1、sunstone hotel investors,inc.*903calle amanecer,suite 100*san clemente,ca 92673*949 369 4000YOURIDEALDESTINATION2006 ANNUAL REPORTA TRAVEL GUIDE TO SUNSTONE HOTELSSunstone Hotel Investors,Inc.*WINNING BRANDS*MAJOR MARKETS*STYLISH RENOVATIONS*WORLD CLASS MANAGEMENTSunstone Hotel Investors,Inc.Your Id
2、eal Destination2006Annual Report*SHI01 Covers.cgla:Layout 1 3/11/07 6:30 PM Page 1Corporate Information 55BOARD OF DIRECTORSlewis n.wolffChairmanWolff Urban Development,LLCrobert a.alterChief Executive OfficerSunstone Hotel Investors,Inc.z.jamie beharManaging DirectorGeneral Motors InvestmentManagem
3、ent Corporationanthony w.donaPartner,Thackeray Partnerskeith p.russellPresident,Russell Financial,Inc.thomas a.lewis jr.Chief Executive OfficerRealty Income Corporationkeith m.lockerChief Executive Officerand President,Inlet Capital,LLCEXECUTIVE OFFICERSrobert a.alterChief Executive Officerjon d.kli
4、nePresidentgary a.stougaardExecutive Vice President&Chief Investment Officerkenneth e.cruseSenior Vice President&Chief Financial OfficerANNUAL MEETING OFSTOCKHOLDERSThe Annual Meeting will be held at 1:00 P.M.on May 1,2007 at:Long Beach Renaissance111 East Ocean BlvdLong Beach,CA 90802TRANSFER AGENT
5、american stock transfer&trust co.59 Maiden LaneNew York,NY 10038(800)937-5449STOCK LISTINGCommon Stock of the Company is traded on the New York Stock Exchange under the symbol“SHO”.Series A Preferred Stock of the Company is traded on the New YorkStockExchange under the symbol“SHO PR A”INDEPENDENT AU
6、DITORSErnst&Young LLPFORM10-K AND OTHERMATERIALSA copy of the Companys Annual Report on From 10-K as filed with the Securities and Exchange Commission is available free of charge to its stockholders.Such requests should be made to:INVESTOR RELATIONSSunstone Hotel Investors,Inc.903 Calle Amanecer,Sui
7、te 100San Clemente,CA 92673-6212(949)369- CEO AND CFOCERTIFICATIONSIn 2006,the Company Chief ExecutiveOfficer(CEO)provided to the NewYork Stock Exchange the annual CEOcertification regarding the Companyscompliance with the New York StockExchanges corporate governance listing standards.In addition,al
8、l requiredcertifications by the Companys CEOand Chief Financial Officer regarding the quality of the Companys public disclosures in its fiscal 2006 reports wereincluded in the Companys filings with theU.S.Securities and Exchange Commission.CORPORATE INFORMATIONDESIGN/MCNULTY&COMPANY,THOUSAND OAKS,CA
9、EDITORIAL/RICHARD HUVARD,CAMARILLO,CAPHOTOGRAPHY/JENNIFER ROCHOLL,ORANGE COUNTY,CAPRINTING/COLORGRAPHICS,ORANGE COUNTY,CASunstone Hotel Investors.Inc.FROM SUNNY SOUTHERN CALIFORNIA TO THEHEART OF TIMES SQUARE,SUNSTONE TRULY IS THEIDEAL DESTINATION FOR EVERY INVESTOR.WITHACCOMODATIONS LIKE THESE,WERE
10、 CERTAINYOUWILL ENJOY YOUR STAY.2004200520066.18%6.00%5.77%247289324200420052006weighted avg.int.rateavg.rooms per hotelSHI01 Covers.cgla.r1:Layout 1 3/15/07 8:38 PM Page 22006 Annual Report2006highlights*Comparable RevPARgrowth of 8.7%*13.7%FFOper share growth*50.6%Adjusted EBITDAgrowth*5 high qual
11、ity acquisitions(including JVpartnerships)*15non core assets sold*$139.4million spent on asset improvements$77.66$84.22$105.11$489.61$651.10$749.20200420052006200420052006revparrevenueFront Desk in the lobby of the San Diego W HotelSHI01_AR2006.cgla.r1:SHI01 AR2006 3/15/07 8:32 PM Page 1FileName:631
12、1.01.p1.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3d?PORTLANDLAKE OSWEGOEUGENESALT LAKE CITYSACRAMENTOPARK CITYPROVOLOS ANGELES/MANHATTAN BEACH/NEWPORT BEACH/CERRITOSRIVERSIDE/ONTARIOSAN DIEGO/DELMARNAPAOXNARD Napa Valley Marriott Sacramento Hawthorn Suites Sacramento Residence Inn
13、-So.Natomas Oxnard Courtyard by Marriott Oxnard Residence Inn Century Plaza Hyatt Regency Cerritos Sheraton at Towne Center Long Beach Renaissance Los Angeles Courtyard by Marriott-LAX Los Angeles Renaissance-LAX Manhattan Beach Residence Inn by Marriott Newport Beach Fairmont Newport Beach Hyatt Re
14、gency Ontario Airport Marriott Riverside Courtyard by Marriott Riverside Marriott Del Mar Hilton Del Mar Marriott La Jolla Embassy Suites Hotel San Diego Courtyard by Marriott-Old Town San Diego Holiday Inn-Downtown San Diego Holiday Inn Express San Diego W Hotel Portland Marriott Lake Oswego Hilton
15、 Garden Inn Eugene Valley River Inn Salt Lake City Marriott-University Park Salt Lake City Sheraton City Centre Park City Marriott Provo Marriott&Conference Center overviewof sunstone hotelskey to iconsRoom CountAttractionsMarket RevPAR RatingUnique HistoryAAA RatingHotel Service AwardHotel Features
16、Annual EventsSunstones Renaissance Harborplace Hotel on Baltimores historic Inner Harboryour ideal homeport in the heart of“Charm City”.SHI01_AR2006.cgla:SHI01 AR2006 3/11/07 3:37 PM Page 2FileName:6311.02.p1.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3dMINNEAPOLISROCHESTERGRAND RAP
17、IDSTROYNEW YORKPHILADELPHIABALTIMOREVIENNADISTRICT OF COLUMBIAWHITE PLAINSCHICAGOATLANTAMELVILLEHOUSTONORLANDO Houston Marriott Houston Wyndham-Greenspoint Minneapolis Doubletree Rochester Kahler Grand Rochester Kahler Inn&Suites Rochester Marriott Rochester Residence Inn Chicago Embassy Suites Gran
18、d Rapids Crowne Plaza Troy Marriott Huntington Hilton-Long Island NY Hilton-Times Square NY Doubletree Suites-Times Square Westchester Renaissance Philadelphia Marriott Baltimore Renaissance-Harbor Place Washington DC Renaissance Tysons Corner Marriott Atlanta Hyatt Regency Suites Atlanta Renaissanc
19、e-Concourse Orlando RenaissanceSunstones Long Beach Renaissance amid a revived downtownpart of the greater renaissance that has swept this vibrant coastal community.SHI01_AR2006.cgla:SHI01 AR2006 3/11/07 3:46 PM Page 3FileName:6311.03.p1.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3d
20、Sunstone Hotel Investors.Inc.its the sense of arrival you experience upon entering the lobby,thatsudden awareness that this is a hotel unlike any other.and yet,theres more here than meets the eye.youll find some of the bestupper-upscale hotels,in some of the most exclusive,high-barrier markets,gener
21、ating some of the highest average daily rates andstrongest revpar performance in the business.sunstone isyour ideal investment destination.feature destinationsThe Presidents Sports Bar,a sophisticatedspot to enjoy a drink or casualAmerican grill cuisine.Elegantly appointed guest roomspromise the per
22、fect respite for eitherthe business or pleasure traveler.in a city rich in american history and teemingwith museum treasures,sunstones currentrenovation of the washington dc renaissancehas created a lodging destination that ishistorical in its own right.TheWashington DC Renaissance was notthe only l
23、ocal treasure to undergorestoration,the area surrounding thehotel has recently seen over$6 billionin new construction.As a result,in the last threeyears,profits have doubled and the hotel has becomeone of the most successful properties in theRenaissance brand and Sunstone Portfolio.washington,dc ren
24、aissance 999 Ninth Street nw Washington,dc 20001*Washington,DC RenaissanceMeetings&ConventionMagazines Gold Key AwardCorporate Incentive Travelmagazines Award of ExcellenceTop 10Annual GridironDinner,featuringThe President,Vice President,First Ladyand Washington Press Corp3 DiamondsWhite HouseUS Cap
25、itolNational MallMuseums807SHI01_AR2006.cgla.r1:SHI01 AR2006 3/15/07 1:02 PM Page 4FileName:6311.04.p1.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3dFeature Destinations 5newport beach just the name conjuresimages of stunning waterfront properties,magnificent yachts cruising its fame
26、dpleasure harbor,and some of southern Californias most affluent,designer shopping destinations.The NewportBeach Fairmont just its name conjures images of regal marbledentries,tony guests lounging around itsheated sky pool,and some of Southern Californiasmost elegant,most luxurious guest suites.TheNe
27、wport Beach Fairmont is,in fact,the citys onlyluxury branded hoteland having just completedan extensive makeover totalling more than$30million,its certain to remain an unrivaled luxuryfor that corporate retreat,business meeting or justthat leisurely getaway with family and friends.2006 Annual Report
28、Legendary Southern California styleand hospitality are on display themoment you step inside the Fairmontscompletely renovated lobby.Newport BeachFairmontMeetings&ConventionMagazines Gold Key AwardCorporate Incentive Travelmagazines Award of ExcellenceTop 10Newport BeachBoat Parade Taste of NewportSk
29、y Deck PoolFairmont Gold Lounge Presidential SuitesNewport Harbor Newport&Laguna Beaches Balboa Island So.Coast Plaza Fashion Island John WayneAirport444newport beach fairmont4500 MacArthur Boulevard,Newport Beach,ca 92660*SHI01_AR2006.cgla:SHI01 AR2006 3/11/07 3:36 PM Page 5FileName:6311.05.p1.pdf0
30、7-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3dits been nearly three decades since thepride of baltimorea classic 1812-era top-sail schoonerwas re-launched,helpingto revitalize Baltimores famed InnerHarbor.The citys historic water-front has become a model of urbanrebirth with the Baltimor
31、eRenaissance Harborplace Hotel inthe center of it all.From the National Aquariumand Oriole Park at Camden Yard to Fells PointHistoric District and shopping at the upscaleGallery Mall,the Baltimore RenaissanceHarborplace Hotel is your perfect homeport in theheart of Charm City.And with major renovati
32、onsscheduled for completion in 2007,youll be able toset sail in total comfort without ever leaving land.This standard guest room view ofBaltimores historic Inner Harbor isanything but standard.baltimore renaissance harborplace 202 East Pratt Street,Baltimore,md 21202*Sunstone Hotel Investors.Inc.Bal
33、timore RenaissanceHarborplaceAttached toBaltimores Gallery MallTop 10The PreaknessStakesThe BaltimoreMarathonThe Volvo Ocean Race4 DiamondsBaltimore HarborCamden YardsNational Aquarium622Grand Opening Gala,a benefit for the Pride ofBaltimore IISHI01_AR2006.cgla:SHI01 AR2006 3/11/07 3:33 PM Page 6Fil
34、eName:6311.06.p1.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3dSan Diego W HotelWorlds 100 Sexiest Hotels Conde Nast Gold ListTop 5Part of the hotel isbuilt within the historic“OldColumbia Square”buildingRooftop“Beach Bar”Petco ParkBalboa ParkGaslamp DistrictSan Diego Zoo2592006 Annu
35、al ReportLocated in the Columbia District ofdowntown San Diego,adjacent thepremier dining,shopping and enter-tainment of the historic GaslampQuarter,the San Diego W Hotel is anurban retreat in“Americas FinestCity”.The greatest“wow factor”of anyvisit to San Diego can be experiencedfirst hand at the S
