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Article by DailyStocks_admin    (08-18-08 09:16 AM)

Sunstone Hotel Investors Inc. CEO ROBERT A ALTER bought 100000 shares on 8-12-2008 at $13.99

BUSINESS OVERVIEW

Our Company

We were incorporated in Maryland on June 28, 2004. We are a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code. Our primary business is to acquire, own, asset manage, renovate and sell luxury, upper upscale and upscale full-service hotels in the United States. Our hotels are operated under leading brand names, such as Marriott, Hilton, Hyatt, Fairmont and Starwood. As of December 31, 2007, we own 45 hotels, comprised of 15,625 rooms, located in 14 states and in Washington, D.C. Our portfolio also includes midscale hotels. In addition, we have a 38% equity interest in a joint venture that owns the Doubletree Times Square, located in New York, New York. The classifications luxury, upper upscale, upscale and midscale are defined by Smith Travel Research, an independent provider of lodging industry statistical data. Smith Travel Research classifies hotel chains into the following segments: luxury; upper upscale; upscale; midscale with food and beverage; midscale without food and beverage; economy; and independent.

Our hotels are operated by third-party managers pursuant to management agreements with the TRS Lessee or its subsidiaries. As of December 31, 2007, Sunstone Hotel Properties, Inc. (“Interstate SHP”), a division of Interstate Hotels & Resorts, Inc. (“Interstate”), operates 26 of our 45 hotels. Additionally, subsidiaries of Marriott Services, Inc. or Marriott International, Inc., which we refer to collectively as Marriott, operate 13 of our hotels, Hyatt Corporation (“Hyatt”) operates three of our hotels, and Fairmont Hotels & Resorts (U.S.) (“Fairmont”), Hilton Hotels Corporation (“Hilton”) and Starwood Hotels & Resorts Worldwide, Inc. (“Starwood”) each operates one of our hotels. We have attempted to align the interests of our operators with our own by structuring our management agreements to allow our operators to earn “incentive” management fees upon the attainment of certain profit thresholds.

Competitive Strengths

We believe the following competitive strengths distinguish us from other owners of lodging properties:


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Positioned for Growth.

Recently Renovated High-Quality Portfolio. From January 1, 2003 through December 31, 2007, we have invested $407.2 million in capital renovations throughout our existing portfolio. We believe this renovation program has improved the competitiveness of our hotels and has better positioned our portfolio for several years of above average growth.

Luxury, Upper Upscale and Upscale Concentration. We believe the luxury, upper upscale and upscale segments, which represented approximately 98.0% of our 2007 hotel revenues, tend to outperform the lodging industry generally.

Nationally Recognized Brands. Substantially all of our hotels are operated under nationally recognized brands, including Marriott, Hilton, Hyatt, Starwood and Fairmont. We believe that affiliations with strong brands help to drive business to our hotels.

Presence in Key Markets. We believe that our hotels are located in desirable markets with major demand generators and significant barriers to entry for new supply. In 2007, 66.0% of our revenues were generated by hotels located in key gateway markets such as Boston, New York, Washington, D.C./Baltimore, Chicago, Atlanta, Orlando, Los Angeles, Orange County and San Diego. Over time, we expect the revenues of hotels located in key gateway markets to grow more quickly than the average for U.S. hotels as a result of stronger economic drivers as well as higher levels of international travel.


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Proven Acquisition and Disposition Capabilities. We believe that our significant acquisition and disposition experience will allow us to continue to execute our strategy to redeploy capital from slower growth to higher growth hotels.


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Proactive Asset Management Group. We have a proactive asset management team focused on growing the long-term revenues and profitability of our hotels. We believe that a proactive asset management program can help to grow revenues of our hotel portfolio by leveraging best practices across various brands and by providing our managers with operational insights from our extensive experience.


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Strategic Relationship with Interstate SHP. We believe that our agreements with Interstate SHP align its interests with ours to maximize the operating performance of our hotels managed by Interstate SHP.


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Experienced Management Team. We have a seasoned senior management team with extensive experience in real estate, lodging and finance.


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Conservative and Flexible Capital Structure. We believe our capital structure provides us with adequate financial flexibility to fund our dividend, renovation program and external growth strategies. As of December 31, 2007, our indebtedness bears fixed interest at a weighted average rate of 5.5%, and has an average term to maturity of approximately nine years. The majority of our debt is in the form of senior unsecured notes or single asset loans rather than cross-collateralized multi-property pools. We believe this structure is appropriate for the operating characteristics of our business and provides flexibility for assets to be sold subject to the existing debt.

Business and Growth Strategy

Our principal business objectives are to generate attractive returns on our invested capital and long-term growth in cash flow in order to maximize total returns to our stockholders. Our focus is to own luxury, upper upscale and upscale hotels located in desirable markets with major demand generators and significant barriers to entry. Our strategies for achieving our business objectives include the following key elements:


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Selective Hotel Acquisitions and Capital Redeployment. We intend to continue to enhance the quality of our portfolio by acquiring premium-branded hotels, or hotels that we believe have the attributes to facilitate their conversion to premium brands, that we believe have been undermanaged or undercapitalized, that are located in growth markets or that offer expansion and renovation opportunities. We also intend to continue to opportunistically sell slower growth, non-core hotels and redeploy these proceeds by acquiring other higher quality hotels with greater cash flow growth potential.


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Opportunistic Hotel Renovations. We will continue to invest capital to renovate and reposition our hotels when we believe doing so will generate attractive returns on our invested capital.

Competition

The hotel industry is highly competitive. Our hotels compete with other hotels for guests in each of their markets. Competitive advantage is based on a number of factors, including location, quality of accommodations, convenience, brand affiliation, room rates, services and amenities, and level of customer service. Competition is often specific to the individual markets in which our hotels are located and includes competition from existing and new hotels operated under brands in the luxury, upper upscale and upscale segments. Increased competition could harm our occupancy or revenues or may require us to provide additional amenities or make capital improvements that we otherwise would not have to make, which may reduce our profitability.

We believe that competition for the acquisition of hotels is highly fragmented. We face competition from institutional pension funds, private equity investors, other REITs and numerous local, regional and national owners, including franchisors, in each of our markets. Some of these entities may have substantially greater financial resources than we do and may be able and willing to accept more risk than we believe we can prudently manage. Competition generally may increase the bargaining power of property owners seeking to sell and reduce the number of suitable investment opportunities available to us.

Management Agreements

Twenty-six of the 45 hotels we own as of December 31, 2007 are managed and operated by Interstate SHP pursuant to management agreements with the TRS Lessee or its subsidiaries. Our remaining 19 hotels as of December 31, 2007 are managed by subsidiaries of Marriott, Hilton, Hyatt, Fairmont or Starwood under management agreements with the TRS Lessee or its subsidiaries. The following is a general description of these agreements.

Interstate SHP. Our management agreements with Interstate SHP require us to pay, on a monthly basis, a management fee ranging from 1.0% to 2.1% of gross revenues; plus an accounting fee of $10-$11 per room per month, subject to an annual increase based on consumer price index; plus an incentive fee of 10.0% of the excess of net operating income over a threshold. The incentive fee, however, may not exceed a range of 0.5% to 1.9% of the total revenues for all the hotels managed by Interstate SHP for any fiscal year. The TRS Lessee must deliver to Interstate SHP a guaranty or guaranties of payment with respect to all fees payable to Interstate SHP.

The initial term of these management agreements is 20 years, and we have the right to renew each management agreement for up to two additional terms of five years each, absent a prior termination by either party. Interstate SHP is located in the same building as our headquarters in San Clemente, California. Pursuant to the terms of the management agreements, without our prior written consent, Interstate SHP may not replace certain of its key personnel in operations, sales and marketing, accounting and finance and other agreed upon personnel. In addition, without our prior written consent, Interstate SHP is not able to alter certain operating procedures or systems deemed integral to the operation of each of the managed hotels.

