Sunstone Hotel Investors Reports Results of Operations for Second Quarter 2007

SAN CLEMENTE, Calif., Aug. 8 /PRNewswire-FirstCall/ -- Sunstone Hotel Investors, Inc. (the "Company") today announced results of operations for the second quarter ended June 30, 2007.

Second Quarter 2007 Highlights (as compared to second quarter 2006): -- Total revenue increased by 22.5% to $271.4 million. -- Income available to common stockholders per diluted share increased 275.9% to $1.09. -- Adjusted EBITDA increased 19.8% to $86.1 million. -- Adjusted FFO available to common stockholders increased 10.7% to $51.4 million. -- Adjusted FFO available to common stockholders per diluted share increased 6.1% to $0.79. -- Total capital expenditures were $38.7 million.

Steve Goldman, Chief Executive Officer, stated, "I am pleased to report that Sunstone finished the second quarter at the top end or ahead of all guidance metrics, and that we accomplished a number of significant tasks during the quarter towards the Company's transformation. During the quarter we made advances in renovations, portfolio management, organizational structure and finance. We substantially completed the major phases of all previously identified renovation projects on schedule and within budget. We continued to improve the quality of our portfolio by selling six non-core hotels, and redeploying the capital into the previously announced acquisitions. We will continue to evaluate opportunities to sell additional assets to improve the quality of our portfolio. Additionally, we completed a reorganization that more clearly defines the ongoing roles, responsibilities and accountability of each member of senior management. Finally, we strengthened our balance sheet through several transactions, including the repayment of restrictive mortgage debt and the repurchase of shares with proceeds from an exchangeable notes offering. As a result of these initiatives, we believe our balance sheet is solid with significant liquidity, our portfolio is exceptionally well positioned for the future and we have a strong management team to execute on our goal to maximize the value of the Company for our shareholders."

SELECTED FINANCIAL DATA ($ in millions, except RevPAR and per share amounts) Three Months Ended June 30, Six Months Ended June 30, 2007 2006 % Change 2007 2006 % Change Total Revenue $271.4 $221.6 22.5% $502.5 $411.0 22.3% Comparable RevPAR (1) $125.77 $115.21 9.2% $119.00 $107.77 10.4% Income available to common stockholders $66.2 $16.9 291.6% $67.1 $30.6 119.1% Income available to common stockholders per diluted share $1.09 $0.29 275.9% $1.13 $0.54 109.3% FFO available to common stockholders (2)(3) $46.3 $44.2 4.7% $76.2 $65.7 16.0% Adjusted FFO available to common stockholders (2)(3) $51.4 $46.4 10.7% $81.3 $75.6 7.4% FFO available to common stockholders per diluted share available (2) (3) $0.71 $0.71 0.4% $1.20 $1.07 11.6% Adjusted FFO available to common stockholders per diluted share available (2) (3) $0.79 $0.75 6.1% $1.28 $1.23 3.4% EBITDA (2) $138.2 $71.8 92.3% $199.0 $140.5 41.7% Adjusted EBITDA (2) $86.1 $71.8 19.8% $146.9 $123.8 18.7% Comparable Hotel Operating Profit Margin (4) 30.6% 29.8% 80 bps 28.5% 27.3% 120 bps (1) RevPAR for 42 hotels (includes prior ownership periods). Excludes 4 hotels under major renovation (Renaissance Baltimore, Renaissance Orlando, Renaissance Long Beach and Embassy Suites La Jolla). (2) Please refer to the non-GAAP financial measures of Funds from Operations ("FFO"), Adjusted FFO, EBITDA, and Adjusted EBITDA on pages 11 and 12 for a tabular presentation of our results and a reconciliation to GAAP measures. (3) Reflects series C convertible preferred stock on an "as-converted" basis. (4) Please refer to page 13 for detailed hotel operating margin analysis.

The Company has filed contemporaneously with this press release the Form 10-Q with the Securities and Exchange Commission for the quarterly period ended June 30, 2007.

Disclosure regarding the non-GAAP financial measures in this release is included on page 7 of this release and reconciliations to the most comparable GAAP measure during each of the periods presented is included on pages 11 and 12.

Performance Relative to Guidance

The following table reflects our guidance for the second quarter 2007 compared to our actual results.

Guidance Actual Second Quarter 2007 Comparable RevPAR Growth 8.0% to 9.5% 9.2 % Adjusted EBITDA $83.0 million to $86.1 million $86.0 million Adjusted FFO available to common stockholders per diluted share $0.74 to $0.78 $0.79 Comparable Hotel Operating Profit Margin Flat to +50 bps +80 bps Capital expenditures $35 million to $38.7 million $42 million

Comparable RevPAR for the 42 hotels owned at the end of the quarter, excluding four hotels which were under renovation in the second quarter (Renaissance Baltimore, Renaissance Orlando, Renaissance Long Beach and Embassy Suites La Jolla), increased 9.2% as compared to the second quarter of 2006, driven by an increase of 4.2% in average daily room rate and a 360 basis-point occupancy increase.

Comparable hotel operating profit margins for the second quarter increased 80 basis points (from 29.8% to 30.6%) (see page 13 for a reconciliation of hotel operating income to the comparable GAAP measure).

Acquisitions, Dispositions, Investments and Financings

On April 26, 2007, the Company sold its $28.5 million Doubletree Times Square mezzanine loan for gross proceeds of $29.7 million. The net proceeds from the sale were used to repay amounts outstanding on the Company's credit facility.

