Nov. 4, 2009 (PR Newswire) -- SAN CLEMENTE, Calif., Nov. 4 /PRNewswire-FirstCall/ -- Sunstone Hotel Investors, Inc. (the "Company") (NYSE: SHO) today announced results for the third quarter ended September 30, 2009.

All RevPAR and hotel EBITDA margin information presented reflect the 38 hotel portfolio on a pro forma basis, which excludes the W San Diego, which was conveyed to a receiver during the third quarter, and the Marriott Ontario Airport, which is in the process of being conveyed to a receiver.

Third Quarter 2009 Operational Results:

--  Total revenue was $176.0 million.
--  Total RevPAR was $101.78.
--  Loss attributable to common stockholders was $23.1 million.
--  Loss attributable to common stockholders per diluted share was $0.31.
--  Adjusted EBITDA was $40.1 million.
--  Adjusted FFO available to common stockholders was $10.3 million.
--  Adjusted FFO available to common stockholders per diluted share was
$0.14.

--  Hotel EBITDA margin was 23.8%.

Art Buser, President and Chief Executive Officer, stated, "We continue to drive operational efficiencies throughout our portfolio resulting in impressive margin performance which we believe will enhance our operations for years to come. We also have executed on a number of finance initiatives designed to reduce corporate risk and provide capacity to capitalize on future opportunities. Going forward, we believe nimble, well-capitalized public lodging companies will have opportunities to create significant long-term shareholder value."

SELECTED FINANCIAL DATA
($in millions, except RevPAR and per share amounts)
(unaudited)
----------

Three Months Ended             Nine Months Ended
September 30,                 September 30,
------------------            -----------------
2009     2008     % Change    2009     2008     % Change
----     ----     --------    ----     ----     --------
Total Revenue    $176.0   $220.1     (20.0)%    $536.7   $663.0    (19.0)%
Total RevPAR (1) 101.78  $127.49     (20.2)%   $100.75  $125.43    (19.7)%
Income available
(loss
attributable)
to common
stockholders    $(23.1)    $4.4    (625.0)%   $(157.7)   $61.6   (356.0)%
Income available
(loss
attributable)
to common
stockholders
per diluted
share           $(0.31)   $0.09    (444.4)%    $(2.53)   $1.11   (327.9)%
EBITDA            $37.9    $68.5     (44.7)%     $27.8   $257.2    (89.2)%
Adjusted EBITDA   $40.1    $68.5     (41.5)%    $123.8   $215.1    (42.4)%
FFO available
to common
stockholders      $5.0    $36.5     (86.3)%    $(55.7)  $119.1   (146.8)%
Adjusted FFO
available to
common
stockholders     $10.3    $36.5     (71.8)%     $31.0   $119.1    (74.0)%
FFO available to
common
stockholders per
diluted
share (2)        $0.07    $0.68     (89.7)%    $(0.89)   $1.99   (144.7)%
Adjusted FFO
available to
common
stockholders
per diluted
share (2)        $0.14    $0.68     (79.4)%     $0.50    $1.99    (74.9)%
Hotel EBITDA
margin (1)       23.8%    29.5%    (570) bps    24.5%    29.5%  (500) bps

(1)  Includes the 38 hotels we owned as of September 30, 2009, excluding
the Marriott Ontario Airport reclassified as "Operations Held for
Non-Sale Disposition" on our balance sheets and statements of
operations, and the W San Diego reclassified as discontinued
operations on our balance sheets and statements of operations.

(2)  Reflects Series C convertible preferred stock on an "as-converted"
basis if such treatment is dilutive.

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 September 30, 2009.

Disclosure regarding the non-GAAP financial measures in this release is included on pages 5 and 6. Disclosure regarding the Hotel EBITDA Margin is included on page 6 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

Equity Offering. Subsequent to the end of the Company's third quarter, the Company issued 23,000,000 shares of its common stock, including the underwriters' over-allotment of 3,000,000 shares. Net proceeds from this offering of approximately $158.6 million were contributed to Sunstone Hotel Partnership LLC, a subsidiary, which will use the proceeds for working capital and other general corporate purposes, which may include hotel acquisitions.