Marriott. Six of our Marriott hotels and seven of our Renaissance hotels are operated under management agreements with subsidiaries of Marriott. These management agreements require us to pay a base management fee between 2.25% and 3.0% of total revenue from these hotels to Marriott and expire between 2014 and 2050. Additionally, ten of these management agreements require an incentive fee of 20.0% of the excess of gross operating profit over a certain threshold; one of the management agreements requires an incentive fee of 20.0% of net cash flow; one of the management agreements requires an incentive fee of 20.0% of net cash flow subject to the hotel achieving a certain operating threshold; and one of the management agreements requires us to pay specific percentages of both room revenue and food and beverage revenue. The management agreements with Marriott may be terminated earlier than the stated term if certain events occur, including the failure of Marriott to satisfy certain performance standards, a condemnation of, a casualty to, or force majeure event involving a hotel, the withdrawal or revocation of any license or permit required in connection with the operation of a hotel and upon a default by Marriott or us that is not cured prior to the expiration of any applicable cure periods. In the event of a sale of the Marriott Troy, Michigan, Marriott has a right of first refusal to either purchase or lease the hotel or terminate the management agreement.

Hyatt. Our three Hyatt hotels are operated under management agreements with Hyatt. The agreement with respect to the Hyatt Regency Newport Beach, California hotel expires in 2039 and requires us to pay 3.5% of total hotel revenue as a base management fee, with an additional 0.5% of total revenue payable to Hyatt based upon the hotel achieving specific operating thresholds. The management agreement with respect to the Hyatt Marietta, Georgia hotel expires in 2040 and requires us to pay 4.0% of total hotel revenue to Hyatt as a base fee. The management agreement with respect to the Hyatt Regency Century Plaza, Century City, California requires us to pay 3.0% of total revenue for that hotel to Hyatt, and expires in 2025. In addition, as part of our purchase of the Hyatt Regency Century Plaza, we entered into a 30-year term agreement with Hyatt whereby Hyatt provided us with a limited performance guaranty to ensure, subject to certain limitations, a return on equity to us. Under the terms of this agreement, were net cash flow generated by the hotel to be insufficient to cover our debt service related to this hotel, plus a 10% return on our equity investment in the hotel, Hyatt Corporation was required to pay us the difference, up to $27.0 million over the term of the agreement. As of the end of our third quarter 2007, we have fully utilized the entire $27.0 guaranty. We used a total of $2.8 million of the $27.0 million performance guaranty during 2007, $17.4 million during 2006, and $6.8 million during 2005 for a total of $27.0 million cumulatively. The management agreements with Hyatt include incentive fees ranging between 10.0% and 33.0% of the hotel’s net profit above certain net profit thresholds. These management agreements may be terminated earlier than the contract term if certain events occur, including the failure of Hyatt to satisfy certain performance standards, a condemnation of, a casualty to, or force majeure event involving the hotel and upon a default by Hyatt or us that is not cured prior to the expiration of any applicable cure period.

Fairmont. Our Fairmont Newport Beach, California hotel is operated under a management agreement with a subsidiary of Fairmont. The agreement requires us to pay 3.0% of total revenue as a base management fee and expires in 2015, with an option to extend the agreement for an additional 20 years. The agreement includes incentive fees ranging from between 15% and 25% of the hotel’s net profit above certain net profit thresholds. The agreement also includes a minimum return threshold below which Fairmont will be required to make limited guaranty payments to us not to exceed $6.0 million.

Starwood. Our W Hotel in San Diego, California is operated under a management agreement with Starwood. The agreement requires us to pay 3.0% of total revenue as a base management fee and expires in 2026. The agreement includes an incentive fee of 10.0% of our net profit at the hotel above the achievement of certain net profit thresholds.

Hilton. Our Embassy Suites La Jolla, California hotel is operated under a management agreement with Hilton. The agreement expires in 2016, and requires us to pay a base management fee as follows: 1.5% of gross revenues in 2006; 1.75% of gross revenues in 2007; 2.0% of gross revenues in 2008; and 2.25% of gross revenue in 2009 through 2016. The agreement includes an incentive fee of 15% of our net profit at the hotel above the achievement of certain net profit thresholds.

The existing management agreements with Fairmont, Hilton, Hyatt, Marriott, and Starwood require the manager to furnish chain services that are generally made available to other hotels managed by that operator. Costs for these chain services are reimbursed by us. Such services include: (1) the development and operation of computer systems and reservation services; (2) management and administrative services; (3) marketing and sales services; (4) human resources training services; and (5) such additional services as may from time to time be more efficiently performed on a national, regional or group level.

Franchise Agreements

As of December 31, 2007, 23 of the hotels we own are operated subject to franchise agreements. We believe that the public’s perception of the quality associated with a brand name hotel is an important feature in its attractiveness to guests. Franchisors provide a variety of benefits to franchisees, including centralized reservation systems, national advertising, marketing programs and publicity designed to increase brand awareness, training of personnel and maintenance of operational quality at hotels across the brand system.

The franchise agreements generally specify management, operational, record-keeping, accounting, reporting and marketing standards and procedures with which our subsidiary, as the franchisee, must comply. The franchise agreements obligate the subsidiary to comply with the franchisors’ standards and requirements with respect to training of operational personnel, safety, maintaining specified insurance, the types of services and products ancillary to guest room services that may be provided by the subsidiary, display of signage and the type, quality and age of furniture, fixtures and equipment included in guest rooms, lobbies and other common areas. The franchise agreements for our hotels require that we deposit up to 5.0% of the gross revenues of the hotels into a reserve fund for capital expenditures.

The franchise agreements also provide for termination at the franchisor’s option upon the occurrence of certain events, including failure to pay royalties and fees or to perform other obligations under the franchise license, bankruptcy and abandonment of the franchise or a change in control. The subsidiary that is the franchisee will be responsible for making all payments under the franchise agreements to the franchisors.

Tax Status

We have elected to be taxed as a REIT under Sections 856 through 859 of the Code, commencing with our taxable year ending December 31, 2004. Under current Federal income tax laws, we generally will not be taxed at the corporate level to the extent we distribute at least 90% of our net taxable income to our stockholders. We may, however, be subject to certain Federal, state and local taxes on our income and property and to Federal income and excise tax on our undistributed income.

Taxable REIT Subsidiary

Subject to certain limitations, a REIT is permitted to own, directly or indirectly, up to 100% of the stock of a taxable REIT subsidiary, or TRS, that may engage in businesses prohibited to a REIT. In particular, hotel REITs are permitted to own a TRS that leases hotels from the REIT, rather than requiring the lessee to be an unaffiliated third party. However, hotels leased to a TRS still must be managed by an unaffiliated third party. The TRS provisions are complex and impose several conditions on the use of TRSs, generally to assure that TRSs are subject to an appropriate level of Federal corporate taxation.

As described above, we may own up to 100% of the stock of one or more taxable REIT subsidiaries, including the TRS Lessee. A TRS is a fully taxable corporation that may earn income that would not be qualifying income if earned directly by us. A TRS may perform activities such as development, and other independent business activities. However, a TRS may not directly or indirectly operate or manage any hotels or provide rights to any brand name under which any hotel is operated.

We and the TRS Lessee must elect for the TRS Lessee to be treated as a TRS. A corporation of which a qualifying TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 20% of the value of our assets may consist of securities of one or more TRS, and no more than 25% of the value of our assets may consist of the securities of TRSs and other assets that are not qualifying assets for purposes of the 75% asset test. The 75% asset test generally requires that at least 75% of the value of our total assets be represented by real estate assets, cash, or government securities.