On April 30, 2007, the Company settled its forward sale agreement for gross proceeds of $110.9 million. The proceeds from the settlement were used to fund the acquisition of the Marriott Boston Quincy Hotel.

On May 1, 2007, the Company completed the acquisition of the 464-room Marriott Boston Quincy Hotel for a purchase price of $117.0 million, or approximately $252,000 per key.

On May 23, 2007, the Company amended its credit facility. The interest rate on the amended credit facility continues to be based on grid pricing, with the interest rate spread changing based on the Company's overall leverage ratio. The applicable interest rate spreads for each of the various leverage ratios contained in the amended credit facility are 25 to 35 basis points lower than those contained in the prior credit facility. In addition, the Company extended the initial maturity date on the credit facility from 2010 to 2011.

On June 11, 2007, the Company announced that its Board of Directors had authorized the Company to repurchase up to $100.0 million of the Company's common stock. As of June 30, 2007, the Company has repurchased 2,604,769 of its shares pursuant to the repurchase program. The Company is currently authorized by its Board of Directors to repurchase up to an additional $26.9 million of its common stock before the expiration of the repurchase program on December 31, 2007.

On June 18, 2007, the Company's operating partnership completed the sale of $220.0 million of 4.6% exchangeable senior notes due 2027. On June 27, the Company's operating partnership completed a follow-on sale of $30.0 million of 4.6% exchangeable senior notes due 2027. The net proceeds from both offerings were used to repay the $175.0 million loan on the Hyatt Regency Century Plaza, to repurchase shares of the Company's common stock for approximately $73.1 million and for general corporate purposes.

On June 29, 2007, the Company announced the completion of the sale of six non-core hotels for gross proceeds of $150.5 million. The net proceeds of approximately $147.4 million were used in part to repay all amounts outstanding under the Company's credit facility and for general corporate purposes.

Balance Sheet/Liquidity Update

As of June 30, 2007, the Company had approximately $110.9 million of cash and cash equivalents (including restricted cash), and there were no amounts outstanding on the Company's $200 million credit facility. On June 30, 2007, total assets were $3.1 billion, including $2.8 billion of net investments in hotel properties, total debt was $1.7 billion and stockholders' equity was $1.1 billion.

Hotel Renovations

During the second quarter of 2007, the Company invested $38.7 million in renovations of its hotels, of which $18.8 million was invested in six major repositioning projects at the following properties: Renaissance Orlando, Renaissance Baltimore, Renaissance Long Beach, Hyatt Regency Century Plaza, Hilton Times Square and Embassy Suites La Jolla. The combined capital investments in these projects were in line with budget and the major phases of these six projects are now substantially complete. The Company generally expects newly renovated properties to drive above-market improvements in RevPAR.

During the second quarter of 2007, the Company completed its scope and budget for guestroom renovations of the newly acquired Marriott Boston Long Wharf Hotel. The Long Wharf project will include the renovation of all guestrooms and guestroom corridors, an expansion of the concierge lounge and the addition of nine new guest rooms. The project, which is budgeted to cost approximately $14 million, is scheduled to commence during the fourth quarter of 2007 and is expected to be completed during the first quarter of 2008. At this time, the Company has no other major renovation projects planned or underway which would be expected to cause meaningful displacement in 2007. The Company is currently reviewing its 2008 capital investment plan. With the completion of the Company's approximately $270 million renovation program in 2007 it is expected that few new projects will be initiated in 2008 that would cause meaningful disruption.

Outlook

The Company is providing guidance at this time but does not undertake to make updates for any developments in its business. Achievement of the anticipated results is subject to risks and uncertainties, including those disclosed in the Company's filings with the Securities and Exchange Commission. The Company has provided guidance for the third quarter of 2007 as well as full year 2007. The Company's guidance does not contemplate any additional hotel acquisitions, dispositions or share repurchases during the remainder of 2007. Third quarter and full year 2007 guidance include an add-back to Adjusted EBITDA and Adjusted FFO for costs associated with the senior management transition.

Third Quarter 2007 Outlook

For the third quarter 2007, the Company expects total portfolio RevPAR to increase approximately 8.5% to 10.0% over the third quarter of 2006 and Comparable RevPAR (excluding the Fairmont Newport Beach, the Hyatt Regency Century Plaza, the Renaissance Orlando, and the Renaissance Baltimore) to increase approximately 6.0% to 7.5% over the third quarter of 2006 (see page 7 for an explanation of measures relating to comparability). The third quarter outlook includes approximately $0.7 million of guaranty payments for the Hyatt Regency Century Plaza and does not include guaranty payments for the Fairmont Newport Beach, which are calculated and recorded in the fourth quarter. Additionally, the Company estimates that for the third quarter of 2007:

-- Income available to common stockholders is expected to be approximately $6.6 million to $9.6 million; -- Adjusted EBITDA is expected to be approximately $72.0 million to $75.0 million; -- Adjusted FFO available to common stockholders is expected to be approximately $39.5 million to $42.5 million; -- Adjusted FFO available to common stockholders per diluted share is expected to be approximately $0.62 to $0.67; -- Total hotel operating margins (excluding guaranty payments) are expected to be approximately 200 to 300 basis points higher than the third quarter of 2006; -- Comparable hotel operating margins are expected to be approximately 125 to 175 basis points higher than the third quarter of 2006; and -- Total capital expenditures for the portfolio are expected to be approximately $35 million to $42 million. Full Year 2007 Outlook

