----------- ---------- ------ Marriott 24 8,520 68.7% $150.28 $103.24 Hilton 7 2,435 69.8% 161.23 112.54 InterContinental 2 345 70.8% 106.02 75.06 Hyatt (1) 1 403 70.3% 123.21 86.62 Other Brand Affiliations (2) 2 647 71.4% 128.93 92.06 Independent 3 1,196 60.9% 102.00 62.12 --- ----- ---- ------ ----- Total 39 13,546 68.4% $145.27 $99.36 === ====== ==== ======= ====== Six Months Ended June 30, 2008 Percent ------------------------------ Change in Occupancy Average Comparable Comparable Brand Percentages Daily Rate RevPAR RevPAR ----- ----------- ---------- ------ ------ Marriott 76.0% $164.25 $124.83 -17.3% Hilton 79.1% 193.33 152.92 -26.4% InterContinental 72.3% 132.20 95.58 -21.5% Hyatt (1) 79.2% 148.75 117.81 -26.5% Other Brand Affiliations (2) 80.3% 151.16 121.38 -24.2% Independent 66.0% 101.74 67.15 -7.5% ---- ------ ----- ---- Total 75.9% $162.92 $123.66 -19.7% ==== ======= ======= ===== (1) Does not include the Hyatt Suites Atlanta Northwest, reclassified as "Held for Sale" at June 30, 2009. (2) Includes a Fairmont and a Sheraton. Does not include the W San Diego Hotel, reclassifed as "Operations Held for Non-Sale Disposition" at June 30, 2009. Sunstone Hotel Investors, Inc. Debt Summary (Unaudited - dollars in thousands) Interest June 30, Recent August 5, Rate / Maturity 2009 Events 2009 Debt Collateral Spread Date Balance (1) Balance ---- ---------- ------ ---- ------- ------ ------- Fixed Rate Debt --------- Secured Hilton Times Mortgage Debt Square 5.92% 12/1/2010 $81,000 $81,000 Secured Mortgage Debt (2) 11 Hotels 5.95% 5/1/2011 247,441 247,441 Secured Renaissance Mortgage Debt Long Beach 4.98% 7/1/2012 34,362 34,362 Secured Renaissance Mortgage Debt Westchester 4.98% 7/1/2012 29,453 29,453 Rochester Secured laundry Mortgage Debt facility 9.88% 6/1/2013 3,729 3,729 Secured Doubletree Mortgage Debt Minneapolis 5.34% 5/1/2015 18,226 18,226 Secured Hilton Mortgage Debt Del Mar 5.34% 5/1/2015 26,432 26,432 Secured Marriott Mortgage Debt Houston 5.34% 5/1/2015 24,263 24,263 Secured Marriott Mortgage Debt Ontario 5.34% 5/1/2015 25,683 25,683 Secured Marriott Mortgage Debt Park City 5.34% 5/1/2015 15,817 15,817 Secured Marriott Mortgage Debt Philadelphia 5.34% 5/1/2015 28,658 28,658 Secured Marriott Mortgage Debt Troy 5.34% 5/1/2015 37,104 37,104 Marriott Secured Tysons Mortgage Debt Corner 5.34% 5/1/2015 47,345 47,345 Secured The Kahler Mortgage Debt Grand 5.34% 5/1/2015 29,186 29,186 Secured Valley Mortgage Debt River Inn 5.34% 5/1/2015 12,179 12,179 Secured Renaissance Mortgage Debt Harborplace 5.13% 1/1/2016 105,811 105,811 Secured Marriott Mortgage Debt Del Mar 5.69% 1/11/2016 48,000 48,000 Hilton Secured Houston Mortgage Debt North 5.66% 3/11/2016 33,902 33,902 Renaissance Orlando Secured Resort at Mortgage Debt Sea World 5.52% 7/1/2016 86,530 86,530 Embassy Secured Suites Mortgage Debt Chicago 5.58% 3/1/2017 75,000 75,000 Marriott Secured Boston Mortgage Debt Long Wharf 5.58% 4/11/2017 176,000 176,000 Secured W Hotel Mortgage Debt San Diego 6.14% 1/1/2018 65,000 65,000 Embassy Secured Suites Mortgage Debt La Jolla 6.60% 6/1/2019 70,000 70,000 Secured Renaissance Mortgage Debt Washington DC 5.95% 5/1/2021 134,864 134,864 Exchangeable Senior Notes Guaranty 4.60% 7/15/2027 62,500 62,500 ------ --- ------ Total Fixed Rate Debt 1,518,485 - 1,518,485 L + Credit 3.75%- Facility 5 Hotels 5.25% 7/17/2011 - - --- --- --- TOTAL DEBT $1,518,485 $- $1,518,485 ========== === ========== Preferred Stock --------------- Series A cumulative redeemable preferred 8.00% perpetual $176,250 $- $176,250 ======== === ======== Series C cumulative convertible redeemable preferred 6.45% perpetual $100,000 $- $100,000 ======== === ======== Debt Statistics ----------------- % Fixed Rate Debt 100.0% 100.0% % Floating Rate Debt 0.0% 0.0% Average Interest Rate 5.64% 5.64% Weighted Average Maturity of Debt (includes amounts outstanding on the Credit Facility) (3) 6.6years 6.6years (1) Reflects net additional draws and repayments on our credit facility. (2) Cross-collateralized loan with life insurance company. (3) Assumes the exchangeable senior notes remain outstanding to maturity. If the exchangeable senior notes were redeemed upon the first call date, the weighted average maturity would be approximately 6 years. DATASOURCE: Sunstone Hotel Investors, Inc. CONTACT: Bryan Giglia, Vice President - Corporate Finance of Sunstone Hotel Investors, Inc., +1-949-369-4236 Web Site: http://www.sunstonehotels.com/

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