The rent that we receive from a TRS qualifies as “rents from real property” as long as the property is operated on behalf of the TRS by a person who qualifies as an “independent contractor” and who is, or is related to a person who is, actively engaged in the trade or business of operating “qualified lodging facilities” for any person unrelated to us and the TRS (an “eligible independent contractor”). A “qualified lodging facility” is a hotel, motel or other establishment in which more than one-half of the dwelling units are used on a transient basis, unless wagering activities are conducted at or in connection with such facility by any person who is engaged in the business of accepting wagers and who is legally authorized to engage in such business at or in connection with such facility. A “qualified lodging facility” includes customary amenities and facilities operated as part of, or associated with, the lodging facility as long as such amenities and facilities are customary for other properties of a comparable size and class owned by other unrelated owners.

We have formed the TRS Lessee as a wholly owned TRS. We lease each of our hotels to the TRS Lessee or one of its subsidiaries. As described below, these leases provide for a base rent plus a percentage rent. These leases must contain economic terms which are similar to a lease between unrelated parties because the Code imposes a 100% excise tax on certain transactions between a TRS and us or our tenants that are not conducted on an arm’s-length basis. We believe that all transactions between us and the TRS Lessee are conducted on an arm’s-length basis. Further, the TRS rules limit the deductibility of interest paid or accrued by a TRS to us to assure that the TRS is subject to an appropriate level of corporate taxation.

As discussed above, the TRS Lessee has engaged independent hotel operators to operate the related hotels on its behalf. Furthermore, we have represented, with respect to hotels that we lease to the TRS Lessee in the future, that the TRS Lessee will engage “eligible independent contractors” to manage and operate the hotels leased by the TRS Lessee. All of our third-party managers qualify as “eligible independent contractors.”

Ground and Air Lease Agreements

Nine of our hotels are subject to ground or air leases that cover either all or portions of their respective properties. As of December 31, 2007, the terms of these ground or air leases (including renewal options) range from 28 to 89 years. These leases generally require us to make rental payments and payments for all charges, costs, expenses and liabilities, including real and personal property taxes, insurance, and utilities.

Any proposed sale of a property that is subject to a ground or air lease or any proposed assignment of our leasehold interest as ground or air lessee under the ground or air lease may require the consent of the applicable ground or air lessor. As a result, we may not be able to sell, assign, transfer or convey our ground or air lessee’s interest in any such property in the future absent the consent of the ground or air lessor, even if such transaction may be in the best interests of our stockholders. Three of our properties prohibit the sale or conveyance of the hotel by us to another party without first offering the ground or air lessor the opportunity to acquire the hotel upon the same terms and conditions as offered to the third party.

We have an option to acquire the ground lessor’s interest in the ground lease relating to three of our hotels for specified amounts and exercisability provisions. At this time, we do not intend to exercise any option to purchase the ground lessor’s interest in any of these ground leases.

Offices

We lease our headquarters located at 903 Calle Amanecer, Suite 100, San Clemente, California 92673 from an unaffiliated third party. We occupy our headquarters under a lease that terminates on June 30, 2010, with an option to extend for an additional five years. We believe that our current facilities are adequate for our present and future operations. Our Internet address is www.sunstonehotels.com . Periodic and current Securities and Exchange Commission (“SEC”) reports and amendments to those reports, are available, free of charge, through links displayed on our web site as soon as reasonably practicable after we file such material with, or furnish it to, the SEC. Our website and the information on our website is not a part of this Annual Report on Form 10-K.

Employees

At February 1, 2008, we had 54 employees. We believe that our relations with our employees are positive. All persons employed in the day-to-day operations of the hotels are employees of the management companies engaged by the TRS Lessee to operate such hotels.

Environmental

All of our hotels have been subjected to environmental reviews. Environmental consultants retained by our lenders have conducted Phase I environmental site assessments on many of our properties. These Phase I assessments relied on older environmental assessments prepared in connection with prior financing. Phase I assessments are designed to evaluate the potential for environmental contamination of properties based generally upon site inspections, facility personnel interviews, historical information and certain publicly available databases. Phase I assessments will not necessarily reveal the existence or extent of all environmental conditions, liabilities or compliance concerns at the properties. While some of these assessments have led to further investigation and sampling, none of the environmental assessments have revealed, nor are we aware of, any environmental liability (including asbestos-related liability) that we believe would harm our business, financial position, results of operations or cash flow.

Under various Federal, state and local laws and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on the property. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of hazardous or toxic substances. Furthermore, a person that arranges for the disposal or transports for disposal or treatment of a hazardous substance at another property may be liable for the costs of removal or remediation of hazardous substances released into the environment at that property. The costs of remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to promptly remediate such substances, may adversely affect the owner’s ability to sell such real estate or to borrow using such real estate as collateral. In connection with the ownership and operation of our properties, we or the TRS Lessee, as the case may be, may be potentially liable for such costs.

We have provided unsecured environmental indemnities to certain lenders. We have performed due diligence on the potential environmental risks including obtaining an independent environmental review from outside environmental consultants. These indemnities obligate us to reimburse the guaranteed parties for damages related to environmental matters. There is no term or damage limitation on these indemnities; however, if an environmental matter arises, we could have recourse against other previous owners.

Seasonality

The lodging business is seasonal in nature, and we experience some seasonality in our business. Revenue for hotels in tourist areas generally is substantially greater during tourist season than other times of the year. Quarterly revenue also may be adversely affected by events beyond our control, such as extreme weather conditions, terrorist attacks or alerts, medical conditions such as public health concerns, airline strikes, cost of air travel, economic factors and other considerations affecting travel.

Inflation

Inflation may affect our expenses, including, without limitation, by increasing costs such as labor, food, taxes, property and casualty insurance and utilities.

CEO BACKGROUND

Z. Jamie Behar Age: 50

Director

Ms. Behar has served as a director since our formation on October 26, 2004. Since October 2005, Ms. Behar has been Managing Director, Real Estate & Alternative Investments, for General Motors Investment Management Corporation, or GMIMCo. From 1986 through October 2005, Ms. Behar was a Portfolio Manager with GMIMCo. She manages GMIMCo clients’ real estate investment portfolios, including both private market and publicly traded security investments, as well as their alternative investment portfolios, totaling approximately $10.5 billion. She is a member of GMIMCo’s Management Committee and Investment Committee, and is Vice Chairman of the GMIMCo Real Estate & Alternative Investment Approval Committee. Ms. Behar is a member of the Board of Directors of Desarrolladora Homex, S.A. de C.V., a publicly listed home development company located in Mexico (and for which she also serves on the audit committee), and serves on the advisory boards of several domestic and international private real estate investment entities. Ms. Behar holds a B.S.E. degree from The Wharton School of the University of Pennsylvania, an M.B.A. degree from the Columbia University Graduate School of Business, and the CFA charter.



Thomas A. Lewis Age: 55

Director

Mr. Lewis has served as a director since May 2, 2006. Mr. Lewis is Chief Executive Officer of Realty Income Corporation, a NYSE listed real estate investment trust. He is also Vice Chairman of the Board of Directors of Realty Income Corporation and has been a member of its Board of Directors since September 1993. He joined Realty Income Corporation in 1987 and served in a variety of executive positions, including Vice President, Capital Markets until 1997, when he was named Chief Executive Officer. In 2000 and 2001 he also held the position of President.



Keith M. Locker Age: 46

Director

Mr. Locker has served as a director since May 2, 2006. Since September 2003, Mr. Locker has been President of Inlet Capital LLC, an investment and asset management firm focused on the commercial real estate industry. In addition, since February 2003, Mr. Locker has been President of Global Capital Resources LLC and GCR Advisors Inc., which fund various types of mortgages. Mr. Locker was previously a Managing Director in the Real Estate Investment Banking Group at Deutsche Bank Securities, Inc. from September 2000 to February 2003. Prior to joining Deutsche Bank in 2000, Mr. Locker was Senior Managing Director at Bear, Stearns & Co. Inc., responsible for Real Estate Investment Banking. Mr. Locker earned a B.S./B.A. from Boston University School of Management in 1983 and an M.B.A. from the Wharton School in 1988. Mr. Locker is a Director of IVP Securities, LLC and Trustee of the National Jewish Center. He is also a member of NAREIT, Urban Land Institute, Commercial Mortgage Securities Association, International Council of Shopping Centers, The Wharton School Zell-Lurie Real Estate Center, Fisher Center for Real Estate and Urban Economics and numerous philanthropic and community organizations.