For the full year 2007, the Company expects total portfolio RevPAR to increase approximately 7.5% to 9.5% over the full year 2006 and Comparable RevPAR (excluding the Fairmont Newport Beach, the Hyatt Regency Century Plaza, the Renaissance Orlando and the Renaissance Baltimore) is expected to increase approximately 6.0% to 7.0% over the full year 2006. Full year 2007 outlook includes approximately $2.8 million of guaranty payments for the Hyatt Regency Century Plaza and approximately $2.0 million of guaranty payments for the Fairmont Newport Beach. Additionally, the Company estimates that for the full year 2007:

-- Income available to common stockholders is expected to be approximately $97.6 million to $102.6 million; -- Adjusted EBITDA is expected to be approximately $307.0 million to $312.0 million; -- Adjusted FFO available to common stockholders is expected to be approximately $176.1 million to $181.1 million; -- Adjusted FFO available to common stockholders per diluted share is expected to be approximately $2.76 to $2.84 as compared to our earlier guidance of approximately $2.69 to $2.80; -- Total hotel operating margins (excluding guaranty payments) are expected to be approximately 175 to 225 basis points higher than the prior year; -- Comparable hotel operating margins are expected to be approximately 90 to 125 basis points higher than the prior year; and -- Total capital expenditures are expected to be approximately $130 million to $140 million, an increase to prior guidance principally due to the addition of the Marriott Boston Long Wharf renovation project. Dividend Update

On August 8, 2007, the Board of Directors of the Company declared a dividend of $0.32 per share payable to its common stockholders. The Company also declared a dividend of $0.50 per share payable to its Series A cumulative redeemable preferred stockholders and a dividend of $0.393 per share payable to its Series C cumulative convertible redeemable preferred stockholders. The dividends will be paid on October 15, 2007 to stockholders of record on September 28, 2007.

The level of any future dividends will be determined by the Company's quarterly operating results and expected capital requirements.

Earnings Call

The Company will host a conference call to discuss second quarter results on August 9, 2007, at 8:30 a.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 1-800-218-0204 (for domestic callers) or 303-262-2140 (for international callers). 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 47 hotels with an aggregate of 16,431 rooms primarily in the upper-upscale segment operated under brands owned by nationally-recognized companies, such as Marriott, Hilton, Hyatt, Fairmont 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," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "should," "will," "continue" 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 which 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: national and local economic and business conditions, including the potential for additional terrorist attacks, that will 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 agreements; relationships with property managers; 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 acquired properties after they are acquired; necessary capital expenditures and our ability to fund them and complete them with minimum disruption; and 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 SEC. 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 8, 2007, 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.

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 (loss) available to common stockholders before minority interest excluding: (1) preferred stock dividends; (2) interest expense (including prepayment penalties, if any); (3) provision for income taxes, including income taxes applicable to sale of assets; and (4) 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 an investor in evaluating our operating performance because they 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 pages 11 and 12. A reconciliation and the components of Hotel Operating Income and Hotel Operating Profit Margin are set forth on page 13. 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 a measure 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 pages 11 and 12.

Beginning with the Company's earnings release for the third quarter of 2007, the Company's definition of "Comparable Hotel Portfolio" will be revised to include those hotels owned as of the reporting date which have not experienced material and prolonged business interruption due to renovations, re-branding or property damage during either the current or the preceding calendar year. The Company's previous definition of Comparable Hotel Portfolio referred to those hotels owned as of the reporting date which had not sustained substantial business interruption during the most recent of the two periods being compared. The previous definition resulted in the exclusion of the Renaissance Baltimore, Renaissance Orlando, Renaissance Long Beach and the Embassy Suites La Jolla from the Comparable Hotel Portfolio during the second quarter. Of these four hotels, only the Renaissance Orlando and Renaissance Baltimore experienced material and prolonged business interruption sufficient to warrant exclusion from the Comparable Hotel Portfolio under the new definition. For the remainder of 2007, the Comparable Hotel Portfolio is expected to exclude only the Fairmont Newport Beach (prolonged and material disruption ended in the third quarter of 2006), the Hyatt Regency Century Plaza (prolonged and material disruption ended in the fourth quarter of 2006), the Renaissance Orlando (prolonged and material renovation disruption ended in the second quarter of 2007), and the Renaissance Baltimore (prolonged and material disruption ended in the second quarter of 2007). Also beginning with the Company's third quarter earnings release, revenue and expense items associated with the Company's two commercial laundry facilities, its electronic purchasing platform, Buy Efficient, L.L.C., and any guaranty payments will be shown below the Hotel Operating Income line in presenting comparable hotel operating margins. Management believes the change to the definition of Comparable Hotel Portfolio as well as the change in the calculation of Hotel Operating Income will result in a more accurate presentation of the trends in RevPAR and comparable hotel operating margins of the Company's stabilized portfolio of hotels.

We caution investors that amounts presented in accordance with our definitions of EBITDA, Adjusted EBITDA, FFO, Adjusted FFO and hotel operating income may not be comparable to similar measures disclosed by other companies, since not all companies calculate these non-GAAP measures in the same manner. EBITDA, Adjusted EBITDA, FFO, Adjusted FFO and hotel operating income 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 and hotel operating income 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 and hotel operating income 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.