36、an Diego WHotelfrom the incredible luxury ofits 1,200 square-foot“Wow Suites”totheir remarkable rooftop“BeachBar”,an urban oasis where you canwarm your soul beneath the starry skywhile warming your soles on a floorof heated sand.Named one of the 100sexiest hotels in the world for the 2ndconsecutive
37、year,theres truly littlemore that can be said about thisworld-class hotel other than wow.Wow!No other exclamation sosimply and succinctly says it allwhen it comes to the San Diego W!w hotel san diego421West B.Street,San Diego,ca 92101*SHI01_AR2006.cgla:SHI01 AR2006 3/11/07 3:34 PM Page 7FileName:631
38、1.07.p1.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3dchristened“la jolla”or the jewelby thespaniards,this exclusive enclave on thesouthern california coast is home to world-class beaches,world-class golf attorrey pines(site of the 2008 u.s.open)andthe world-class Scripps Institute o
39、f Oceanography.Its called the Golden Triangle and ideally situated within it all is the Embassy SuitesHotel.Here,the beauty and tranquility ofthe natural surroundings are reflected inthe hotels 12-story tropical atrium andspectacular koi pond.The$10 milliondollar renovation program scheduled for com
40、-pletion in 2007,reflects Sunstones commitment toremake this all-suite luxury hotel into a gleamingjewel in its own right.la jolla embassy suites hotel4550 La Jolla Village Drive,San Diego,ca 92122*A tropical oasis beneath a 12-storyatrium,the hotels lobby breathes newlife into guests as they relax
41、amid lushfoliage and exotic flowers.Newly renovated,spacious two-roomsuites are the standard for every guestat La Jollas finest all-suite property.Sunstone Hotel Investors.Inc.La Jolla Embassy Suites HotelSuccessful Meetingsmagazines Pinnacle AwardMeetings&ConventionMagazines Gold Key AwardCorporate
42、 Incentive Travelmagazines Award of ExcellenceTop 5Buick Invitational at Torrey Pines Golf CourseMarine Corps“Top Gun”Annual Air Show3 DiamondsHistoric Koi PondHelipadScripps Instituteof OceanographySteven BirchAquarium&MuseumSalk InstituteUCSD335SHI01_AR2006.cgla.r1:SHI01 AR2006 3/15/07 1:03 PM Pag
43、e 8FileName:6311.08.p1.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3dorlando renaissance6677 Sea Harbor Drive,Orlando,ca 32821*“it is not location,location,location.it is market,market,market.”robert alter,sunstone chief executive officer.why simply vacation at seaworldorlando when y
44、ou can dive into aworld of luxury at the orlandorenaissance resort at seaworld?Here,beneath one of the worlds largest atriums,youre not only steps awayfrom SeaWorld but convenientlyclose to the rest of Orlando and central Floridas vacation destinationsincluding the Walt Disney WorldTheme Parks,Unive
45、rsal Studiosand the Kennedy Space Center.Your stay here may well be the mostthrilling adventure of your vacation.Orlando Renaissance2006 Annual ReportSuccessful Meetingsmagazines Pinnacle AwardMeetings&ConventionMagazines Gold Key AwardCorporate Incentive Travelmagazines Award of ExcellenceTop 204 D
46、iamondsSeaworldAdventure ParkWalt Disney WorldTheme ParksDiscovery CoveEpcotUniversal Studios778Mist,the Orlando Renaissances latesthot spot,is set to descend upon thehotel this spring where sushi and martiniswill be exquisitely served up amid thebeauty of saltwater aquariums andthe bars eclectic mo
47、dern design.SHI01_AR2006.cgla.r1:SHI01 AR2006 3/15/07 1:04 PM Page 9FileName:6311.09.p1.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3dSunstone Hotel Investors.Inc.between the glitz and glamour of l.a.andthe suburban chic of the o.c.,lies the longbeach renaissance.long beach has enjoy
48、edquite a renaissance of its ownhome tothe Queen Mary and the Aquarium of the Pacific among other attractions.Meanwhile,located in the revitalizedheart of the city,the Long BeachRenaissance is undergoing a transfor-mation of its own.Now,next to taking the checkered flag at theToyota Grand Prix of Lo
49、ng Beach,a stay at theLong Beach Renaissance is your surest way to experience the winners circle.A chic,casual elegance permeates everyone of the hotels newly renovatedguest rooms.long beach renaissance111 East Ocean Boulevard,Long Beach,ca 90802*Long BeachRenaissance Toyota Grand Prix of Long Beach
50、 Long BeachMarathon Long Beach Jazz FestivalTop 10Scene Location for 1994 Meg Ryan&Andy Garcia Film,“When a Man Loves AWoman”Queen MaryAquarium of the Pacific Long BeachConvention CenterThe Pike Cruise Terminal374SHI01_AR2006.cgla:SHI01 AR2006 3/11/07 3:30 PM Page 10FileName:6311.10.p1.pdf07-05-01 1
51、2:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3dwith more than$23 million spent on renovations in 2006,the century plazahyatt regency is once again set to star asthe“Worlds Most Beautiful Hotel”a title it initially earned upon its 1966 debut.Since thattime,the gleaming 19-story landmarkbuilt onthe
52、site of the 20th CenturyFox movie ranchhasplayed host to every U.S.President from LyndonJohnson to Bill Clinton.Here,Nixon hosted a dinnerin honor of the Apollo XI astronauts.During theReagan years,the Century Plaza assumed the titlerole“Western White House”.Now more than ever,this venerable star on
53、 L.A.s Westside is the place tosee and be seen.century plaza hyatt regency 2025 Avenue of the Stars,Los Angeles,ca 90067*Total escape from the hustle and bustle of L.A.can be found around theCentury Plazas beautiful pools.Voted“Best gym in America”by FitnessMagazine,Equinox Fitness Clubs comesto the
54、 Century Plaza in 2007!Feature Destinations 11Century PlazaHyatt Regency2006 Annual ReportSuccessful Meetingsmagazines Pinnacle AwardMeetings&ConventionMagazines Gold Key AwardCorporate Incentive Travelmagazines Award of ExcellenceTop 10L.A.s only groundlevel,privateentrance RegencyClub Lounge4 Diam
55、ondsReagans“WesternWhite House”DGA Awards Writers GuildAwards Women in FilmRodeo Drive&Beverly HillsThe Getty MuseumUCLA723SHI01_AR2006.cgla:SHI01 AR2006 3/11/07 3:31 PM Page 11FileName:6311.11.p1.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3dSunstone Hotel Investors.Inc.12 To Our Sh
56、areholdersto our shareholders*2006 proved to be another year of significant evolution for Sunstone Hotel Investors,Inc.Our mission is clear to be a leading owner of high-quality hotels committed to maximizing shareholder value through disciplined acquisitions,selective dispositions,aggressive asset
57、management,targeted capital investments and a balanced capital structure.We have successfully executed that mission.portfolio management Throughout 2006,we refined the portfolio compositionby acquiring five high-quality hotels with strong upside potential in top-performingmarkets and selling fifteen
58、 of our smaller,non-core hotels.Our five acquisitionstotaled more than$547 million and increased our presence within mid-town NewYork City and the greater San Diego market.Both the San Diego and New York markets produced great results in 2006 and are projected to generate strong growthin 2007 and be
59、yond.We sold fifteen hotels in 2006 for proceeds of$175 million.The sales reduced our exposure to slower-growth markets and locations withpotential supply additions.Our forward focus will remain consistent,as evidencedby the acquisition of the 499 room Los Angeles International Airport Renaissancein
60、 January 2007.aggressive asset management Sunstone continually looks past conventionalwisdom for creative approaches to raise the revenue bar at each one of our hotels.Under the leadership of Marc Hoffman,who joined us from Marriott Internationalin the summer of 2006,we will continue to strengthen o
61、ur asset management capabilities and drive incremental value from each of our hotels.Using the CenturyPlaza Hyatt Regency as an example,we renegotiated our workers compensationplan,sought a competitive energy contract,contracted with a third party to run theEquinox spa,and revamped our parking contr
62、act to provide the hotel with almost$3.7 million per year in combined savings and added cash flow.targeted capital investments Our hotel renovation program was a top priority in 2006 and will continue to be in 2007.With more than$139 millionspent in 2006,the quality and design of the finished produc
63、ts have been first-rate,and I fully expect these renovations to generate significant returns for usin the coming years.The renovation highlights in 2006 include the completion ofthe Newport Beach Fairmont,Century Plaza Hyatt Regency and TysonsCorner Marriott.I am looking forward to completing the re
64、novations of theOrlando,Baltimore and Long Beach Renaissance Hotels,the New York Hilton-Times Square,and La Jolla Embassy Suites in 2007.balanced capital structure We have continued to follow a disciplinedapproach to our balance sheet.We finished the year with 100%of our debtfixed at an average inte
65、rest rate of 5.8%and average term of approximately nineyears.Our balance sheet will continue to provide us with the capacity and flexibility needed to facilitate the Companys long term growth objectives.the lodging industry In 2006 the lodging industry was in the early stages ofa broad-based recover
66、y.In 2007 I believe the industry fundamentals remainstrong,especially in many of the major metropolitan markets where we have anestablished presence.These markets will have limited supply additions over theSHI01_AR2006.cgla.r1:SHI01 AR2006 3/15/07 4:25 PM Page 12FileName:6311.12.p1.pdf07-05-01 12:55
67、:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3dTo Our Shareholders 13near term and continued strong demand growth.These factors combined willprovide significant opportunities to drive earnings growth throughout 2007 andinto 2008.Sunstone continues to focus on positioning our portfolio to capitalizeon
68、the opportunities afforded by these favorable industry fundamentals.looking forward Sunstone has experienced significant growth over the pasttwo years-evolving into a prominent acquirer and owner of high-qualityhotels.In continuing Sunstones evolution in 2007 and beyond,I am pleasedto introduce to y
69、ou my successor,Steven Goldman,as Chief ExecutiveOfficer.Steven joined Sunstone from Global Hyatt Corporation in March ofthis year.His proven leadership,experience and industry relationships willcomplement the established senior management team and lead Sunstone intoits next stage of evolution.I wou