Keith P. Russell Age: 62

Director

Mr. Russell has served as a director since our formation on October 26, 2004. Since June 2001, Mr. Russell has been President of Russell Financial, Inc., a strategic and financial consulting firm serving businesses and high net worth individuals. Mr. Russell is retired as the Chairman of Mellon West and the Vice Chairman of Mellon Financial Corporation, in which capacities he served from May 1996 until March 2001. From September 1991 through April 1996, Mr. Russell served in various positions at Mellon, including Vice Chairman and Chief Risk Officer of Mellon Bank Corporation and Chairman of Mellon Bank Corporation’s Credit Policy Committee. From 1983 to 1991, Mr. Russell served as President and Chief Operating Officer, and a director, of Glenfed/Glendale Federal Bank. Mr. Russell also serves on the Boards of Directors of Nationwide Health Properties, Inc. (for which he also serves as chair of the audit committee and a member of the nominating and governance committee) and Countrywide Financial Corporation (for which he also serves as chair of the credit committee and a member of the finance committee, audit and ethics committee and the special oversight committee). Mr. Russell holds a B.A. degree in Economics from the University of Washington and an M.A. degree in Economics from Northwestern University.

MANAGEMENT DISCUSSION FROM LATEST 10K

Operations

To qualify as a REIT, we are precluded from directly operating and earning income from our hotels. Therefore, consistent with the provisions of the Code, the Operating Partnership and its subsidiaries have leased our hotel properties to the TRS Lessee, which has in turn contracted with “eligible independent contractors” to manage our hotels. Under the Code, an “eligible independent contractor” is an independent contractor who is actively engaged in the trade or business of operating “qualified lodging facilities” for any person unrelated to us and the TRS Lessee. The Operating Partnership and the TRS Lessee are consolidated into our financial statements for accounting purposes. The income of the TRS Lessee is subject to taxation like other C corporations, which may reduce our operating results, funds from operations and the cash otherwise available for distribution to our stockholders.

Factors Affecting Our Results of Operations

Acquisitions . In January 2007, we acquired the 499-room LAX Renaissance hotel located in Los Angeles, California for approximately $65.2 million and retained Marriott as manager.

In March 2007, we acquired the 402-room Marriott Long Wharf hotel located in Boston, Massachusetts for approximately $228.5 million and retained Marriott as manager. In connection with this acquisition we obtained a $176.0 million mortgage loan with a maturity date of April 2017 and a fixed interest rate of 5.58%.

In May 2007, we acquired the 464-room Marriott Boston Quincy hotel located in Quincy, Massachusetts for approximately $117.0 million and retained Marriott as manager.

The aggregate cost for these 16 hotel acquisitions was approximately $1.9 billion, or $257,000 per room.

Investment in unconsolidated joint ventures . In December 2006, we entered into a joint venture agreement with Whitehall Street Global Real Estate Limited Partnership 2005 and Highgate Holdings to acquire the 460-room Doubletree Guest Suites Hotel located in New York City, New York. Our total initial investment in the joint venture was approximately $68.5 million. Our total initial investment was funded entirely from cash on hand and was comprised of two parts: (i) a $28.5 million mezzanine loan, which bore an interest rate of 8.5% on a face value of $30.0 million and (ii) a $40.0 million equity investment representing a 38% ownership interest in the joint venture. In April 2007, we sold the $28.5 million mezzanine loan for net proceeds of $29.0 million. The total debt of the joint venture is $300.0 million, including the $30.0 million mezzanine loan.

In December 2007, we entered into a joint venture agreement with Strategic Hotels & Resorts, Inc., or Strategic, to own and operate BuyEfficient, LLC, an electronic purchasing platform that allows members to procure food, operating supplies, furniture, fixtures and equipment. Under the terms of the agreement, Strategic acquired a 50% interest in BuyEfficient, LLC from us for $6.3 million. As part of this transaction, we recognized a gain on sale of $6.1 million, and contributed $0.3 million to the new joint venture with Strategic to operate BuyEfficient, LLC Prior to this sale, all of BuyEfficient, LLC’s revenue and expenses were reflected on the appropriate line of our income statements. After this sale, our 50% interest in BuyEfficient, LLC is reflected on our balance sheet as investment in unconsolidated joint ventures, and on our income statements as equity in earnings (losses) of unconsolidated joint ventures.

The aggregate net sale proceeds for the 25 hotel dispositions through December 31, 2007 was $373.4 million, or $75,000 per room. The results of operations of all of the hotels identified above and the gains or losses on dispositions through December 31, 2007 are included in discontinued operations for all periods presented through the time of sale. The proceeds from the sales are included in our cash flows from investing activities for the respective periods.

Renovations . During 2007, we spent $135.2 million on capital investments. This included repositioning projects completed during the year at the Renaissance Orlando, Renaissance Baltimore, Renaissance Long Beach, Hyatt Regency Century Plaza, Hilton Times Square and Embassy Suites La Jolla hotels.

Indebtedness . During the first quarter of 2007, we drew down $138.0 million of our $200.0 million credit facility to fund our purchases of the Renaissance LAX and the Marriott Long Wharf, and to fund other working capital requirements. During the second quarter of 2007, we drew down an additional $27.0 million of the credit facility to fund our purchase of the Marriott Boston Quincy, and to fund other working capital requirements. During the fourth quarter, we drew down an additional $10.0 million of the credit facility to fund working capital requirements. We repaid $24.0 million of the credit facility in April 2007, and $141.0 million in June 2007, using proceeds we received from the sale of six hotel properties, and repaid the remaining $10.0 million balance in November 2007. As of December 31, 2007, we had no outstanding indebtedness under our credit facility, and had $10.8 million outstanding irrevocable letters of credit backed by the credit facility, leaving, as of that date, $189.2 million available under the credit facility.

In March 2007, we obtained a $176.0 million mortgage loan with a maturity date of April 2017 and a fixed interest rate of 5.58% in connection with the acquisition of the Marriott Long Wharf. In addition, in April 2007, we amended one of our mortgage loans to eliminate amortization and to provide for partial collateral releases, provided we continue to meet certain loan covenants, from May 2007 until the maturity date of May 2011, at which time the outstanding loan balance of $248.2 million will be due and payable. We also repaid a $175.0 million mortgage loan in June 2007, which had a maturity date of December 2014. In connection with this repayment, we incurred prepayment penalties of $0.4 million.

In June 2007, the Operating Partnership issued an aggregate $250.0 million of exchangeable senior notes with a maturity date of July 2027 and an interest rate of 4.60%. Interest on the notes is payable semi-annually in arrears on January 15 and July 15 of each year, beginning January 15, 2008. The notes, subject to specified events and other conditions, are exchangeable into, at our option, cash, our common stock, or a combination of cash and our common stock. The initial exchange rate for each $1,000 principal amount of notes is 28.9855 shares of our common stock, representing an exchange price of approximately $34.50 per common share. The initial exchange rate is subject to adjustment under certain circumstances. The Operating Partnership does not have the right to redeem the notes, except to preserve our REIT status, before January 20, 2013, and may redeem the notes, in whole or in part, thereafter at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest. Upon specified change in control events as well as specified dates, holders of the notes may require the Operating Partnership to repurchase their notes, in whole or in part, for cash equal to 100% of the principal amount of the notes to be repurchased, plus any accrued and unpaid interest. The notes are the senior unsecured obligations of the Operating Partnership. We and all of our subsidiaries that are guarantors under our credit facility have guaranteed the Operating Partnership’s obligations under the notes.