Sunstone Hotel Investors, Inc. Consolidated Balance Sheets (in thousands, except per share data) June 30, December 31, 2007 2006 (unaudited) Assets Current assets: Cash and cash equivalents $51,245 $29,029 Restricted cash 59,693 65,669 Accounts receivable, net 48,481 41,695 Due from affiliates 1,315 1,383 Inventories 3,073 3,089 Prepaid expenses 5,824 7,006 Total current assets 169,631 147,871 Investment in hotel properties, net 2,818,465 2,477,514 Other real estate, net 14,314 14,673 Investment in unconsolidated joint venture 37,659 68,714 Deferred financing costs, net 13,348 7,381 Goodwill 17,365 22,249 Other assets, net 13,565 21,971 Total assets $3,084,347 $2,760,373 Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses $30,642 $31,912 Accrued payroll and employee benefits 15,675 12,338 Due to SHP 15,199 16,607 Dividends payable 25,196 23,826 Other current liabilities 35,534 32,354 Current portion of notes payable 21,326 23,231 Total current liabilities 143,572 140,268 Notes payable, less current portion 1,726,463 1,476,597 Other liabilities 6,641 6,429 Total liabilities 1,876,676 1,623,294 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, 2007 and December 31, 2006, liquidation preference of $24.375 per share 99,396 99,296 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, 2007 and December 31, 2006, stated at liquidation preference of $25.00 per share 176,250 176,250 Common stock, $0.01 par value, 500,000,000 shares authorized, 59,291,944 shares issued and outstanding at June 30, 2007 and 57,775,089 shares issued and outstanding at December 31, 2006 593 578 Additional paid in capital 998,912 958,591 Retained earnings 144,845 65,545 Cumulative dividends (212,325) (163,181) Total stockholders' equity 1,108,275 1,037,783 Total liabilities and stockholders' equity $3,084,347 $2,760,373 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, 2007 2006 2007 2006 Revenues Room $177,080 $144,032 $325,920 $261,488 Food and beverage 74,472 59,667 139,536 114,973 Other operating 19,846 17,853 37,035 34,493 Total revenues 271,398 221,552 502,491 410,954 Operating expenses Room 38,613 31,016 72,722 57,620 Food and beverage 52,409 41,191 99,596 79,309 Other operating 10,403 9,307 20,186 18,773 Advertising and promotion 13,891 11,999 26,981 22,857 Repairs and maintenance 9,959 8,606 19,229 16,351 Utilities 8,672 7,585 16,994 15,123 Franchise costs 9,755 7,664 17,529 13,333 Property general and administrative 30,247 25,157 56,890 47,778 Property tax, ground lease and insurance 14,845 12,450 28,630 23,155 Corporate overhead 9,475 4,502 16,806 10,374 Depreciation and amortization 29,237 22,722 55,749 42,643 Total operating expenses 227,506 182,199 431,312 347,316 Operating income 43,892 39,353 71,179 63,638 Equity in losses of unconsolidated joint venture (110) -- (1,461) -- Interest and other income 796 513 1,475 1,611 Interest expense (27,026) (21,889) (49,749) (47,572) Income from continuing operations 17,552 17,977 21,444 17,677 Income from discontinued operations 56,920 4,075 57,856 22,200 Net Income 74,472 22,052 79,300 39,877 Preferred stock dividends and accretion (5,188) (5,154) (10,375) (9,241) Undistributed income allocated to Series C preferred stock (3,113) -- (1,799) -- Income Available to Common Stockholders $66,171 $16,898 $67,126 $30,636 Basic per share amounts: Income from continuing operations available to common stockholders $0.21 $0.22 $0.19 $0.15 Income from discontinued operations 0.89 0.07 0.95 0.39 Basic income available to common stockholders per common share $1.10 $0.29 $1.14 $0.54 Diluted per share amounts: Income from continuing operations available to common stockholders $0.22 $0.22 $0.23 $0.15 Income from discontinued operations 0.87 0.07 0.90 0.39 Diluted income available to common stockholders per common share $1.09 $0.29 $1.13 $0.54 Weighted average common shares outstanding: Basic 60,230 57,700 59,022 56,753 Diluted 64,962 58,169 63,679 57,181 Dividends paid per common share $0.32 $0.30 $0.64 $0.60 Sunstone Hotel Investors, Inc. Reconciliation of Income Available to Common Stockholders to Non-GAAP Financial Measures (Unaudited and in Thousands Except Per Share Amounts) Reconciliation of Income Available to Common Stockholders to EBITDA and Adjusted EBITDA Three Months Six Months Ended June 30, Ended June 30, 2007 2006 2007 2006 Income available to common stockholders $66,171 $16,898 $67,126 $30,636 Series A and C preferred stock dividends 5,188 5,154 10,375 9,241 Undistributed income allocated to Series C preferred stock 3,113 -- 1,799 -- Amortization of deferred stock compensation 