70、ld like to personally thank our shareholders and other supporters.We continue to shape Sunstone Hotel Investors,Inc.to be“Your Ideal Destination”.Sincerely,Robert A.AlterChief Executive Officer2006 Annual ReportSHI01_AR2006.cgla.r1:SHI01 AR2006 3/15/07 4:26 PM Page 13FileName:6311.13.p1.pdf07-05-01
71、12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3dSunstone Hotel Investors.Inc.14 Table of ContentsSelected Financial Data15Managements Discussion and Analysis of Financial Condition and Results of Operations 16Report of Independent Registered Public Accounting Firm27Consolidated Balance Sheets28Con
72、solidated and Combined Statements of Operations29Consolidated and Combined Statements of Stockholders and Members Equity30Consolidated and Combined Statements of Cash Flows33Notes to Consolidated and Combined Financial Statements34Report of Independent Registered Public Accounting Firm53Market for R
73、egistrants Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities54Corporate Information55financial information *SHI01_AR2006.cgla:SHI01 AR2006 3/11/07 3:28 PM Page 14FileName:6311.14.p1.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3d2006 Annual ReportSele
74、cted Financial Data 15The following table sets forth selected financial information for the Company and its predecessor companies,or the Predecessor,that has been derived from the consolidated and combined financial statements and notes.This information should be read inconjunction with“Managements
75、Discussion and Analysis of Financial Condition and Results of Operations”and our consoli-dated and combined financial statements and related notes included elsewhere in this Annual Report.The CompanyThe PredecessorPeriod PeriodYear EndedYear EndedOctober 26 toJanuary 1 toYear EndedYear EndedDecember
76、 31,December 31,December 31,October 25,December 31,December 31,200620052004200420032001($in thousands)operating data:Revenues:Room$589,572$381,217$44,707$236,005$252,650$135,636Food and beverage234,337152,96819,75480,43293,46236,097Other operating79,14752,2937,15533,55333,43218,522Management and oth
77、er fees from affiliates4688705194Total revenues903,056586,47871,620350,678380,249190,449Operating expenses:Room131,57285,01610,63650,54058,32330,015Food and beverage167,116107,19113,36755,25565,57526,156Other operating39,53230,2144,74322,46023,15312,334Advertising and promotion51,10337,6504,56420,65
78、323,58611,218Repairs and maintenance36,78424,5973,33914,31816,8907,672Utilities34,91424,0093,13714,08415,4888,109Franchise costs33,93021,7763,10816,94717,9779,753Property tax,ground lease and insurance55,36631,1684,02218,47323,9729,307Property general and administrative102,88266,0148,88528,88130,175
79、12,508Corporate overhead19,04614,4907,17623,21425,18719,599Depreciation and amortization96,28564,6129,32940,75144,33626,038Impairment loss1,2455,9114,855Total operating expenses768,530506,73772,306306,821350,573177,564Operating income(loss)134,52679,741(686)43,85729,67612,885Equity in earnings of un
80、consolidated joint venture140Interest and other income4,2083,0791545607852,080Interest expense(96,109)(56,881)(16,253)(38,785)(46,980)(22,351)Income(loss)before minority interest,income taxes,and discontinued operations42,76525,939(16,785)5,632(16,519)(7,386)Minority interest(1,761)2,706125(17)Incom
81、e tax benefit2712,9494,834Income(loss)from continuing operations42,76524,178(14,079)6,028(13,587)(2,552)Income(loss)from discontinued operations10,4726,027(3,818)(24,231)(8,679)(7,834)Net income(loss)53,23730,205$(17,897)$(18,203)$(22,266)$(10,386)Preferred stock dividends and accretion(19,616)(10,9
82、73)Income available to common stockholders$33,621$19,232Net income(loss)per common share$0.59$0.47$(0.54)Cash flows provided by(used in)operating activities$163,104$113,403$(236)$33,064$60,034$26,720balance sheet data:Investment in hotel properties,net$2,477,514$2,054,001$1,127,272$1,227,537$1,316,6
83、59Total assets2,760,3732,249,1891,253,7451,364,9421,145,889Total debt1,499,8281,181,178712,461917,652942,423Total liabilities1,623,2941,290,164791,5831,033,9931,047,147Equity1,037,783859,929417,332330,345398,742common stock/membershipunit information:Common stock outstanding57,77552,19134,519Members
84、hip units outstanding3,700Unvested restricted stock issuable(1)409298293Total diluted common stock,membership units and unvestedrestricted stock units outstanding58,18452,48938,512(1)Shares of common stock issuable related to unvested restricted stock units.SELECTED FINANCIAL DATASHI01_Financials.cg
85、la:SHI01 Financials 3/11/07 3:13 PM Page 15FileName:6311.Fin.p15.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3dSunstone Hotel Investors.Inc.16 Managements Discussion and AnalysisWe own primarily luxury,upper upscale and upscale hotels in the United States operated under leading brand
86、 names franchised or licensed from others,such as Marriott,Hilton,Hyatt,Fairmont,and Starwood.OPERATIONSOur financial data prior to October 26,2004 is for our predecessor companies,or the Predecessor,who owned and operatedthe hotels during the periods presented.In conjunction with our initial public
87、 offering,we made substantial changes to ouroperations to effect certain formation and structuring transactions and to qualify and elect to be treated as a real estate investment trust,or REIT,under the Internal Revenue Code of 1986,as amended,or the Code.As a result,our historical results of operat
88、ions prior to October 26,2004 are not indicative of our current or future results of operations.Formation and structuring transactions and our initial public offering.As a result of our initial public offering and the relatedformation and structuring transactions,the following items affect the compa
89、rability of our results from and after October 26,2004,and our results prior to that date:the payment of management fees to the Management Company which assumed responsibility for our hotel operations atthe majority of our hotels pursuant to the management agreements with us;the reduction of corpora
90、te general and administrative costs as a result of the transfer of employees to the ManagementCompany;the reflection of a minority interest to give effect to the interests in Sunstone Hotel Partnership owned by the predecessorcompanies(which subsequently were converted into shares of our common stoc
91、k);the exclusion of two hotels that were not contributed to us;the reduction in interest expense as a result of the repayment of some of our notes payable;the reduction in ground lease expense reflecting the acquisition of the ground lessors interest in the land under the Embassy Suites Hotel,Chicag
92、o,Illinois;and the incremental costs associated with operating as a public company.REIT structure.For us to qualify as a REIT,our income cannot be derived from our operation of hotels.Therefore,consistentwith the provisions of the Code,Sunstone Hotel Partnership and its subsidiaries have leased our
93、hotel properties to the TRSLessee,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
94、person unrelated to us and the TRS Lessee.Sunstone Hotel Partnership and the TRS Lessee are consolidated into our financial statements for accounting purposes.Since we control both Sunstone Hotel Partnership and our TRS Lessee,our principal source of funds on a consolidated basis are from the perfor
95、mance of our hotels.The earnings of the TRS Lessee are subject to taxation like other C corporations,which reduce our operating results,fundsfrom operations and the cash otherwise available for distribution to our stockholders.FACTORS AFFECTING OUR RESULTS OF OPERATIONSRevenues.Substantially all of
96、our revenues are derived from the operation of our hotels.Specifically,our revenues consist ofthe following:Room revenue,which is primarily driven by occupancy and average daily rate;Food and beverage revenue,which is primarily driven by occupancy and banquet/catering bookings;Other operating revenu
97、e,which consists of ancillary hotel revenue such as performance guarantees 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 facilitie
98、s located in Rochester,Minnesota and Salt Lake City,Utah and our electronic purchasing platform,Buy Efficient,L.L.C.;and Management and other fees from affiliates,which consists of other non-operating income and management and other fees from our affiliates prior to our initial public offering.The f
99、ollowing 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,other operating revenue or management and other fees from affiliat
100、es.Operating costs and expenses.Our operating costs and 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 c
101、atering bookings and,therefore,has a significant correlation with food and beverage revenue;MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONSSHI01_Financials.cgla:SHI01 Financials 3/11/07 3:13 PM Page 16FileName:6311.Fin.p16.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374
102、ba84e8b3ea0509cef0d3d2006 Annual ReportManagements Discussion and Analysis 17 Other operating expense,which consists of the corresponding expense of other operating revenue,advertising and promotion,repairs and maintenance,utilities,and franchise fees and assessments categories;Property tax,ground l
103、ease and insurance expense,which consists of the expenses associated with property tax,groundlease and insurance payments,each of which are primarily fixed expenses;Property general and administrative expense,which consists of our property-level general and administrative expenses,such aspayroll and
104、 related costs,professional fees,and travel expenses,as well as management fees with respect to our hotels;Corporate overhead expense,which consists of our corporate-level expenses such as payroll and related costs,amortizationof deferred stock compensation,professional fees,travel expenses and offi
105、ce rent;and Depreciation and amortization expense,which consists of depreciation on our hotel buildings,improvements,furniture,fixtures and equipment.Most categories of variable operating expenses,such as utilities and certain labor costs,such as housekeeping,fluctuate withchanges in occupancy.Incre
106、ases in RevPAR attributable to improvements in occupancy are accompanied by increases in most categories of variable operating costs and expenses.Increases in RevPAR attributable to improvements in ADR typicallyonly result in increases in limited categories of operating costs and expenses,primarily
107、credit card commissions,franchise feesand franchise assessments.Thus,improvements in ADR have a more significant impact on improving our operating marginsthan occupancy.We continually work with our operators to improve our operating leverage,which generally refers to the ability to translaterevenues