In August 2007, we repaid a $13.1 million mortgage loan with a maturity date of September 2007.

In December 2007, we repaid an $8.7 million mortgage loan with an effective maturity date of August 2009, incurring a loss on early extinguishment of debt of $0.8 million.

Operating Performance Indicators . The following performance indicators are commonly used in the hotel industry:


•

occupancy;


•

average daily rate, or ADR;


•

revenue per available room, or RevPAR, which is the product of occupancy and ADR, but does not include food and beverage revenue, or other operating revenue;


•

comparable RevPAR growth, which we define as the change in RevPAR generated by hotels we owned as of the end of the reporting period, but excluding those hotels that experienced material and prolonged business interruption due to renovations, re-branding or property damage during either the current or preceding calendar year. For hotels that were not owned for the entirety of the comparison periods, comparable RevPAR is calculated using RevPAR generated during periods of prior ownership. We refer to this subset of our hotels used to calculate comparable RevPAR growth as our “Comparable Portfolio”;


•

hotel operating margin, which is the product of total operating income divided by total revenues;


•

comparable hotel operating margin, which is the operating margin of our Comparable Portfolio; and


•

operating leverage, which is the product of incremental operating income divided by incremental revenues.

Revenues. Substantially all of our revenues are derived from the operation of our hotels. Specifically, our revenues consist of the following:


•

Room revenues , which is the product of the number of rooms sold and the ADR;


•

Food and beverage revenues , which is comprised of revenues realized in the hotel food and beverage outlets as well as banquet and catering events; and


•

Other operating revenues , which include ancillary hotel revenue such as performance guaranties and other items primarily driven by occupancy such as telephone, transportation, parking, spa, entertainment and other guest services. Additionally, this category includes operating revenue from our two commercial laundry facilities located in Rochester, Minnesota and Salt Lake City, Utah. Prior to December 2007, this category also included operating revenue from BuyEfficient, LLC As described above, in December 2007 we entered into a joint venture agreement with Strategic and sold a 50% interest in BuyEfficient, LLC to Strategic. Going forward, in accordance with the equity method of accounting, our 50% share of BuyEfficient, LLC’s earnings will now be shown on the line item equity in earnings (losses) of unconsolidated joint ventures. Due to our continued investment in BuyEfficient, LLC, no amounts have been reclassified to discontinued operations.

Expenses. Our expenses consist of the following:


•

Room expense , which is primarily driven by occupancy and, therefore, has a significant correlation with room revenue;


•

Food and beverage expense , which is primarily driven by food and beverage sales and banquet and catering bookings and, therefore, has a significant correlation with food and beverage revenue;


•

Other operating expense , which includes the corresponding expense of other operating revenue, advertising and promotion, repairs and maintenance, utilities, and franchise fees;


•

Property general and administrative expense , which includes our property-level general and administrative expenses, such as payroll and related costs, professional fees, travel expenses, and management fees;


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Property tax, ground lease and insurance expense , which includes the expenses associated with property tax, ground lease and insurance payments, each of which is primarily a fixed expense;


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Corporate overhead expense, which includes our corporate-level expenses such as payroll and related costs, amortization of deferred stock compensation, professional fees, travel expenses and office rent; and


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Depreciation and amortization expense , which includes depreciation on our hotel buildings, improvements, furniture, fixtures and equipment.

Other Revenue and Expense. Other revenue and expense consists of the following:


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Equity in earnings (losses) of unconsolidated joint ventures , which includes our portion of earnings or losses from our joint ventures;

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Interest and other income, which includes interest we have earned on our restricted and unrestricted cash accounts as well as any gains or losses we have recognized on sales of assets other than hotels;


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Interest expense, which includes interest expense incurred on our outstanding debt, amortization of deferred financing fees, prepayment penalties and costs associated with early extinguishment of debt; and


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Preferred stock dividends and accretion, which includes dividends earned on our Series A and Series C preferred stock and redemption value accretion on our Series C preferred stock

Most categories of variable operating expenses, such as utilities and certain labor costs, such as housekeeping, fluctuate with changes in occupancy. Increases in RevPAR attributable to improvements in occupancy are accompanied by increases in corresponding categories of variable operating costs and expenses. Increases in RevPAR attributable to improvements in ADR typically result in more limited increases in operating costs and expenses, primarily credit card commissions and management and franchise fees. Thus, changes in ADR generally have a more significant effect on our operating margins than changes in occupancy.

We continually work with our operators to improve our operating leverage, which generally refers to our ability to retain incremental revenue as profit by minimizing incremental operating expenses. There are, however, limits to how much our operators can accomplish in this regard without affecting the competitiveness of our hotels and our guests’ experiences at our hotels. Furthermore, our hotels operate with significant fixed costs, such as general and administrative expense, insurance, property taxes, and other expenses associated with owning hotels that our operators cannot necessarily control. For example, we have experienced increases in hourly wages, employee benefits (especially health insurance) and utility costs, which negatively affected our operating margin. Our historical performance may not be indicative of future results, and our future results may be worse than our historical performance.

Revenues. Total revenue for the year ended December 31, 2007 was $1.1 billion as compared to $855.3 million for the year ended December 31, 2006 and $541.7 million for the year ended December 31, 2005. Total revenue for 2007 included room revenue of $688.9 million, food and beverage revenue of $289.7 million, and other revenue of $78.2 million. Total revenue for 2006 included room revenue of $549.8 million, food and beverage revenue of $228.3 million, and other revenue of $77.1 million. Total revenue for 2005 included room revenue of $343.7 million, food and beverage revenue of $147.7 million, and other revenue of $50.4 million.

Included in the following tables are comparisons of the key operating metrics for our hotel portfolio for the years ended December 31, 2007, 2006 and 2005. The comparisons do not include the results of operations for the seven hotels sold in 2007, the 15 hotels sold during 2006, and the three hotels sold during 2005. Because 16 of our hotels owned as of December 31, 2007 were acquired during 2005, 2006 and 2007, the key operating metrics for the total hotel portfolio and the comparable hotel portfolio reflect the results of operations of those seven hotels under previous ownership for either a portion of or the years ended December 31, 2007, 2006 and 2005.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Factors Affecting Our Results of Operations

Acquisitions . In January 2007, we acquired the 499-room LAX Renaissance hotel located in Los Angeles, California for approximately $65.2 million and retained Marriott as manager. The acquisition was initially funded through a draw on our credit facility, which we ultimately repaid with a portion of the proceeds we received in June 2007 from the sale of six hotel properties.

In March 2007, we acquired the 402-room Marriott Long Wharf hotel located in Boston, Massachusetts for approximately $228.5 million and retained Marriott as manager. In connection with this acquisition we obtained a $176.0 million mortgage loan with a maturity date of April 2017 and a fixed interest rate of 5.58%. The balance of the purchase price was funded through a draw on our credit facility, which we ultimately repaid with a portion of the proceeds we received in June 2007 from the sale of six hotel properties. Subsequent to this acquisition, we added an additional 10 rooms at this hotel, increasing the room count to 412.

In May 2007, we acquired the 464-room Marriott Boston Quincy hotel located in Quincy, Massachusetts for approximately $117.0 million and retained Marriott as manager. The acquisition was funded primarily through the settlement of a forward sale agreement with an affiliate of Citigroup Global Markets, Inc. as the forward counterparty (the “Forward Sale Agreement”), with the balance funded through a draw on our credit facility, which we ultimately repaid with a portion of the proceeds we received in June 2007 from the sale of six hotel properties.