1,861 1,009 3,106 1,816 Continuing operations: Depreciation and amortization 29,237 22,722 55,749 42,643 Interest expense 25,915 19,228 48,360 36,829 Amortization of deferred financing fees 334 459 612 969 Write-off of deferred financing fees 362 1,505 362 1,701 Prepayment penalties 415 -- 415 -- Loss on early extinguishment of debt -- 2,600 -- 9,976 Write-off of loan premium -- (1,903) -- (1,903) Unconsolidated joint venture: Depreciation and amortization 1,233 -- 2,466 -- Interest expense 1,957 -- 3,874 -- Amortization of deferred financing fees 330 -- 660 -- Discontinued operations: Depreciation and amortization 1,035 3,120 2,109 6,173 Interest expense 973 996 1,972 2,124 Amortization of deferred financing fees 28 51 38 119 Write-off of deferred financing fees -- -- -- 173 EBITDA 138,152 71,839 199,023 140,497 Gain on sale of assets (55,938) -- (55,938) (16,653) Non-recurring costs associated with CEO succession and executive officer severance 3,864 -- 3,864 -- (52,074) -- (52,074) (16,653) Adjusted EBITDA $86,078 $71,839 $146,949 $123,844 Reconciliation of Income Available to Common Stockholders to FFO and Adjusted FFO Income available to common stockholders $66,171 $16,898 $67,126 $30,636 Series C preferred stock dividends 1,662 1,663 3,325 3,325 Undistributed income allocated to Series C preferred stock 3,113 -- 1,799 -- Real estate depreciation and amortization - continuing operations 29,019 22,524 55,310 42,218 Real estate depreciation and amortization - unconsolidated joint venture 1,233 -- 2,466 -- Real estate depreciation and amortization - discontinued operations 1,035 3,120 2,109 6,173 Gain on sale of assets (55,938) -- (55,938) (16,653) FFO available to common stockholders 46,295 44,205 76,197 65,699 Continuing operations: Write-off of deferred financing fees 362 1,505 362 1,701 Prepayment penalties 415 -- 415 -- Loss on early extinguishment of debt -- 2,600 -- 9,976 Write-off of loan premium -- (1,903) -- (1,903) Discontinued operations: Write-off of deferred financing fees -- -- -- 173 Non-recurring costs associated with CEO succession and executive officer severance 3,864 -- 3,864 -- Non-recurring amortization of deferred stock compensation associated with executive officer severance 437 -- 437 -- 5,078 2,202 5,078 9,947 Adjusted FFO available to common stockholders $51,373 $46,407 $81,275 $75,646 FFO available to common stockholders per diluted share $0.71 $0.71 $1.20 $1.07 Adjusted FFO available to common stockholders per diluted share $0.79 $0.75 $1.28 $1.23 Diluted weighted average shares outstanding (1) 64,962 62,272 63,679 61,284 (1) Diluted weighted average shares outstanding includes the Series C Convertible Preferred Stock on an as-converted basis. Sunstone Hotel Investors, Inc. Reconciliation of Income Available to Common Stockholders to Non-GAAP Financial Measures Guidance for Quarter Ended September 30, 2007 and Year Ended 2007 (Unaudited and in Thousands Except Per Share Amounts) Reconciliation of Income Available to Common Stockholders to EBITDA and Adjusted EBITDA Quarter Ended Year Ended September 30, 2007 December 31, 2007 Low End High End Low End High End of of of of Range Range Range Range Income available to common stockholders $6,600 $9,600 $97,600 $102,600 Series A preferred stock dividends 3,500 3,500 14,100 14,100 Series C preferred stock dividends 1,600 1,600 6,500 6,500 Undistributed income allocated to Series C preferred stock -- -- 1,800 1,800 Amortization of deferred stock compensation 1,300 1,300 5,700 5,700 Continuing operations: Depreciation and amortization 29,900 29,900 114,100 114,100 Interest expense 24,800 24,800 100,300 100,300 Amortization of deferred financing fees 400 400 1,400 1,400 Prepayment penalties -- -- 400 400 Write-off deferred financing fees -- -- 400 400 Discontinued operations: Depreciation and amortization -- -- 2,100 2,100 Unconsolidated joint venture: Depreciation and amortization 1,200 1,200 4,900 4,900 Interest expense 2,300 2,300 9,000 9,000 EBITDA 71,600 74,600 358,300 363,300 Gain on sale of assets -- -- (56,000) (56,000) Non-recurring costs associated with CEO succession and executive officer severance 400 400 4,700 4,700 Adjusted EBITDA $72,000 $75,000 $307,000 $312,000 Reconciliation of Income Available to Common Stockholders to FFO and Adjusted FFO Income available to common stockholders $6,600 $9,600 $97,600 $102,600 Series C preferred stock dividends 1,600 1,600 6,500 6,500 Undistributed income allocated to Series C preferred stock -- -- 1,800 1,800 Continuing operations: Real estate depreciation and amortization 29,700 29,700 