Secured Finance Initiatives. The Company has initiated a secured debt restructuring program to proactively address value and cash flow deficits among certain of its mortgaged hotels. The primary goal of this program is to achieve benefits for the Company's stockholders through loan amendments, or in certain cases, consensual transfers to the lenders of the hotel assets in full satisfaction of the debt. Loans within the Company's secured debt restructuring program generally meet two criteria: (1) the hotel is not generating sufficient cash flow to cover debt service, and under the current terms of the mortgage, the hotel is not expected to generate sufficient cash flow for the foreseeable future, and (2) the present value of the hotel is significantly less than the principal amount of the applicable loan. The loans secured by such hotels, subject to customary exceptions, are non-recourse to the Company. As of September 30, 2009, five of the Company's loans totaling $471.4 million are or have been subject to the Company's secured debt restructuring program. Each of these five loans is discussed further below.

W San Diego. Effective September 30, 2009, possession and control of the W San Diego was transferred to a court-appointed receiver. In connection with this transfer, the Company deconsolidated this hotel and reclassified the assets and liabilities, including the $29.0 million hotel asset and the hotel's $65.0 million mortgage indebtedness, to discontinued operations on its balance sheets. Additionally, the Company reclassified the W San Diego's results of operations and cash flows to discontinued operations on its statements of operations and cash flows. Once title to the hotel is transferred, the Company will record a gain on extinguishment of debt, and the net assets and liabilities will be removed from the Company's balance sheets.

Marriott Ontario Airport. In September 2009, the Company elected to cease the subsidization of debt service on the non-recourse mortgage for the Marriott Ontario Airport, which may result in a default under the non-recourse mortgage. The Company believes the value of this hotel is now significantly less than the principal amount of the mortgage. Prior to the time that the Company elected to discontinue subsidizing operating expenses at this hotel, the Company made several attempts to work with the special servicer handling the Marriott Ontario Airport loan to seek modification of the repayment terms. While the special servicer declined the Company's request for a proposed modification of this loan, the lender was under no duty to agree to any such proposed modification. At this point, 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 potential default, the Company has reclassified the assets, liabilities and results of operations of the Marriott Ontario Airport to "operations held for non-sale disposition" on its balance sheets, statements of operations and statements of cash flows. This hotel had a net book value of $16.6 million, and the amount of debt outstanding under the mortgage was $25.5 million at September 30, 2009.

Renaissance Westchester. In August 2009, the Company elected to cease the subsidization of debt service on the non-recourse mortgage for the Renaissance Westchester, which resulted in a default under the mortgage. The Company believes the value of this hotel is now significantly less than the principal amount of the mortgage. The Company continues to work with the special servicer responsible for the Renaissance Westchester loan towards reaching a modification of this loan, but the Company cannot provide any assurance that it will achieve such a result. Absent a modification, the Company may elect to surrender the hotel to the lender or cooperate with the lender's appointment of a receiver. This hotel had a net book value of $25.0 million, and the amount of debt outstanding under the mortgage was $29.4 million at September 30, 2009.

Massachusetts Mutual Life Insurance Company. The Company currently is in discussions with Massachusetts Mutual Life Insurance Company, or Mass Mutual, to negotiate an amendment to a $246.3 million, 5.95% non-recourse mortgage loan that matures in 2011. The Company elected not to make the November 1 debt service payment on this loan, which is expected to result in a default under this loan. This loan is currently secured by 11 of the Company's hotels, comprised of 2,587 rooms --Renaissance Atlanta Concourse; Hilton Huntington; Courtyard by Marriott Los Angeles; Residence Inn by Marriott Manhattan Beach; Marriott Provo; Kahler Inn & Suites Rochester; Marriott Rochester; Courtyard by Marriott San Diego (Old Town); Holiday Inn Downtown, San Diego; Holiday Inn Express San Diego (Old Town); and Marriott Salt Lake City (University Park). The Company is seeking an amendment to the terms of this loan because it believes that the present value of the hotels securing this loan is currently less than the outstanding principal amount of this loan. The Company cannot provide any assurances that it will be successful in its efforts to amend the terms of this loan. Absent an amendment, the Company may elect to surrender the hotels to the lender or cooperate with the lender's appointment of a receiver. The 11 hotels securing this loan had a net book value including goodwill of $258.8 million at September 30, 2009.

Renaissance Baltimore. The Company is currently finalizing an amendment to the $105.2 million non-recourse mortgage loan secured by the Renaissance Baltimore. If executed, the amendment would result in the elimination of amortization on this loan for a period of up to 30 months. The Company anticipates executing this amendment during the fourth quarter.