Investments in unconsolidated joint ventures . In December 2006, we entered into a joint venture agreement with Whitehall Street Global Real Estate Limited Partnership 2005 and Highgate Holdings to acquire the 460-room Doubletree Guest Suites Hotel Times Square located in New York City, New York. Our total initial investment in the joint venture was approximately $68.5 million. Our total initial investment was funded entirely from cash on hand and was comprised of two parts: (i) a $28.5 million mezzanine loan, which bore an interest rate of 8.5% on a face value of $30.0 million and (ii) a $40.0 million equity investment representing a 38% ownership interest in the joint venture. In April 2007, we sold the $28.5 million mezzanine loan for net proceeds of $29.0 million. The total debt of the joint venture is $300.0 million, including the $30.0 million mezzanine loan.

In December 2007, we entered into a joint venture agreement with Strategic Hotels & Resorts, Inc. (“Strategic”), to own and operate BuyEfficient, LLC (“BuyEfficient”), an electronic purchasing platform that allows members to procure food, operating supplies, furniture, fixtures and equipment. Under the terms of the agreement, Strategic acquired a 50% interest in BuyEfficient from us for $6.3 million. As part of this transaction, we recognized a gain on sale of $6.1 million, and contributed $0.3 million to the new joint venture with Strategic. Prior to this sale, all of BuyEfficient’s revenue and expenses were reflected on the appropriate line of our income statements. After this sale, our 50% interest in BuyEfficient is reflected on our balance sheet as investments in unconsolidated joint ventures, and on our income statements as equity in net losses of unconsolidated joint ventures.

Dispositions . In May 2008, we sold the Hyatt Regency Century Plaza for net proceeds of $358.8 million, and a net gain of $42.1 million. The net proceeds from this sale are currently presented on our balance sheets as cash proceeds held by accommodator. In July 2008 upon the expiration of the exchange asset identification period, we used a portion of the net proceeds to repay our credit facility, which had been used to fund our repurchase of 7,374,179 shares of our common stock for $129.0 million, (excluding fees and costs) in a modified “Dutch Auction” tender offer (the “Tender Offer”). We continue to analyze alternatives for the reinvestment of the net proceeds, which, depending on market conditions, may include hotel acquisitions, debt repayments, stock repurchases, a special dividend to stockholders, or other types of investments. Consistent with our strategic plan, we continue to evaluate the potential divestiture of a significant portfolio of non-core hotels, which may be completed as a portfolio sale, single asset sales, or not at all, depending on market conditions.

Renovations . During the first quarter of 2008, we invested $31.8 million in capital improvements. During the second quarter of 2008, we invested an additional $27.9 million in capital improvements for a total of $59.7 million during the first half of 2008.

Indebtedness . During the first quarter of 2007, we drew down $138.0 million of our $200.0 million credit facility to fund our purchases of the Renaissance LAX and the Marriott Long Wharf, and to fund other working capital requirements. We drew down an additional $27.0 million of the credit facility during the second quarter of 2007 in connection with the acquisition of the Marriott Boston Quincy, and for other working capital requirements. We repaid $24.0 million of the credit facility in April 2007, and repaid the remaining balance in June 2007, using proceeds we received from the sale of six hotel properties. During the first quarter of 2008, we drew down $12.0 million of the credit facility to fund our working capital requirements. We repaid the entire $12.0 million in March 2008. During the second quarter of 2008, we drew down $28.0 million of the credit facility to fund our working capital requirements. We repaid $8.0 million of this draw in April 2008, $16.5 million in May 2008 and the remaining $3.5 million in June 2008. As of June 30, 2008, we had no outstanding indebtedness under our credit facility, and had $5.3 million outstanding irrevocable letters of credit backed by the credit facility, leaving, as of that date, up to $194.7 million available under the credit facility.

In March 2007, we obtained a $176.0 million mortgage loan with a maturity date of April 2017 and a fixed interest rate of 5.58% in connection with the acquisition of the Marriott Long Wharf. In addition, in April 2007, we amended one of our mortgage loans to eliminate amortization and to provide for partial collateral releases, so long as we continue to meet certain loan covenants until the maturity date in May 2011, at which time the outstanding loan balance of $248.2 million will be due and payable. We also repaid a $175.0 million mortgage loan in June 2007, which had a maturity date of December 2014. In connection with this repayment, we incurred prepayment penalties of $0.4 million.

In June 2007, the Operating Partnership issued an aggregate $250.0 million of exchangeable senior notes with a maturity date of July 2027 and an interest rate of 4.60%. Interest on the notes is payable semi-annually in arrears on January 15 and July 15 of each year, beginning January 15, 2008. The notes, subject to specified events and other conditions, are exchangeable into, at our option, cash, our common stock, or a combination of cash and our common stock. The initial exchange rate for each $1,000 principal amount of notes was 28.9855 shares of our common stock, representing an exchange price of approximately $34.50 per common share. The exchange rate is subject to adjustment under certain circumstances, and was adjusted as a result of the Tender Offer to 29.8137. The Operating Partnership does not have the right to redeem the notes, except to preserve our REIT status, before January 20, 2013, and may redeem the notes, in whole or in part, thereafter at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest. Upon specified change in control events as well as specified dates, holders of the notes may require the Operating Partnership to repurchase their notes, in whole or in part, for cash equal to 100% of the principal amount of the notes to be repurchased, plus any accrued and unpaid interest. The notes are the senior unsecured obligations of the Operating Partnership. We and all of our subsidiaries that are guarantors under our credit facility guaranty or will guaranty the Operating Partnership’s obligations under the notes.

In August 2007, we repaid a $13.1 million mortgage loan with a maturity date of September 2007.

In December 2007, we repaid an $8.7 million mortgage loan with an effective maturity date of August 2009, incurring a loss on early extinguishment of debt of $0.8 million, which was partially offset by a write-off of $0.5 million in loan premium.

Operating Performance Indicators . The following performance indicators are commonly used in the hotel industry:


•

occupancy ;


•

average daily rate , or ADR;


•

revenue per available room , or RevPAR, which is the product of occupancy and ADR, but does not include food and beverage revenue, or other operating revenue;

•

comparable RevPAR growth , which we define as the change in RevPAR generated by hotels we owned as of the end of the reporting period, but excluding those hotels that experienced material and prolonged business interruption due to renovations, re-branding or property damage during either the current or preceding calendar year. For hotels that were not owned for the entirety of the comparison periods, comparable RevPAR is calculated using RevPAR generated during periods of prior ownership. We refer to this subset of our hotels used to calculate comparable RevPAR growth as our “Comparable Portfolio”; and


•

operating flow through , which is the quotient of incremental operating income divided by incremental revenues.

Revenues. Substantially all of our revenues are derived from the operation of our hotels. Specifically, our revenues consist of the following:


•

Room revenues , which is the product of the number of rooms sold and the ADR;


•

Food and beverage revenues , which is comprised of revenues realized in the hotel food and beverage outlets as well as banquet and catering events; and


•

Other operating revenues , which include ancillary hotel revenue from items primarily driven by occupancy such as telephone, transportation, parking, spa, entertainment and other guest services. Additionally, this category includes, among other things, operating revenue from our two commercial laundry facilities located in Rochester, Minnesota and Salt Lake City, Utah, as well as hotel space leased by third parties. Prior to December 2007, this category also included operating revenue from BuyEfficient. As described above, in December 2007 we entered into a joint venture agreement with Strategic and sold a 50% interest in BuyEfficient to Strategic. In accordance with the equity method of accounting, our 50% share of BuyEfficient’s earnings is now reflected in our income statements as equity in net losses of unconsolidated joint ventures. Due to our continued investment in BuyEfficient, no amounts have been reclassified to discontinued operations.