115,300 115,300 Unconsolidated joint venture: Real estate depreciation and amortization 1,200 1,200 4,900 4,900 Gain on sale of assets -- -- (56,000) (56,000) FFO available to common stockholders 39,100 42,100 170,100 175,100 Prepayment penalties -- -- 400 400 Write-off deferred financing fees -- -- 400 400 Non-recurring costs associated with CEO succession and executive officer severance 400 400 4,700 4,700 Non-recurring amortization of deferred stock compensation associated with executive officer severance -- -- 500 500 Adjusted FFO available to common stockholders $39,500 $42,500 $176,100 $181,100 Adjusted FFO available to common stockholders per diluted share $0.62 $0.67 $2.76 $2.84 Diluted weighted average shares outstanding (1) 63,873 63,873 63,778 63,778 (1) Diluted weighted average shares outstanding includes the Series C Convertible Preferred Stock on an as-converted basis. Sunstone Hotel Investors, Inc. Comparable Hotel Operating Margin (Unaudited and In Thousands Except Hotels and Rooms) Quarter Ended June 30, 2007 Actual Major Prior Pro Forma June 30, Renovation Ownership June 30, 2007 (1) Properties(2) Adjustments(3) 2007(4) Number of Hotels 46 (4) 42 Number of Rooms 15,971 (2,114) 13,857 Hotel operating profit margin (9) 30.4% 29.6% 29.7% 30.6% Hotel Revenues Room revenue $177,080 $(23,922) $1,727 $154,885 Food and beverage revenue 74,472 (10,193) 929 65,208 Other operating revenue 19,846 (1,758) 63 18,151 Total Hotel Revenues 271,398 (35,873) 2,719 238,244 Hotel Expenses Room expense 38,613 (4,961) 416 34,068 Food and beverage expense 52,409 (6,835) 617 46,191 Other hotel expense 67,525 (9,090) 573 59,008 General and administrative expense 30,247 (4,364) 305 26,188 Total Hotel Expenses 188,794 (25,250) 1,911 165,455 Hotel Operating Income 82,604 (10,623) 808 72,789 Corporate overhead 9,475 (56) -- 9,419 Depreciation and amortization 29,237 (4,371) -- 24,866 Impairment loss -- -- -- -- Operating Income 43,892 (6,196) 808 38,504 Equity in earnings of unconsolidated joint venture (110) -- -- (110) Interest and other income 796 (110) -- 686 Interest expense (27,026) 2,852 -- (24,174) Income (loss) from discontinued operations 56,920 -- -- 56,920 Net Income $74,472 $(3,454) $808 $71,826 Six Months Ended June 30, 2007 Actual Major Prior Pro Forma June 30, Renovation Ownership June 30, 2007 (1) Properties(2) Adjustments(3) 2007(4) Number of Hotels 46 (4) 42 Number of Rooms 15,971 (2,114) 13,857 Hotel operating profit margin (9) 28.6% 27.6% 21.2% 28.5% Hotel Revenues Room revenue $325,920 $(44,449) $10,295 $291,766 Food and beverage revenue 139,536 (19,481) 5,213 125,268 Other operating revenue 37,035 (3,368) 981 34,648 Total Hotel Revenues 502,491 (67,298) 16,489 451,682 Hotel Expenses Room expense 72,722 (9,603) 2,815 65,934 Food and beverage expense 99,596 (13,442) 3,743 89,897 Other hotel expense 129,549 (17,345) 4,257 116,461 General and administrative expense 56,890 (8,331) 2,178 50,737 Total Hotel Expenses 358,757 (48,721) 12,993 323,029 Hotel Operating Income 143,734 (18,577) 3,496 128,653 Corporate overhead 16,806 (111) -- 16,695 Depreciation and amortization 55,749 (8,647) -- 47,102 Impairment loss -- -- -- -- Operating Income 71,179 (9,819) 3,496 64,856 Equity in earnings of unconsolidated joint venture (1,461) -- -- (1,461) Interest and other income 1,475 (234) -- 1,241 Interest expense (49,749) 5,674 -- (44,075) Income (loss) from discontinued operations 57,856 -- -- 57,856 Net Income $79,300 $(4,379) $3,496 $78,417 Quarter Ended June 30, 2006 Actual Major Prior Pro Forma June 30, Renovation Acquired Ownership June 30, 2006(5) Properties(6) Properties(7) Adjustments(8) 2006(4) Number of Hotels 43 (4) 3 42 Number of Rooms 14,606 (2,114) 1,365 13,857 Hotel operating profit margin (9) 30.1% 31.1% 31.3% 22.6% 29.8% Hotel Revenues Room revenue $144,032 $(22,569) $15,924 $4,273 $141,660 Food and beverage revenue 59,667 (11,556) 6,168 1,771 56,050 Other operating revenue 17,853 (1,386) 1,525 564 18,556 Total Hotel Revenues 221,552 (35,511) 23,617 6,608 216,266 Hotel Expenses Room expense 31,016 (4,696) 3,642 1,078 31,040 Food and beverage expense 41,191 (7,351) 3,607 1,610 39,057 Other hotel expense 57,611 (8,423) 5,902 1,606 56,696 General and administrative expense 25,157 (4,007) 3,075 821 25,046 Total Hotel Expenses 154,975 (24,477) 16,226 5,115 151,839 Hotel Operating Income 66,577 (11,034) 7,391 1,493 64,427 Corporate overhead 4,502 (28) -- -- 4,474 Depreciation and amortization 22,722 (3,574) -- -- 19,148 Impairment loss -- -- -- -- -- Operating Income 39,353 (7,432) 7,391 1,493 40,805 Equity in