Hotel Sales. 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.

Hotel Acquisitions. The Company believes that the recent declines in demand for lodging and continuing capital constraints may lead to opportunities to acquire hotels at discount valuations. The Company is actively analyzing various potential hotel acquisition opportunities, with prioritization based on the following criteria:

--  Valuation: The Company is analyzing acquisition targets that are
expected to trade at a discount relative to the Company's current
enterprise value per key and/or EBITDA multiple.
--  Value-Add: As the costs of construction, renovations, labor and
materials have declined from peak levels, the Company is evaluating
acquisitions where selective renovation/repositioning work add value.
--  Synergies: Economies of scale, ownership efficiencies, improved pricing
power and staff sharing, may be realized by owning multiple hotels
within the same market.
--  Outperforming Markets: The Company seeks to invest in strong locations
within markets that are expected to outperform the U.S. average in terms
of growth in lodging demand.

--  Pipeline: The Company is exploring preferred relationships with current
owners of hotel real estate, who may look to divest of such real estate
in the future.

While discount acquisition opportunities appear to be increasing in number, there can be no assurances that the Company will be successful in executing on its plan to acquire quality hotel assets at discount valuations.

Balance Sheet/Liquidity Update

Ken Cruse, Chief Financial Officer, stated, "We continue to proactively manage our balance sheet, and remain focused on creating long-term stockholder value. Through the successful execution of our various finance initiatives this year, we have positioned the Company to enter the next business cycle in a position of strength."

As of September 30, 2009, the Company had approximately $251.3 million of cash and cash equivalents, including restricted cash of $48.7 million. Subsequent to September 30, 2009, the Company increased its cash position by approximately $158.6 million to approximately $409.9 million as net proceeds were received from the Company's equity offering. As of September 30, 2009, the Company had no outstanding indebtedness under its $85.0 million credit facility, and had $3.1 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 and for acquisition opportunities.

On September 30, 2009, excluding the Marriott Ontario Airport and the W San Diego, total assets were $2.5 billion, including $2.2 billion of net investments in hotel properties, total debt was $1.4 billion and stockholders' equity was $0.9 billion.

Financial Covenants

The Company is subject to compliance with various covenants under its credit facility, its Series C preferred stock, and its 4.6% Exchangeable Senior Notes due 2027 (the "Senior Notes"). If the Company fails to meet certain of the credit facility's covenants, a default may occur, which may result in a reduction in, or the complete elimination of, funds available under the 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. As anticipated, as of September 30, 2009, the Company failed one of the financial covenants regarding its Series C preferred stock. If the Company remains out of compliance with this covenant for the next three quarters, 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 would 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. 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. In the event the Company were to default on indebtedness in excess of $300.0 million, and such default resulted in the acceleration of the maturity of such indebtedness, either the trustee or the holders of not less than 25% in principal amount of the outstanding Senior Notes may declare the Senior Notes and any unpaid interest due and payable. As of November 4, 2009, the only indebtedness currently in default and whose maturity has been accelerated is the $29.4 million non-recourse loan for the Renaissance Westchester.

Goodwill and Other Impairment Losses

During the third quarter of 2009, in light of the continuing economic turbulence, the Company determined that an intra-year impairment analysis should be performed as of September 30, 2009. In conjunction with this impairment evaluation, the Company determined that the goodwill associated with the Marriott Rochester may be impaired as of September 30, 2009, and, accordingly, the Company recorded an impairment loss of $2.2 million to goodwill and other impairment losses.

Hotel Renovations

During the third quarter of 2009, the Company invested $7.4 million in capital projects.

Dividend Update

On October 21, 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 January 15, 2010 to stockholders of record on December 31, 2009. No dividend was declared on the Company's common stock.

The Company intends to make dividends on its 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 third quarter results on November 4, 2009, at 2:00 p.m. PST. A live web cast of the call will be available via the Investor Relations section of the Company's website at www.sunstonehotels.com. Alternatively, investors may dial 1-877-941-2927 (for domestic callers) or 1-480-629-9725 (for international callers) with passcode #4173224. 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 40 hotels comprised of 14,006 rooms primarily in the upper-upscale segment operated under nationally recognized brands, such as Marriott, Hyatt, Fairmont and Hilton. For further information, please visit the Company's website at 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.