Expenses. Our expenses consist of the following:


•

Room expense, which is primarily driven by occupancy and, therefore, has a significant correlation with room revenue;


•

Food and beverage expense, which is primarily driven by food and beverage sales and banquet and catering bookings and, therefore, has a significant correlation with food and beverage revenue;


•

Other operating expense , which includes the corresponding expense of other operating revenue, advertising and promotion, repairs and maintenance, utilities, and franchise fees;


•

Property general and administrative expense , which includes our property-level general and administrative expenses, such as payroll and related costs, professional fees, travel expenses and management fees;


•

Property tax, ground lease and insurance expense , which includes the expenses associated with property tax, ground lease and insurance payments, each of which is primarily a fixed expense;


•

Corporate overhead expense , which includes our corporate-level expenses such as payroll and related costs, amortization of deferred stock compensation, professional fees, travel expenses and office rent; and


•

Depreciation and amortization expense , which includes depreciation on our hotel buildings, improvements, furniture, fixtures and equipment.

Other Revenue and Expense. Other revenue and expense consists of the following:


•

Equity in net losses of unconsolidated joint ventures , which includes our portion of net losses from our joint ventures;


•

Interest and other income , which includes interest we have earned on our restricted and unrestricted cash accounts, as well as interest we have earned on the net proceeds we received from the sale of the Hyatt Regency Century Plaza which, as of June 30, 2008, were held by an accommodator to facilitate a potential acquisition. In addition, interest and other income includes any gains or losses we have recognized on sales of assets other than hotels;


•

Interest expense , which includes interest expense incurred on our outstanding debt, amortization of deferred financing fees, prepayment penalties and costs associated with early extinguishment of debt; and


•

Preferred stock dividends and accretion , which includes dividends earned on our Series A and Series C preferred stock and redemption value accretion on our Series C preferred stock.

Most categories of variable operating expenses, such as utilities and certain labor costs, such as housekeeping, fluctuate with changes in occupancy. Increases in RevPAR attributable to improvements in occupancy are accompanied by increases in corresponding categories of variable operating costs and expenses. Increases in RevPAR attributable to improvements in ADR typically result in more limited increases in operating costs and expenses, primarily credit card commissions and management and franchise fees. Thus, changes in ADR generally have a more significant effect on our operating margins than changes in occupancy.

We continually work with our operators to improve our operating flow through, which generally refers to our ability to retain incremental revenue as profit by minimizing incremental operating expenses. There are, however, limits to how much our operators can accomplish in this regard without affecting the competitiveness of our hotels and our guests’ experiences at our hotels. Furthermore, our hotels operate with significant fixed costs, such as general and administrative expense, insurance, property taxes, and other expenses associated with owning hotels that our operators cannot necessarily control. For example, we have experienced increases in hourly wages, employee benefits (especially health insurance), and utility costs, which negatively affected our operating margin. Our historical performance may not be indicative of future results, and our future results may be worse than our historical performance.

Operating Results

The following tables present the unaudited operating results for our total portfolio for the three and six months ended June 30, 2008 and 2007, including the amount and percentage change in the results between the periods. Our total portfolio represents the results of operations included in the consolidated income statements, and includes 44 hotels (14,894 rooms) as of June 30, 2008 and 2007. The results of operations for the hotel that was sold in 2008 are included in income from discontinued operations for the three and six months ended June 30, 2008. The results of operations for the hotel that was sold in 2008 and the seven hotels that were sold in 2007 are included in income from discontinued operations for the three and six months ended June 30, 2007.

CONF CALL

Bryan Giglia

Thank you. Good afternoon, everyone, and thank you for joining us today. By now you should have received a copy of the corresponding press release. If you do not yet have a copy, you can access it on the investor relations tab of our website at www.sunstonehotels.com.

Before we begin this conference, I'd like to remind everyone that this call contains forward-looking statements that are subject to risks and uncertainties, including those contained in our prospectuses, 10-Ks, 10-Qs, and other filings with the SEC, which could cause actual results to differ materially from those projected. We caution you to consider those matters in evaluating our forward-looking statements.

We also note that this call contains non-GAAP financial information, including EBITDA, adjusted EBITDA, FFO, adjusted FFO and hotel operating margins. We are providing that information as a supplement to information prepared in accordance with Generally Accepted Accounting Principles. Explanations of such non-GAAP items and reconciliations to net income are contained in our earnings release that we issued earlier today.

With us today are Bob Alter, Executive Chairman, and Ken Cruse, Chief Financial Officer. Bob will go over the highlights from the quarter and provide a status update on the CEO search. Ken will provide an in-depth review of the quarter and discuss our capital structure and credit ratios, as well as second quarter and updated full-year guidance. Following the remarks, the team will be available to answer questions.

To begin management's discussion, I would like to turn the call over to Bob. Bob, please go ahead.

Bob Alter

Thank you, Brian. Good afternoon, everyone, and welcome to the Sunstone Hotel Investors first quarter earnings conference call. As many of you know, on March 4, I was appointed as interim CEO to fill the vacancy created by Steve Goldman's departure, and on March 14, the Board formed a search committee to provide for a replacement CEO. That search has gone forward, and I will give you more progress on that as the call progresses.

As you know, it's been over a year since I've been on one of these earnings calls, and as much as I enjoy these calls, I don't expect this to become a recurring event. I will provide an update, as I said, later on this call.

Let's review the recent quarter. Our team continues to execute on Sunstone's business plan and we are pleased with our portfolio's performance during the quarter. With our hotels posting positive year-over-year growth in total portfolio RevPAR and hotel operating margins. We continue to get strong lift from the $275 million renovation program we completed last year, as our renovated hotels continue to ramp up.

The hotels we renovated in 2006 and 2007 continue to deliver strong year-over-year RevPAR growth, and it can take over two years for a hotel to stabilize after a major renovation. The Hyatt Regency Century Plaza and the Fairmont Newport Beach are two examples of hotels where we completed renovations in 2006 and which continued to produce double digit RevPAR growth during the first quarter.

Adjusted EBITDA during the quarter was $61 million, up slightly from last year, and adjusted FFO per share was flat to last year at $0.48. The first quarter 2008 total hotel portfolio RevPAR increased by 3.1%, driven by a 4.8% increase in ADR, which was offset by 120 basis points decline in occupancy. The result was slightly above the midpoint of our range, and compares favorably to total U.S. upper up scale RevPAR, which increased 0.9 in quarter one, according to Smith Travel Research.

Comparable portfolio RevPAR, excluding the Renaissance Baltimore and the Renaissance Orlando, our two non-comparable hotels from the previous period, they both experienced material and prolonged business interruption during 2007. They increased 1.6%; also well above the U.S. upper up scale average.

Both total and comparable RevPAR were negatively impacted by recently completed renovations at Marriott Boston Long Wharf. The renovation, which was commenced during the fourth quarter of 2007 and was completed this March, did not cause sufficient displacement to qualify the hotel as non-comparable. That said, total and comparable hotel RevPAR would have been 100 basis points higher had we excluded that hotel.

On the acquisitions front, we continue to analyze potential deals, but have not seen anything compelling opportunities at this time. That said, the markets are dynamic, and we will continue to evaluate potential investments and be ready to act when the time is right. We continue to look to improve the overall quality of our portfolio and target asset dispositions on a case by case basis.

With respect to supply trends, we continue to keep a close eye on San Diego and Baltimore, as both markets are currently assimilating new supply. We do believe that the prolonged dislocation of the credits markets will delay future supply growth, especially in the high barrier to entry urban markets, where the majority of our earnings are generated.

Our continued focus in 2008 is to maximize the performance of our portfolio. To this end, the asset management team has identified considerable cost reductions throughout our portfolio. Our asset management team continues to work closely with our third party operators to ensure that appropriate cost management measures have been taken, and that the hotels continue their focus and their sales efforts in revenue management strategy to maximize the hotel's top line performance.

We remain cautious about 2008 and are closely monitoring our bookings for the balance of the year. While our transient demand is softening, our other segments, especially group, remain strong. Group pace continues to be strong, up approximately 6% in revenue versus this time last year. We will have more clarity over the coming months, but in the interim, we will continue to execute on our plan and run our business to maximize the long term value to our shareholders.