earnings of unconsolidated joint venture -- -- -- -- Interest and other income 513 (52) -- -- 461 Interest expense (21,889) 2,020 -- -- (19,869) Income (loss) from discontinued operations 4,075 -- -- -- 4,075 Net Income $22,052 $(5,464) $7,391 $1,493 $25,472 Six Months Ended June 30, 2006 Actual Major Prior Pro Forma June 30, Renovation Acquired Ownership June 30, 2006(5) Properties(6) Properties(7) Adjustments(8) 2006(4) Number of Hotels 43 (4) 3 42 Number of Rooms 14,606 (2,114) 1,365 13,857 Hotel operating profit margin (9) 28.4% 29.7% 26.6% 16.5% 27.3% Hotel Revenues Room revenue $261,488 $(41,205) $27,789 $15,682 $263,754 Food and beverage revenue 114,973 (23,093) 11,341 4,815 108,036 Other operating revenue 34,493 (2,528) 3,145 1,365 36,475 Total Hotel Revenues 410,954 (66,826) 42,275 21,862 408,265 Hotel Expenses Room expense 57,620 (8,871) 6,911 4,625 60,285 Food and beverage expense 79,309 (14,664) 6,889 5,075 76,609 Other hotel expense 109,592 (15,667) 11,653 5,871 111,449 General and administrative expense 47,778 (7,794) 5,591 2,692 48,267 Total Hotel Expenses 294,299 (46,996) 31,044 18,263 296,610 Hotel Operating Income 116,655 (19,830) 11,231 3,599 111,655 Corporate overhead 10,374 (54) -- -- 10,320 Depreciation and amortization 42,643 (6,722) -- -- 35,921 Impairment loss -- -- -- -- -- Operating Income 63,638 (13,054) 11,231 3,599 65,414 Equity in earnings of unconsolidated joint venture -- -- -- -- Interest and other income 1,611 (88) -- -- 1,523 Interest expense (47,572) 3,459 -- -- (44,113) Income (loss) from discontinued operations 22,200 -- -- -- 22,200 Net Income $39,877 $(9,683) $11,231 $3,599 $45,024 (1) Represents our ownership results for the 46 hotels we owned as of the end of the period. (2) Represents our ownership results for the four hotels under renovation programs (Renaissance Baltimore, Renaissance Orlando, Renaissance Long Beach and Embassy Suites La Jolla ) in 2007. (3) Represents prior ownership results for 1 hotel we acquired during the second quarter of 2007 and the 3 hotels acquired during the first six months of 2007. (4) Represents our ownership and prior ownership results for 42 hotels we owned as of June 30, 2007, excluding the four hotels under renovation programs (Renaissance Baltimore, Renaissance Orlando , Renaissance Long Beach and Embassy Suites La Jolla ). (5) Represents our ownership results for the same 43 hotels we owned as of June 30, 2007 and 2006. (6) Represents our ownership results for the four hotels under renovation programs in the first six months of 2007 (Renaissance Baltimore, Renaissance Orlando, Renaissance Long Beach and Embassy Suites La Jolla) that we owned during the period. (7) Represents prior ownership results for three hotels that we acquired subsequent to June 30, 2006, that were not under a renovation program in the second quarter of 2007. (8) Represents prior ownership results for the three hotels we acquired during the first six months of 2006, that were not under a renovation program in the second quarter of 2007. (9) Hotel operating profit margin is calculated as hotel operating income divided by total hotel revenues. Sunstone Hotel Investors, Inc. Comparable Portfolio Operating Statistics by Region (Unaudited) Quarter Ended June 30, 2007 Number Number Occupancy Average Comparable Region of Hotels of Rooms Percentages Daily Rate RevPAR California (1) 16 4,815 81.2% $158.44 $128.65 Other West (2) 8 2,485 80.7% 102.49 82.71 Midwest (3) 8 2,520 69.5% 141.82 98.56 Middle Atlantic (4) 8 3,448 84.6% 212.84 180.06 South (5) 2 589 82.1% 121.00 99.34 Total Comparable Portfolio 42 13,857 79.8% $157.61 $125.77 Six Months Ended June 30, 2007 Number Number Occupancy Average Comparable Region of Hotels of Rooms Percentages Daily Rate RevPAR California (1) 16 4,815 79.3% $158.41 $125.62 Other West (2) 8 2,485 80.8% 107.54 86.89 Midwest (3) 8 2,520 67.2% 133.73 89.87 Middle Atlantic (4) 8 3,448 78.1% 203.77 159.14 South (5) 2 589 81.9% 122.76 100.54 Total Comparable Portfolio 42 13,857 77.2% $154.15 $119.00 Quarter Ended June 30, 2006 Percent Change in Occupancy Average Comparable Comparable Region Percentages Daily Rate RevPAR RevPAR California (1) 75.2% $150.97 $113.53 13.3% Other West (2) 77.3% 95.30 73.67 12.3% Midwest (3) 67.6% 134.78 91.11 8.2% Middle Atlantic (4) 82.5% 208.01 171.61 4.9% South (5) 81.8% 115.36 94.36 5.3% Total Comparable Portfolio 76.2% $151.19 $115.21 9.2% Six Months Ended June 30, 2006 Percent Change in Occupancy Average Comparable Comparable Percentages Daily Rate RevPAR RevPAR Region California (1) 73.9% $148.56 $109.79 14.4% Other