108、 into profits by limiting variable costs.Notwithstanding our efforts to reduce variable costs,there are limits to howmuch our operators can accomplish in that regard without affecting the competitiveness of our hotels and our guests experiencesat our hotels.Furthermore,we have significant fixed cost
109、s,such as depreciation and amortization,insurance,principal and interest payments on our debt,and other expenses associated with owning hotels that do not necessarily decrease when circumstances such as market factors cause a reduction in our hotel revenue.For example,we have experienced increases i
110、nwages,employee benefits(especially health insurance)and utility costs,which negatively affected our operating margin.Additionally,recent increases in property insurance costs will negatively impact our margins over the next year.Our historicalperformance may not be indicative of future results,and
111、our future results may be worse than our historical performance.acquisition,sale and major redevelopment activity Our results during the periods discussed have been,and our future results will be,affected by our acquisition,sale and redevelopment activity during the applicable period.Acquisition of
112、hotels.The following table sets forth the hotels that we,or our Predecessor,acquired or developed from the beginning of 2004 through December 31,2006,and indicates their room count and acquisition date:Hotel RoomsAcquisition Date 2006W Hotel,San Diego,California259June 26,2006Embassy Suites,La Jolla
113、,California335May 17,2006Hilton Times Square,New York City,New York444March 17,2006Del Mar Marriott,San Diego,California284January 10,20062005Hyatt Regency Century Plaza,Los Angeles,California728October 5,2005Fairmont Hotel,Newport Beach,California444July 11,2005Sheraton Hotel,Cerritos,California203
114、June 27,2005Renaissance Orlando Resort at Sea World,Orlando,Florida(1)780June 23,2005Renaissance Harborplace,Baltimore,Maryland622June 23,2005Renaissance Concourse,Atlanta,Georgia387June 23,2005Renaissance Long Beach,Long Beach,California373June 23,2005Renaissance Westchester,White Plains,New York35
115、7June 23,2005Renaissance Washington,D.C.,Washington D.C.807June 23,2005(2)2004Residence Inn by Marriott,Rochester,Minnesota80June 18,2004(3)JW Marriott,Cherry Creek,Colorado(4)196April 28,2004(3)Total January 1,2004 to December 31,20066,299(1)Acquired 85%ownership interest.(2)Acquired 25%ownership i
116、nterest on June 23,2005,and the remaining 75%interest July 13,2005.(3)Opening date of developed hotel.(4)Following our initial public offering,this hotel is not a part of our hotel portfolio.The aggregate cost for these 15 hotel acquisitions was approximately$1.5 billion,or$244,000 per room.SHI01_Fi
117、nancials.cgla:SHI01 Financials 3/11/07 3:13 PM Page 17FileName:6311.Fin.p17.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3dSunstone Hotel Investors.Inc.18 Managements Discussion and AnalysisInvestment in unconsolidated joint venture.On December 28,2006,we entered into a joint venture
118、agreement with WhitehallStreet Global Real Estate Limited Partnership 2005 and Highgate Holdings to acquire the 460-room Doubletree Guest SuitesHotel located in New York City for approximately$68.5 million.Our$68.5 million investment was funded entirely from cash on hand and is comprised of two part
119、s:(i)a$28.5 million mezzanine loan,which bears 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.Acquisition of hotels since December 31,2006.On January 4,2007,we acquired the 499-room LAX Renaiss
120、ance hotel located in Los Angeles,California for approximately$65.0 million,or approximately$130,000 per room,and retained Marriott International as manager.Sale of hotels.The following table sets forth the hotels that we,or our Predecessor,sold from the beginning of 2004 throughDecember 31,2006,and
121、 indicates their room count and sale date:Hotel RoomsSale Date 2006Holiday Inn,Rochester,Minnesota170December 21,2006Courtyard by Marriott,Fresno,California116September 13,2006Courtyard by Marriott,Lynnwood,Washington164September 13,2006Courtyard by Marriott,Santa Fe,New Mexico213September 13,2006Cr
122、owne Plaza,Englewood,New Jersey194September 13,2006Crowne Plaza,Williamsburg,Virginia303September 13,2006Hawthorn Suites,Kent,Washington152September 13,2006Holiday Inn,Boise,Idaho265September 13,2006Holiday Inn,Craig,Colorado152September 13,2006Holiday Inn,Price,Utah151September 13,2006Holiday Inn,R
123、enton,Washington226September 13,2006Holiday Inn,San Diego(Stadium),California175September 13,2006Marriott,Ogden,Utah292September 13,2006Marriott,Pueblo,Colorado164September 13,2006Holiday Inn,Hollywood,California160March 15,20062005Holiday Inn,Provo,Utah78December 22,2005Doubletree,Carson,California
124、224April 14,2005Holiday Inn,Mesa,Arizona246April 14,20052004San Marcos Resort,Chandler,Arizona295November 18,2004Holiday Inn,Flagstaff,Arizona156November 10,2004Concord Hotel and Conference Center,Concord,California324September 30,2004Four PointsSheraton,Silverthorne,Colorado160August 27,2004Holiday
125、 Inn,Anchorage,Alaska247May 27,2004Holiday Inn,La Mirada,California292May 18,2004Hawthorn Suites,Anaheim,California129April 15,2004Total January 1,2004 to December 31,20065,048The aggregate net sale proceeds for the 25 closed hotel dispositions through December 31,2006 was$252.1 million,or$50,000 pe
126、r room.The results of operations of all of the hotels identified above and the gains or losses on dispositions throughDecember 31,2006 are included in discontinued operations for all periods presented through the time of sale.The proceedsfrom the sales are included in our cash flows from investing a
127、ctivities for the respective periods.SHI01_Financials.cgla:SHI01 Financials 3/11/07 3:13 PM Page 18FileName:6311.Fin.p18.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3d2006 Annual ReportManagements Discussion and Analysis 19The following table summarizes our portfolio and room data(in
128、cluding that of our Predecessor)from the beginning of 2004through December 31,2006,adjusted for the hotels acquired and sold during the respective periods.200620052004 portfolio datahotelsNumber of hotelsbeginning of period605461Add:Acquisitions49Add:Developments2(1)Less:Sales(15)(3)(7)Less:Assets n
129、ot included(2Number of hotelsend of period496054portfolio dataroomsNumber of roomsbeginning of period17,33313,18314,901Add:Acquisitions1,3224,701Add:Developments276(1)Add:Room expansions20Less:Sales(2,897)(548)(1,603)Less:Rooms converted to other usage(3)Less:Assets not included(411Number of roomsen
130、d of period15,75817,33313,183Average rooms per hotelend of period322289244(1)Reflects the opening of the Residence Inn by Marriott,Rochester,Minnesota and the acquisition of the JW Marriott,Cherry Creek,Colorado.(2)Reflects the exclusion of the JW Marriott,Cherry Creek,Colorado(196 rooms)and the Emb
131、assy Suites Hotel,Los Angeles,California(215 rooms)that were not contributed in connection with our initial public offering.OPERATING RESULTSThe following table presents our operating results for 2006 and 2005,including the amount and percentage change in the results between the two periods.These pe
132、riod amounts can be found in our consolidated and combined financial statementsand related notes included elsewhere in this Annual Report.20062005Change$Change%(dollars in thousands,except statistical data)revenuesRoom$589,572$381,217$208,35554.7Food and beverage234,337152,96881,36953.2Other operati
133、ng79,14752,29326,85451.4Total revenues903,056586,478316,57854.0operating expensesHotel operating550,317361,621188,69652.2Property general and administrative102,88266,01436,86855.8Corporate overhead19,04614,4904,55631.4Depreciation and amortization96,28564,61231,67349.0Total operating expenses768,530
134、506,737261,79351.7operating income134,52679,74154,78568.7Equity in earnings of unconsolidated joint venture140 140100.0Interest and other income4,2083,0791,12936.7Interest expense(96,109)(56,881)(39,228)(69.9)income before minority interestand discontinued operations42,76525,93916,82664.9Minority in
135、terest(1,761)1,761100.0income from continuing operations42,76524,17818,58776.9Income from discontinued operations10,4726,0274,44573.8net income53,23730,205$23,03276.3Preferred stock dividends and accretion(19,616)(10,973)income available to common stockholders$33,621$19,232operating statisticsOccupa
136、ncy(1)74.4%73.4%Average daily rate(1)$141.28$131.70$9.587.3RevPAR(1)$105.11$96.67$8.448.7(1)Operating statistics are based on 45 hotels that we owned as of December 31,2006,and exclude four hotels undergoing rebranding and renovation programs(Hyatt Regency Century Plaza,Renaissance Orlando,Marriott
137、Tysons Corner,and Embassy Suites La Jolla).)(2)(2)%SHI01_Financials.cgla:SHI01 Financials 3/11/07 3:13 PM Page 19FileName:6311.Fin.p19.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3dSunstone Hotel Investors.Inc.20 Managements Discussion and AnalysisThe following table presents our ope
138、rating results for 2005 and 2004,including the amount and percentage change in the results between the two periods.The operating results for 2004 have been derived by combining the Predecessor results for theperiod of January 1,2004 through October 25,2004,and our results for the period October 26,2
139、004 through December 31,2004.These period amounts can be found in our consolidated and combined financial statements and related notes includedelsewhere in this Annual Report.20052004Change$Change%(dollars in thousands,except statistical data)revenuesRoom$381,217$280,712$100,50535.8Food and beverage
140、152,968100,18652,78252.7Other operating52,29340,70811,58528.5Management and other fees from affiliates692(692)(100.0)Total revenues586,478422,298164,18038.9operating expensesHotel operating361,621259,646101,97539.3Property general and administrative66,01437,76628,24874.8Corporate overhead14,49030,39
141、0(15,900)(52.3)Depreciation and amortization64,61250,08014,53229.0Impairment loss1,245(1,245)(100.0)Total operating expenses506,737379,127127,61033.7operating income79,74143,17136,57084.7Interest and other income3,0797142,365331.2Interest expense(56,881)(55,038)(1,843)(3.3)income(loss)before minorit