Before I turn the call over to Ken, let me update you on our CEO search process. The search committee has been working diligently and has had a list, an initial field of 20 potential candidates. We've reduced that down to a smaller group, have interviewed a significant number of people, and are now evaluating our final few choices. We expect to have an announcement very shortly on a new CEO for the company.

With that, I'd like to turn the call over to Ken to take you through additional details on the quarter, and to review our capital structure, credit ratios, as well as second quarter and updated full year guidance.

Ken Cruse

Thanks Bob, and good afternoon, everyone, and thank you for joining us today. First, let me spend a few minutes drilling down on our RevPAR performance during the first quarter. As Bob said, total RevPAR was up 3.1% for the quarter, and comparable RevPAR was up 1.6%. Both of which were significantly above the U.S. upper upscale average according to Smith Travel.

Our California properties generated 3.5% growth in comparable RevPAR during the quarter. Total Los Angeles and Orange County area hotels posted an impressive 9% RevPAR increase over Q1 2007, while our San Diego hotels continue to struggle with a 7.9% RevPAR decline in Q1. This decline was primarily due to the lobby renovation in the W hotel, and bathroom renovation at our Holiday Inn San Diego downtown, as well as new luxury supply in the San Diego market. San Diego citywide's are expected to pick up, beginning in Q2, and we would expect the demand trends to improve as a result.

During the quarter, we wrote yet another page in our Rochester, Minnesota, success story, as the portfolio continues to realize double digit RevPAR growth, driven in part by increased demand for our high end hotel within a hotel, known as the International at the Kahler Grand. We are currently converting 40 regular rooms within the Kahler Grand into 19 international rooms. We expect to have these new luxury rooms online in the fourth quarter.

Going forward, we may consider the conversion of additional regular rooms into international rooms, as well as other highest and best used conversions within the approximately one million square feet of building area comprising the Kahler Grand property. Our middle Atlantic region was flat for the quarter. Our Marriott Boston Long Wharf was responsible for much of the underperformance in the middle Atlantic region, as renovation displacement and seasonal market softness impacted this hotel.

RevPAR at our D.C. properties was also down by about 4%, primarily due to a shift in group business from Q1 to Q3 of 2008, and typical election year softness in that market. On the positive side, our New York hotels posted double digit RevPAR growth for the quarter. Our 2007 renovation hotels have begun to ramp-up.

In Q1, RevPAR in Orlando was up over 30% to the prior year, and although Baltimore has not performed as well as Orlando in terms of absolute RevPAR increase, considering the Baltimore Comp Set RevPAR was down 14% in Q1, while our hotel was up slightly, relative to the set, our hotel significantly out-performed.

Comparable hotel operating margins for the quarter decreased 30 basis points, slightly better than we had anticipated due to successful cost containment measures developed by our asset management team and implemented by our managers. For example, we've introduced operational efficiencies at our Renaissance Orlando by permanently eliminating 11 manager positions from a pool of 64 managers, which represent a 17% reduction in manager head count, and meaningful permanent cost reductions at this hotel. We've also made across the board reductions in overtime costs at the majority of our hotels.

We continue to benefit from the lowest management fee structure among lodging REIT’s. Our management fee expenses, including incentive management fees, were 7.4 million in the quarter, or approximately 3% of gross revenues, which compares very favorably to our lodging RevPAR.

We ended the quarter with $1.7 billion of debt, 100% of which is fixed at an average rate of just 5.5%, or approximately 100 to 150 basis points below current market rate. The average term to maturity of our debt is seven years, assuming we redeem our 4.6% exchangeable notes on the first call date. While we continue to keep a close watch on any potential business effects of the ongoing tightness in the credit markets from a capital needs perspective, we believe we are well covered.

We have no significant debt maturities until 2010 and no immediate need for external financing. We have 12 hotels that are unencumbered of debt, including the Hyatt Regency Century Plaza, the Fairmont Newport Beach and the Marriott Boston Quincy, and these assets provide a means to access significant amount of mortgage capital, should the need arise. Finally, with a $200 million credit facility, which bears an interest rate of just LIBOR plus 90 basis points, and $70 million of cash on hand, we ended the quarter at a very strong liquidity position.

During the quarter we repurchased approximately 734,000 shares of our common stock at an average price of $16.11 or a discount of nearly 20% to our current market price for a total cost of $11.1 million. Our $150 million share repurchase authorization has approximately $138 million remaining for the balance of the year.

We will evaluate repurchasing our common stock, along with prepaying any existing debt and acquiring new hotels as a use for excess cash flow from operations, and/or any proceeds from potential asset sale. As a general rule, we will look to maintain significant financial flexibility in order to take advantage of opportunities as they arrive.

As for our credit ratios, we ended the quarter with pro forma net debt to EBITDA of approximately 5.5 times, which is within our long-term target of 5.0 to 5.5 times, and we ended the quarter with pro forma fixed charge coverage ratio of approximately 2.0 times, which is at our long term target level. We expect to see additional improvement in our credit ratios as our hotel operations improve and as we amortize our outstanding debt balance.

Based on our current forecasts, our common dividend pay outs will be below 70% of our cash available for distribution, or CAD. Going forward, we will continue to evaluate our dividend level and stock repurchase policies with an aim to maximize the return to our shareholders.

On to guidance. I want to point out that guidance we are providing at this time is based on the expected performance of our existing portfolio. Our guidance does not assume any additional acquisitions, dispositions, debt repayments or stock repurchases. Also, our Q2 and full year 2008 guidance reflect our current projections, which are based on the assumption of limited growth in the U.S. economy. Our expected results are subject to change as a result of, among other things, a decline in the U.S. GDP, which we would expect to negatively impact actual results.

As full detail on the guidance can be found on our earnings release, I'll just walk you through the high points at this point. For the second quarter, we expect total and comparable RevPAR to increase between 4% and 6% over the second quarter in 2007 and we expect both total hotel portfolio and comparable portfolio operating margins in the second quarter to be up approximately 50 to 100 basis points, as compared to the second quarter of 2007.

For the full year, we are maintaining our prior guidance for both total and comparable RevPAR, which we expect to increase between 2% and 5% over the year 2007. We are also maintaining our margin guidance as we continue to expect both total and comparable hotel portfolio operating margins to range between negative 25 basis points and positive 50 basis points over 2007, depending on revenue growth.

As a result of our stronger than expected Q1 performance and share repurchases, we are increasing the bottom end of our adjusted EBITDA guide and are increasing both the bottom and top end of our adjusted FFO guidance. We now expect full year adjusted EBITDA to be approximately $310 million to $323.5 million, and adjusted FFO per share to be approximately $2.93 to $3.14. This represents an increase of $0.05 on the bottom end and $0.02 on the top.

To wrap up my comments, I would like to say that we are very pleased with our performance during the first quarter of 2008. In spite of challenges in the economy and changes in our CEO suite, we have continued to execute on our plan. Through this continued focus we believe that we have positioned the company to produce solid results this year and beyond.

Thank you very much for your time today and for your continued interest in Sunstone. I'll now turn the call back over to Bob.

Bob Alter

Thanks, Ken. Even in these uncertain economic times, we believe the lodging sector is fundamentally sound and we remain focused on execution and improving our effectiveness at maximizing the value of our assets. We own a geographically diverse portfolio of high institutional quality from primarily upper upscale hotels. 80% of our EBITDA comes from our top 30 hotels in major markets. The implementation of increased levels of discipline and accountability has begun to bear fruit as our first quarter results demonstrate.

We will continue to focus on our core competencies as we drive internal growth, while evaluating acquisition opportunities that will enhance our earnings, thereby allowing us to build long term shareholder value. Historically, the greatest opportunities are found during this phase of the cycle, and we have positioned the company well to take advantage of these opportunities as they arise. We appreciate your time today as well as your continued support of Sunstone. I am very proud of what this team has accomplished to date and look forward to talking to you again in the coming months. Thank you.

With that, I'd like to open up the call to questions. Operator, please go ahead.

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