West (2) 77.2% 101.58 78.42 10.8% Midwest (3) 63.6% 129.10 82.11 9.4% Middle Atlantic (4) 75.6% 197.11 149.02 6.8% South (5) 80.6% 117.84 94.98 5.9% Total Comparable Portfolio 73.3% $147.02 $107.77 10.4% (1) Excludes the Renaissance Long Beach and the Embassy Suites La Jolla which are under renovation programs. (2) Includes Oregon, Utah and Texas. (3) Includes Illinois, Michigan and Minnesota. (4) Includes Maryland, Massachusetts, Virginia, District of Columbia, New York and Pennsylvania. Excludes the Renaissance Baltimore which is under a renovation program. (5) Includes Florida and Georgia. Excludes the Renaissance Orlando which is under a renovation program. Sunstone Hotel Investors, Inc. Comparable Portfolio Operating Statistics by Brand (Unaudited) Quarter Ended June 30, 2007 Number Number Occupancy Average Comparable Brand of Hotels of Rooms Percentages Daily Rate RevPAR Marriott (1) 23 7,296 80.2% $155.48 $124.69 Hilton (2) 5 1,599 84.9% 222.31 188.74 InterContinental 3 665 73.0% 110.55 80.70 Hyatt 3 1,331 80.8% 186.72 150.87 Other Brand Affiliations (3) 5 1,747 83.8% 135.49 113.54 Independent 3 1,219 68.1% 94.98 64.68 Total Comparable Portfolio 42 13,857 79.8% $157.61 $125.77 Six Months Ended June 30, 2007 Number Number Occupancy Average Comparable Brand of Hotels of Rooms Percentages Daily Rate RevPAR Marriott (1) 23 7,296 76.9% $153.35 $117.93 Hilton (2) 5 1,599 81.2% 204.55 166.09 InterContinental 3 665 73.2% 108.85 79.68 Hyatt 3 1,331 78.7% 187.98 147.94 Other Brand Affiliations (3) 5 1,747 82.7% 136.07 112.53 Independent 3 1,219 65.9% 93.83 61.83 Total Comparable Portfolio 42 13,857 77.2% $154.15 $119.00 Quarter Ended June 30, 2006 Percent Change in Occupancy Average Comparable Comparable Brand Percentages Daily Rate RevPAR RevPAR Marriott (1) 78.7% $151.59 $119.30 4.5% Hilton (2) 83.5% 208.11 173.77 8.6% InterContinental 74.9% 102.64 76.88 5.0% Hyatt 68.9% 181.08 124.76 20.9% Other Brand Affiliations (3) 74.1% 125.93 93.31 21.7% Independent 64.1% 88.40 56.66 14.1% Total Comparable Portfolio 76.2% $151.19 $115.21 9.2% Six Months Ended June 30, 2006 Percent Change in Occupancy Average Comparable Comparable Brand Percentages Daily Rate RevPAR RevPAR Marriott (1) 75.7% $147.68 $111.79 5.5% Hilton (2) 77.3% 194.63 150.45 10.4% InterContinental 73.4% 100.10 73.47 8.4% Hyatt 69.2% 179.29 124.07 19.2% Other Brand Affiliations (3) 71.6% 126.56 90.62 24.2% Independent 60.9% 87.86 53.51 15.6% Total Comparable Portfolio 73.3% $147.02 $107.77 10.4% (1) Excludes the Renaissance Baltimore, Renaissance Orlando and the Renaissance Long Beach which are under renovation programs. (2) Excludes the Embassy Suites La Jolla which is a under a renovation program. (3) Includes two Sheratons, a Wyndham, a Fairmont and a W Hotel. Sunstone Hotel Investors, Inc. Debt Summary (Unaudited - Dollars in Thousands) Interest June 30, Aug. 8, Rate/ Maturity 2007 Recent 2007 Debt Collateral Spread Date Balance Events(1) Balance Fixed Rate Debt Secured Mortgage Debt 1 hotel 8.51% 2007 $13,111 $(13,111) $ -- Secured Mortgage Debt 1 hotel 8.78% 2009 8,775 8,775 Secured Mortgage Debt 1 hotel 5.92% 2010 81,000 1,000 Secured Mortgage Debt (2) 12 hotels 5.95% 2011 248,164 248,164 Secured Mortgage Debt (3) 2 hotels 4.98% 2012 65,000 65,000 Secured Mortgage Debt Rochester 9.88% 2013 5,139 5,139 laundry facility Secured Mortgage Debt (3) 10 hotels 5.34% 2015 275,600 275,600 Secured Mortgage Debt (3) 2 hotels 5.20% 2016 198,000 198,000 Secured Mortgage Debt 1 hotel 5.69% 2016 48,000 48,000 Secured Mortgage Debt 1 hotel 5.66% 2016 34,000 34,000 Secured Mortgage Debt 1 hotel 5.58% 2017 75,000 75,000 Secured Mortgage Debt 1 hotel 5.58% 2017 176,000 176,000 Secured Mortgage Debt 1 hotel 6.14% 2018 65,000 65,000 Secured Mortgage Debt 1 hotel 6.60% 2019 70,000 70,000 Secured Mortgage Debt 1 hotel 5.95% 2021 135,000 135,000 Exchangeable Senior Notes Guaranty 4.60% 2027 250,000 250,000 Total Fixed Rate Debt 1,747,789 1,734,678 Credit Facility Unsecured L + 2010 -- -- 0.90%- 1.50% TOTAL DEBT $1,747,789 $ -- $1,734,678 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 (4) 5.55% 5.53% Weighted Average Maturity of Debt (excludes Credit Facility) (5) 9.89 years 9.97 years (1) Reflects loan repayment which occurred in August 2007. (2) Cross-collateralized loan with life insurance company. (3) Individual, non cross-collateralized loans. (4) Assumes LIBOR of 5.36%. (5) 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 date would be 7.8 years. For additional information: Bryan Giglia Vice President of Finance Sunstone Hotel Investors, Inc. (949) 369-4204