142、y interest,income taxes and discontinued operations25,939(11,153)37,092332.6Minority interest(1,761)2,831(4,592)(162.2)Income tax benefit271(271)(100.0)income(loss)from continuing operations24,178(8,051)32,229400.3Income(loss)from discontinued operations6,027(28,049)34,076121.5net income(loss)30,205
143、$(36,100)$66,305183.7Preferred stock dividends and accretion(10,973)income available to common stockholders$19,232operating statisticsOccupancy(1)73.4%72.0%Average daily rate(1)$131.70$103.99$27.7126.6RevPAR(1)$96.67$74.87$21.8029.1(1)Operating statistics are based on 45 hotels that we owned as of D
144、ecember 31,2006,and exclude 4 hotels undergoing rebranding and renovation programs(Hyatt Regency CenturyPlaza,Renaissance Orlando,Marriott Tysons Corner,and Embassy Suites La Jolla).2004 amounts do not include prior ownership data.Room revenue.Room revenue increased$208.4 million,or 54.7%,for the ye
145、ar ended December 31,2006 as compared to theyear ended December 31,2005.We have acquired 13 hotels subsequent to January 1,2005:W Hotel San Diego,EmbassySuites La Jolla,Hilton Times Square,Del Mar Marriott,Hyatt Regency Century Plaza,Fairmont Newport Beach,SheratonHotel Cerritos,Renaissance Orlando,
146、Renaissance Harborplace,Renaissance Concourse,Renaissance Long Beach,RenaissanceWestchester and Renaissance Washington D.C.(which we refer to as the“thirteen hotels”).The thirteen hotels contributed$184.4 million to room revenue during 2006.In addition,growth in the hotels we acquired prior to Decem
147、ber 31,2004(which we refer to as our“existing portfolio”)contributed$24.0 million to room revenue during 2006 due to increases inboth occupancy($2.7 million)and ADR($21.3 million).Room revenue increased$100.5 million,or 35.8%for the year ended December 31,2005 as compared to the year ended December
148、31,2004.We acquired ten hotels during the period from January 1,2004 to January 1,2006:Rochester ResidenceInn,Renaissance Orlando,Renaissance Harborplace,Renaissance Concourse,Renaissance Long Beach,Renaissance Westchester,Renaissance Washington D.C.,Sheraton Hotel Cerritos,Fairmont Newport Beach,an
149、d Hyatt Regency Century Plaza(whichwe refer to as the“ten hotels”).The ten hotels contributed$84.7 million to room revenue during 2005.In addition,growth in our existing portfolio contributed$26.5 million to room revenue during 2005 due to increases in both occupancy($2.4million)and ADR($24.1 millio
150、n).These increases were partially offset by$10.7 million in room revenue related to propertiesthat were included in our 2004 results of operations but were not contributed to us by our Predecessor.%SHI01_Financials.cgla.r1:SHI01 Financials 3/15/07 5:30 PM Page 20FileName:6311.Fin.p20.pdf07-05-01 12:
151、55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3d2006 Annual ReportManagements Discussion and Analysis 21Food and beverage revenue.Food and beverage revenue increased$81.4 million,or 53.2%,for the year ended December 31,2006 as compared to the year ended December 31,2005.The thirteen hotels contribute
152、d$77.9 million to food and beveragerevenue during 2006.Food and beverage revenue generated from our existing portfolio increased$3.5 million during 2006 ascompared to 2005.Food and beverage revenue increased$52.8 million,or 52.7%,for the year ended December 31,2005 as compared to the yearended Decem
153、ber 31,2004.The ten hotels contributed$50.9 million to food and beverage revenue during 2005.Food andbeverage revenue generated from our existing portfolio increased$4.3 million during 2005 as compared with 2004.These increases were partially offset by$2.4 million from properties that were included
154、in our 2004 results of operations but werenot contributed to us by our Predecessor.Other operating revenue.Other operating revenue increased$26.9 million,or 51.4%,for the year ended December 31,2006 ascompared to the year ended December 31,2005.The thirteen hotels contributed$25.2 million to other o
155、perating revenueduring 2006.In addition,other operating revenue generated from our existing portfolio contributed$1.6 million during 2006 as compared to 2005.A substantial portion of our other operating revenue in 2006 resulted from a performance guarantee provided by the manager of the Hyatt Regenc
156、y Century Plaza.We used a total of$17.4 million of the$27.0 millionperformance guarantee during 2006 and$6.8 million during 2005 for a total of$24.2 million cumulatively.We expect to fullyutilize the remaining amount of this guarantee in 2007,which will result in lower other operating revenues in fu
157、ture periodsas compared to 2006 and 2005.The increases in other operating revenues from our existing portfolio during 2006 were primarilydue to increased attrition and cancellation fees collected by our hotels,combined with increased revenue generated by ourelectronic purchasing platform,Buy Efficie
158、nt,L.L.C.and by one of our laundry facilities.Other operating revenue increased$11.6 million,or 28.5%,for the year ended December 31,2005 as compared to the yearended December 31,2004.The ten hotels contributed$12.4 million to other operating revenue during 2005.This increasewas partially offset by
159、a decrease of$0.8 million from properties that were included in our 2004 results of operations but werenot contributed to us by our Predecessor.Other operating revenue generated from our existing portfolio remained relativelyconstant in 2005 as compared to 2004.Management and other fees from affilia
160、tes.No management and other fees from affiliates were generated during either the yearended December 31,2006 or the year ended December 31,2005.Management and other fees from affiliates in 2004 relate tothe Doubletree,Nashville,Tennessee and Residence Inn by Marriott,Beverly Hills,California,which a
161、re properties owned byaffiliates.Following our initial public offering,we no longer provide any services for,or receive any management or other feesfrom,these hotels.Hotel operating expenses.Hotel operating expenses,which are comprised of room,food and beverage,advertising and promotion,repairs and
162、maintenance,utilities,and other hotel operating expenses increased$188.7 million,or 52.2%,for the year endedDecember 31,2006 as compared to the year ended December 31,2005.The thirteen hotels contributed$176.3 million tohotel operating expenses during 2006.In addition,hotel operating expense in our
163、existing portfolio increased$12.4 millionduring 2006 as compared to 2005.These higher costs in our existing portfolio during 2006 were primarily the result of increases in room expense and franchise costs due to increases in occupancy and revenue,combined with increases in utilityexpense due to high
164、er energy costs,property and liability insurance due to higher insurance premiums,and property tax dueto higher tax rates as well as supplemental tax bills assessed on several of our hotels.Hotel operating expenses increased$102.0,or 39.3%,during the year ended December 31,2005 as compared to the ye
165、ar endedDecember 31,2004.The ten hotels contributed$97.1 million in other operating expenses during 2005.In addition,hotel operating expenses in our existing hotel portfolio increased$13.8 million during 2005 as compared with 2004 primarily as a result of increases in room expenses,food and beverage
166、 expenses,advertising and promotion,and franchise costs.These increaseswere partially offset by$8.9 million in hotel operating expenses from properties that were included in our 2004 results of operations but were not contributed to us by our Predecessor,as well as ground lease expense incurred in 2
167、004 but whichground lease was purchased as a part of our formation and structuring transactions in connection with our initial public offering.Property general and administrative expense.Property general and administrative expense increased$36.9 million,or 55.8%,for the year ended December 31,2006 a
168、s compared to the year ended December 31,2005.The thirteen hotels contributed$31.9million to property general and administrative expense.In addition,property general and administrative expense in our existingportfolio increased$5.0 million due to increases in management fees payable to our managemen
169、t companies,and other hotelspecific expenses,such as increased credit card commissions,associated with the overall increase in revenue.Property general and administrative expense increased$28.2 million,or 74.8%,for the year ended December 31,2005 as comparedto the year ended December 31,2004.The ten
170、 hotels contributed$18.6 million to property general and administrative expenseduring 2005.The remaining increase was due to$9.6 million in management and accounting fees payable to the ManagementCompany that were not payable in 2004 prior to our initial public offering,other hotel specific expenses
171、,such as increasedcredit card commissions and franchise fees associated with the overall increase in revenue,partially offset by properties thatwere included in our 2004 results of operations but were not contributed to us by our Predecessor.SHI01_Financials.cgla:SHI01 Financials 3/11/07 3:13 PM Pag
172、e 21FileName:6311.Fin.p21.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3dSunstone Hotel Investors.Inc.Corporate overhead expense.Corporate overhead expense increased$4.6 million,or 31.4%,during the year ended December 31,2006 as compared to the year ended December 31,2005,primarily as
173、 a result of increases in payroll and related expenses,including deferred stock compensation expense.Corporate overhead expense decreased$15.9 million,or 52.3%,during the year ended December 31,2005 as compared to theyear ended December 31 2004,primarily as a result of the decrease in salaries and w
174、ages attributable to the transfer of certainemployees to the Management Company,partially offset by the increased costs of being a public company.Depreciation and amortization expense.Depreciation and amortization expense increased$31.7 million,or 49.0%during the yearended December 31,2006 as compar
175、ed to the year ended December 31,2005.The thirteen hotels contributed$30.9 millionin depreciation and amortization expense during 2006.Depreciation and amortization expense in our existing portfolio increased by$0.8 million.Depreciation and amortization increased$14.5 million,or 29.0%,during the yea
176、r ended December 31,2005 as compared tothe year ended December 31,2004.The ten hotels contributed$15.0 million,slightly offset by properties that were includedin our 2004 results of operations but were not contributed to us by the predecessor companies.Interest expense.Interest expense increased$39.
177、2 million,or 69.9%,during the year ended December 31,2006 as compared tothe year ended December 31,2005.This increase was primarily due to greater outstanding loan balances in 2006 compared with2005,as we obtained additional loans to finance our acquisitions.As a result of new loans and refinancing
178、activities,interest expense includes an additional$30.8 million in interest incurred during the year ended December 31,2006 compared to theyear ended December 31,2005.In addition,we incurred increased amortization of deferred financing fees of$1.2 million during 2006 as compared to 2005.In connectio
179、n with our refinancing of three hotel properties during 2006,we incurred a losson early extinguishment of debt of$10.0 million related to the cost associated with the defeasance of the debt being refinanced.These increases were partially offset by a decrease of$2.8 million in prepayment penalties du
180、ring 2006 as compared to 2005.Interest expense increased$1.8 million,or 3.3%during the year ended December 31,2005 as compared to the year endedDecember 31,2004.We incurred an additional$8.7 million in interest expense during 2005 as compared with 2004 due togreater outstanding loan balances in 2005
181、 as compared with 2004,as we obtained additional loans to finance our acquisitions.This was offset by a decrease in deferred financing fees amortization of$4.0 million,a decrease in prepayment penalties of$2.4 million,and a decrease in loss on interest rate capitalization agreements of$0.5 million i
182、n 2005 as compared with 2004.Our total notes payable,including the current portion,was$1,499.8 million at December 31,2006 and$1,181.2 million atDecember 31,2005,with a weighted average interest rate per annum of approximately 5.8%at December 31,2006 and 5.9%at December 31,2005.At December 31,2006,t
183、he interest rates for all of our outstanding notes payable were fixed.Income tax benefit.As limited liability companies,the predecessor companies were pass-through entities and not liable for Federal and certain state income taxes,which were the responsibility of their respective members.However,sub
184、sidiaries ofsome of our predecessor companies were corporations that were liable for taxes on their earnings.We maintain a taxable REIT subsidiary which is liable for taxes on its earnings.The change in the tax benefit is attributable to the historical tax benefit for our predecessor companies being
185、 eliminated.Income(loss)from discontinued operations.Income(loss)from discontinued operations totaled income of$10.5 million for the yearended December 31,2006,income of$6.0 million for the year ended December 31,2005,and a loss of$28.0 million for theyear ended December 31,2004.As described under“A
186、cquisition,Sale and Major Redevelopment ActivitySale of Hotels,”we sold fifteen hotels in 2006,three hotels in 2005,and seven hotels in 2004.Consistent with Statement of Financial Account-ing Standards No.144,“Accounting for the Impairment or Disposal of Long-Lived Assets,”we have reclassified the r
187、esults ofoperations for these hotels as discontinued operations.LIQUIDITY AND CAPITAL RESOURCESHistorical.During the periods presented,our sources of cash included our operating activities,working capital,notes payable,our revolving credit facility,sales of hotel properties,contributions by the Pred
188、ecessor,and proceeds from our public and privateofferings of common and preferred stock.Our primary uses for cash were for acquisitions of hotels,capital expenditures forhotels,operating expenses,distributions to the Predecessor,repayment of notes payable and dividends on our common andpreferred sto
189、ck.Operating activities.Net cash provided by operating activities was$163.1 million for 2006 compared to$113.4 million for 2005,and$32.8 million in 2004.This increase was primarily due additional cash generated from our acquired properties and increasedcash flow generated by our existing portfolio.I
190、nvesting activities.Our cash used in investing activities fluctuates primarily based on acquisitions,sales and renovation of hotels.Net cash used in investing activities was$500.7 million in the year ended December 31,2006 compared to net cash used of22 Managements Discussion and AnalysisSHI01_Finan
191、cials.cgla:SHI01 Financials 3/11/07 3:13 PM Page 22FileName:6311.Fin.p22.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3d2006 Annual ReportManagements Discussion and Analysis 23$974.3 million in the year ended December 31,2005,and net cash used of$37.0 million in the year ended Decembe
192、r 31,2004.During 2006,we acquired four hotels for$522.2 million,including the assumption of$81.0 million in debt and a$6.5million deposit paid at the end of 2005,acquired an office building and land adjacent to one of our hotels for$4.4 million,incurred additional costs of$0.8 million related to our
193、 2005 acquisitions,and paid an$8.5 million deposit for a hotel purchasedin January 2007,for a total cash outlay of$448.4 million.In addition,in 2006,we paid cash of$68.6 million to acquire a 38%ownership interest in a joint venture to acquire an additional hotel,$139.4 million for renovations to our
194、 hotels,increased thebalance on our restricted cash replacement reserve accounts by$2.1 million,and received net proceeds of$157.7 million fromthe sale of fifteen hotels combined with the collection of additional proceeds from a hotel we sold in 2004.During 2005,we acquired nine hotels for$963.9 mil
195、lion,including the assumption of$63.1 million in debt and paid$6.5million in other deposits to be applied to 2006 acquisitions,for a total of$907.3 million.In addition,we invested$71.6 millionof capital expenditures in our hotels,increased the balance on our restricted cash replacement reserve accou
196、nts by$26.8 million,and we received net proceeds of$31.4 million from the sale of three hotels and a vacant land parcel.During 2004,we developed and acquired two hotels for$38.8 million,decreased the balance on our restricted cash replacementreserve accounts by$8.7 million and invested$65.3 million
197、of capital expenditures in our hotels.Additionally,we received netproceeds of$58.4 million from the sale of seven hotels.Financing activities.Net cash provided by financing activities was$349.1 million for the year ended December 31,2006 comparedto net cash provided of$872.4 million for the year end
198、ed December 31,2005,and net cash used of$15.8 million for the yearended December 31,2004.Net cash provided by financing activities in 2006 consisted primarily of proceeds from notespayable of$440.5 million,and net proceeds from our preferred and common stock offerings of$54.1 million and$157.7 milli
199、on,respectively,partially offset by$202.9 million of principal payments on notes payable and$10.0 million related to the cost associated with the defeasance of debt we refinanced,$86.7 million of dividends,and$3.7 million in deferred financing costs.Net cash provided by financing activities in 2005
200、consisted primarily of net proceeds from our preferred securities and primarycommon stock offerings of$216.3 million and$312.2 million,respectively,and proceeds from notes payable of$701.2 million,partially offset by$56.8 million of dividends and distributions to our stockholders and holders of memb
201、ership units in the Operating Partnership(all of which were converted to common stock in the fourth quarter of 2005),$295.6 million of principalpayments on notes payable and$4.8 million in deferred financing costs.Net cash used in financing activities in 2004 consisted primarily of$9.4 million of di
202、stributions to the Predecessor,$246.5million to purchase membership units from the Predecessors members and minority interest,$620.2 million of principal payments on notes payable,$6.5 million in payments of loan financing costs,partly offset by the proceeds from notes payable of$457.3 million,contr
203、ibutions from the Predecessor of$25.3 million and proceeds from our initial public offering,includingthe exercise of the over-allotment options of$384.1 million,net of related costs.Future.We expect our primary uses for cash to be for acquisitions of hotels,capital expenditures for hotels,operating
204、expenses,repayment of principal on our notes payable,interest expense and dividends.We expect our primary sources of cash will comefrom our operating activities,working capital,notes payable,our revolving credit facility,sale of hotel properties,and proceedsfrom our forward stock sale agreement and
205、from public and private offerings of common and preferred stock.Our ability toincur additional debt depends on a number of financial factors,including our leverage,the value of our unencumbered assetsand borrowing restrictions imposed by lenders under our existing notes payable,and our revolving cre
206、dit facility.Our abilityto raise funds through the issuance of equity securities depends on,among other things,general market conditions for hotel companies and REITs and market perceptions about us.We will continue to analyze which source of capital is most advantageous to us at any particular poin
207、t in time.However,the capital markets may not be available to us when needed on favorable terms or at all.We believe that our capital structure,including our$200.0 million revolving credit facility,proceeds available to us under ourforward sale agreement(see Note 13 to our consolidated financial sta
208、tements,Stockholders Equity Common Stock),andcash flow from operations,will provide us with sufficient liquidity to meet our current operating expenses and other expensesdirectly associated with our business for the foreseeable future,and in any event for at least the next twelve months.As of Decemb
209、er 31,2006,our revolving credit facility had no amounts outstanding,and had$11.6 million backing outstanding irrevocable letters of credit,leaving$188.4 million available at December 31,2006.We are subject to compliance with applicable credit ratios under the revolving credit facility.In January 200
210、6,we obtained a$48.0 million mortgage loan with amaturity date of January 2016 and a fixed interest rate of 5.69%.In February 2006,we refinanced two of our hotel properties,replacing a$36.9 million mortgage at a fixed interest rate of 8.25%scheduled to mature in 2008,with an eleven-year$75.0million
211、mortgage at a fixed interest rate of 5.58%,and replacing a$35.8 million mortgage at a fixed rate of 8.25%scheduled to mature in 2008,with a ten-year$34.0 million mortgage at a fixed rate of 5.66%.In March 2006,we assumed an$81.0 million fixed rate mortgage loan with a maturity date of December 2010
212、and a fixed interest rate of 5.92%.In April 2006,werefinanced one of our hotel properties,replacing a$52.9 million mortgage at a fixed interest rate of 7.5%,scheduled to maturein 2008,with a 15-year$135.0 million mortgage at a fixed interest rate of 5.95%.Also in April 2006,we repaid in full our$75.
213、0 million subordinated term loan.In May 2006,we obtained a$70.0 million mortgage loan maturing in June 2019 with aSHI01_Financials.cgla:SHI01 Financials 3/11/07 3:13 PM Page 23FileName:6311.Fin.p23.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3dSunstone Hotel Investors.Inc.fixed inter
214、est rate of 6.60%to finance a hotel acquisition.In June 2006,we obtained a$65.0 million fixed rate mortgage loanwith a maturity date of January 2018 and an interest rate of 6.14%to finance a hotel acquisition.In August 2006,we exercisedour right under the earn-out agreement for a loan on one of our
215、hotels to draw an additional$13.0 million.The terms underthe revised mortgage loan remain the same,with interest only payments at a rate of 5.30%payable until July 2008,and a maturity date in July 2016.As of December 31,2006,all of our outstanding debt has fixed interest rates.The majority of our mo
216、rtgage debt is in the formof 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.contractual obligations The fol
217、lowing table summarizes our payment obligations and commitments as of December 31,2006(in thousands):Payment due by period Less than1 to 33 to 5More thanContractual obligations Total1 yearyearsyears5 years(in thousands)Notes payable$1,499,828$23,231$33,568$353,056$1,089,973Interest obligations on no
218、tes payable694,92187,087170,163152,649285,022Operating lease obligations319,3364,8499,8608,840295,787Construction commitments26,21226,212Employment obligations2,6131,2311,382Total$2,542,910$142,610$214,973$514,545$1,670,782capital expenditures and reserve funds We believe we maintain each of our hot
219、els in good repair and condition and in conformity with applicable franchise agreements,ground leases,laws and regulations.Our capital expenditures primarily relate to the ongoing maintenance of our hotels and are budgeted in the reserve accounts described in the following paragraph.We also incur ca
220、pital expenditures following the acquisition of hotels for renovation and development.We spent$139.4 million during 2006 for renovations to our hotels.For2007,our renovation budget includes$26.2 million of contractual construction commitments.Our capital expenditures forthe twelve months following D
221、ecember 31,2006 are expected to be approximately$120.0 million to$130.0 million.All ofthese amounts are expected to be funded out of our operating cash flow and our cash and reserve accounts.If we acquire,renovate or develop additional hotels in the future,our capital expenditures will increase.Our
222、capital expenditures also fluctuatefrom year to year,since we are not required to spend the entire amount in the reserve accounts each year.With respect to our hotels that are operated under franchise agreements with major national hotel brands and for all of ourhotels subject to a first mortgage li
223、en,we are obligated to maintain a furniture,fixture and equipment,or FF&E,reserve account for future planned and emergency-related capital expenditures at these hotels.The amount funded into each of thesereserve accounts is determined pursuant to the management,franchise and loan agreements for each
224、 of the respective hotels,ranging between 4.0%and 5.0%of the respective hotels total annual revenue.As of December 31,2006,$36.6 million wasavailable in restricted cash reserves for future capital expenditures at our hotels.According to the respective loan agreements,the reserve funds are to be held
225、 by the respective lenders in a restricted cash account.off-balance sheet arrangements Our off-balance sheet arrangements consist of our ownership interest in a joint venture.For further discussion of this jointventure and its effect on our financial condition,results of operations and cash flows,se
226、e Note 6 to the Consolidated Financial Statements.seasonality The lodging business is seasonal in nature,and we experience some seasonality in our business as indicated in the table below.Revenue for hotels in tourist areas generally is substantially greater during tourist season(i.e.,second and thi
227、rd quarter)thanother times of the year.Quarterly revenue also may be adversely affected by events beyond our control,such as extremeweather conditions,terrorist attacks or alerts,SARS,airline strikes,economic factors and other considerations affecting travel.Our revenues by quarter during 2005 and 2
228、006 were as follows(dollars in thousands):FirstSecondThirdFourthQuarterQuarterQuarterQuarterrevenues2005$101,298$113,316$161,060$210,8042006$197,564$230,407$226,094$248,99124 Managements Discussion and AnalysisSHI01_Financials.cgla:SHI01 Financials 3/11/07 3:13 PM Page 24FileName:6311.Fin.p24.pdf07-
229、05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3d2006 Annual ReportManagements Discussion and Analysis 25INFLATIONInflation may affect our expenses,including,without limitation,by increasing such costs as taxes,property and casualty insurance and utilities.CRITICAL ACCOUNTING POLICIESOur disc
230、ussion and analysis of our financial condition and results of operations is based upon our consolidated and combinedfinancial statements,which have been prepared in accordance with GAAP.The preparation of these financial statements requires us to make estimates and judgments that affect the reported
231、 amounts of assets,liabilities,revenue and expenses and related disclosure of contingent assets and liabilities.We evaluate our estimates on an ongoing basis.We base our estimates on historical experience,information that is currentlyavailable to us and on various other assumptions that we believe a
232、re reasonable under the circumstances.Actual results may differ from these estimates under different assumptions or conditions.We believe the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our combined financial statements.Impair
233、ment of long-lived assets.We periodically review each property for possible impairment.Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset.If such assets are considered
234、 to be impaired,the impairment recognized is measuredby the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets.In this analysis offair value,we use discounted cash flow analysis to estimate the fair value of our properties taking into account each proper
235、tysexpected cash flow from operations,holding period and proceeds from the disposition of the property.The factors addressedin determining estimated proceeds from disposition include anticipated operating cash flow in the year of disposition,terminalcapitalization rate and selling price per room.Our
236、 judgment is required in determining the discount rate applied to estimatedcash flows,growth rate of the properties,the need for capital expenditures,as well as specific market and economic conditions.Additionally,the classification of these assets as held-for-sale(if applicable)requires the recordi
237、ng of these assets at their estimated fair value less estimated selling costs which can affect the amount of impairment recorded.Depreciation and amortization expense.Depreciation expense is based on the estimated useful life of our assets.The life of theassets is based on a number of assumptions,in
238、cluding the cost and timing of capital expenditures to maintain and refurbishour hotels,as well as specific market and economic conditions.Hotel properties and other completed real estate investmentsare depreciated using the straight-line method over estimated useful lives ranging from five to 35 ye
239、ars for buildings and improvements and three to 12 years for furniture,fixtures and equipment.While management believes its estimates are reasonable,a change in the estimated lives could affect depreciation expense and net income or the gain or loss on the saleof any of our hotels.We have not change
240、d the estimated useful lives of any of our assets during the periods discussed.Accrual of self-insured obligations.We are self-insured up to certain amounts with respect to employee medical,employee dental,general liability insurance,personal injury claims,automobile liability and other coverages.We
241、 establish reserves forour estimates of the loss that we will ultimately incur on reported claims as well as estimates for claims that have been incurred but not yet reported.Our reserves,which are reflected in“Due to Management Company”and other liabilities in our consolidated and combined balance
242、sheets,are based on actuarial valuations and our history of claims.Our actuaries incorporate historical loss experience and judgments about the present and expected levels of costs per claim.Trends in actual experience are an important factor in the determination of these estimates.We believe that o
243、ur estimated reserves for such claims are adequate,however,actual experience in claim frequency and amount could materially differ from ourestimates and adversely affect our results of operations,cash flow,liquidity and financial condition.NEW ACCOUNTING STANDARDS AND ACCOUNTING CHANGESIn June 2006,
244、the FASB issued Interpretation No.48,“Accounting for Uncertainty in Income Taxes”(“FIN 48”).FIN 48 clarifies the accounting for uncertainty in income taxes recognized in our financial statements in accordance with FASB Statement No.109,“Accounting for Income Taxes”.The provisions of FIN 48 are effec
245、tive for our fiscal year beginning January 1,2007.We are currently evaluating the impact of the provisions of FIN 48,and currently cannot estimate the impact to our financial statements.In September 2006,the FASB issued Statement No.157(“FAS 157”),“Fair Value Measurements”(“FAS 157”).FAS 157 defines
246、 fair value,establishes a framework for measuring fair value in generally accepted accounting principles,and expandsdisclosures about fair value measurements.The provisions of FAS 157 are effective for our fiscal year beginning January 1,2008.We are currently evaluating the impact of the provisions
247、of FAS 157,and currently cannot estimate the impact to our financial statements.SHI01_Financials.cgla:SHI01 Financials 3/11/07 3:13 PM Page 25FileName:6311.Fin.p25.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3dSunstone Hotel Investors.Inc.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOU
248、T MARKET RISKTo the extent that we incur debt with variable interest rates,our future income,cash flows and fair values relevant to financialinstruments are dependent upon prevailing market interest rates.Market risk refers to the risk of loss from adverse changes inmarket prices and interest rates.
249、As of December 31,2006 none of our outstanding debt is subject to variable interest rates.CONTROLS AND PROCEDURES(a)Evaluation of Disclosure Controls and Procedures Based upon an evaluation of the effectiveness of disclosure controls and procedures,Sunstone Hotel Investors,Inc.s Chief Executive Offi
250、cer(CEO)and Chief Financial Officer(CFO)have concluded that as of the end of the period covered by ourAnnual Report on Form 10-K our disclosure controls and procedures(as defined in Rules 13a-15(e)or 15d-15(e)under theSecurities Exchange Act of 1934,as amended(the“Exchange Act”)were effective to pro
251、vide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded,processed,summarized and reported within thetime periods specified by the rules and forms of the Securities and Exchange Commission and is accumulated and communicatedto management,including t
252、he CEO and CFO,as appropriate to allow timely decisions regarding required disclosure.(b)Managements Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting(as definedin Rule 13a-15(f)under
253、the Exchange Act),to provide reasonable assurance regarding the reliability of our financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.Due to its inherent limitations,internal control over financial reportin
254、g may not prevent or detect misstatements.Also,projectionsof any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changesin conditions,or that the degree of compliance with the policies or procedures may deteriorate.Under the supervisio
255、n and with the participation of our management,including our CEO and CFO,we conducted an evaluationof the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of SponsoringOrganizations of the Treadway Commission in Internal ControlIntegrated F
256、ramework.Based on its evaluation,our managementconcluded that our internal control over financial reporting was effective as of December 31,2006.Ernst&Young LLP,an independent registered public accounting firm,has audited the Consolidated and Combined FinancialStatements included in this Annual Repo
257、rt and,as part of its audit,has issued its reports,included herein,on(1)our manage-ments assessment of the effectiveness of our internal control over financial reporting and(2)the effectiveness of our internalcontrol over financial reporting.(c)Changes in Internal Control over Financial Reporting Th
258、ere was no change in our internal control over financial reporting that occurred during the most recently completed fiscalquarter that has materially affected,or is reasonably likely to materially affect,our internal control over financial reporting.26 Managements Discussion and AnalysisSHI01_Financ
259、ials.cgla:SHI01 Financials 3/11/07 3:13 PM Page 26FileName:6311.Fin.p26.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3d2006 Annual ReportReport of Independent Registered Public Accounting Firm 27TO THE BOARD OF DIRECTORS AND STOCKHOLDERSSUNSTONE HOTEL INVESTORS,INC.:We have audited ma
260、nagements assessment,included in the accompanying Managements Report on Internal Control over Financial Reporting,that Sunstone Hotel Investors,Inc.maintained effective internal control over financial reporting as of December 31,2006,based on criteria established in Internal ControlIntegrated Framew
261、ork issued by the Committee ofSponsoring Organizations of the Treadway Commission(the COSO criteria).Sunstone Hotel Investors,Inc.s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over finan
262、cial reporting.Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the companys internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Boa
263、rd(UnitedStates).Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.Our audit included obtaining an understandingof internal control over financial reporti
264、ng,evaluating managements assessment,testing and evaluating the design and operatingeffectiveness of internal control,and performing such other procedures as we considered necessary in the circumstances.Webelieve that our audit provides a reasonable basis for our opinion.A companys internal control
265、over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles.A companys internal control over financial repo
266、rting includes those policies and proceduresthat(1)pertain to the maintenance of records that,in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company;(2)provide reasonable assurance that transactions are recorded as necessary to permitprepara
267、tion of financial statements in accordance with generally accepted accounting principles,and that receipts and expendituresof the company are being made only in accordance with authorizations of management and directors of the company;and(3)provide reasonable assurance regarding prevention or timely
268、 detection of unauthorized acquisition,use,or disposition of thecompanys assets that could have a material effect on the financial statements.Because of its inherent limitations,internal control over financial reporting may not prevent or detect misstatements.Also,projections of any evaluation of ef
269、fectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures may deteriorate.In our opinion,managements assessment that Sunstone Hotel Investors,Inc.maintained effective int
270、ernal control over financialreporting as of December 31,2006,is fairly stated,in all material respects,based on the COSO criteria.Also,in our opinion,Sunstone Hotel Investors,Inc.maintained,in all material respects,effective internal control over financial reporting as of December 31,2006,based on t
271、he COSO criteria.We also have audited,in accordance with the standards of the Public Company Accounting Oversight Board(United States),the consolidated balance sheets of Sunstone Hotel Investors,Inc.and subsidiaries as of December 31,2006 and 2005,and therelated consolidated statements of operations
272、,shareholders equity,and cash flows for the years ended December 31,2006 and2005,and for the period from October 26,2004(commencement of operations)through December 31,2004,the relatedcombined statements of operations,members equity,and cash flow of the Sunstone Predecessor Company for the period Ja
273、nuary 1,2004 through October 25,2004 of Sunstone Hotel Investors,Inc.and our report dated February 6,2007 expressedan unqualified opinion thereon.Irvine,California February 6,2007 REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRMSHI01_Financials.cgla:SHI01 Financials 3/11/07 3:13 PM Page 27File
274、Name:6311.Fin.p27.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3dSunstone Hotel Investors.Inc.December 31,December 3120062005(In thousands)assetsCurrent assets:Cash and cash equivalents$29,029$17,538Restricted cash65,66954,305Accounts receivable,net41,69542,879Due from affiliates1,383
275、1,994Inventories3,0892,814Prepaid expenses7,0064,187Current assets of discontinued operations359Total current assets147,871124,076Investment in hotel properties,net2,477,5142,054,001Investment in hotel properties held for sale,net9,111Other real estate,net14,6737,545Investment in unconsolidated join
276、t venture68,714 Deferred financing costs,net7,3818,299Goodwill22,24927,169Other assets,net21,97118,780Other assets of discontinued operations,net208Total assets$2,760,373$2,249,189liabilities and stockholders equityCurrent liabilities:Accounts payable and accrued expenses$31,912$22,293Accrued payrol
277、l and employee benefits12,3388,960Due to Management Company16,60719,404Dividends payable23,82619,831Other current liabilities32,35429,414Current portion of notes payable23,2314,387Current liabilities of discontinued operations302Total current liabilities140,268104,591Notes payable,less current porti
278、on1,476,5971,176,791Other liabilities6,4298,782Total liabilities1,623,2941,290,164Commitments and contingencies(Note 15)Preferred stock,Series C Cumulative Convertible Redeemable Preferred Stock,$0.01 par value,4,102,564 shares authorized,issued and outstanding at December 31,2006 and 2005,liquidati
279、on preference of$24.375 per share99,29699,096Stockholders equityPreferred stock,$0.01 par value,100,000,000 shares authorized.8.0%Series A Cumulative Redeemable Preferred Stock,7,050,000 shares issued and outstanding at December 31,2006 and 4,850,000 shares issued and outstanding at December 31,2005
280、,stated at liquidation preference of$25.00 per share176,250121,250Common stock,$0.01 par value,500,000,000 shares authorized,57,775,089 shares issued and outstanding at December 31,2006 and 52,190,649 shares issued and outstanding at December 31,2005578522Additional paid in capital958,887798,400Reta
281、ined earnings65,54512,308Cumulative dividends(163,477)(72,551)Total stockholders equity1,037,783859,929Total liabilities and stockholders equity$2,760,373$2,249,189See accompanying notes to consolidated and combined financial statements.28 Consolidated Balance SheetsCONSOLIDATEDBALANCE SHEETS,SHI01_
282、Financials.cgla:SHI01 Financials 3/11/07 3:13 PM Page 28FileName:6311.Fin.p28.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3d2006 Annual ReportConsolidated and Combined Statements of Operations 29The CompanyThe PredecessorPeriodPeriodOctober 26,January 1,Year EndedYear Ended2004 throu
283、gh2004 throughDecember 31,December 31,December 31,October 25,2006200520042004(In thousands,except per share data)revenuesRoom$589,572$381,217$44,707$236,005Food and beverage234,337152,96819,75480,432Other operating79,14752,2937,15533,553Management and other fees from affiliates4688Total revenues903,
284、056586,47871,620350,678operating expensesRoom131,57285,01610,63650,540Food and beverage167,116107,19113,36755,255Other operating39,53230,2144,74322,460Advertising and promotion51,10337,6504,56420,653Repairs and maintenance36,78424,5973,33914,318Utilities34,91424,0093,13714,084Franchise costs33,93021
285、,7763,10816,947Property tax,ground lease,and insurance55,36631,1684,02218,473Property general and administrative102,88266,0148,88528,881Corporate overhead19,04614,4907,17623,214Depreciation and amortization96,28564,6129,32940,751Impairment loss1,245Total operating expenses768,530506,73772,306306,821
286、Operating income(loss)134,52679,741(686)43,857Equity in earnings of unconsolidated joint venture140Interest and other income4,2083,079154560Interest expense(96,109)(56,881)(16,253)(38,785)Income(loss)before minority interest,income taxes and discontinued operations42,76525,939(16,785)5,632Minority i
287、nterest(1,761)2,706125Income tax benefit271Income(loss)from continuing operations42,76524,178(14,079)6,028Income(loss)from discontinued operations10,4726,027(3,818)(24,231)net income(loss)53,23730,205$(17,897)$(18,203)Preferred stock dividends and accretion(19,616)(10,973)income available to common
288、stockholders$33,621$19,232Basic per share amounts:Income(loss)from continuing operations$0.40$0.32$(0.42)Income(loss)from discontinued operations0.190.15(0.12)Net income(loss)per common share$0.59$0.47$(0.54)Diluted per share amounts:Income(loss)from continuing operations$0.40$0.32$(0.42)Income(loss
289、)from discontinued operations0.180.15(0.12)Net income(loss)per common share$0.58$0.47$(0.54)Weighted average common shares outstanding:Basic57,24740,65533,196Diluted57,69140,95933,196Dividends paid per common share$1.22$1.155$0.285See accompanying notes to consolidated and combined financial stateme
290、nts.CONSOLIDATED AND COMBINEDSTATEMENTS OF OPERATIONSSHI01_Financials.cgla:SHI01 Financials 3/11/07 3:13 PM Page 29FileName:6311.Fin.p29.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3d30 Consolidated and Combined Statements of Stockholders and Members EquityPreferred StockCommon Stock
291、 AccumulatedAdditionalRetainedOtherNumber ofNumber ofPaid inEarningsCumulativeComprehensiveMembersSharesAmountSharesAmountCapital(Deficit)DividendsLossEquityTotal(In thousands,except per share data)the predecessorBalance at December 31,2003$(1,742)$332,087$330,345Contributions25,32225,322Distributio
292、ns(9,350)(9,350)Net loss(18,203)(18,203)Comprehensive loss(18,203)Balance at October 25,2004(1,742)329,856328,114the companyAdjustments for formation and structuring transactions(Note 13)26,64626,646Reclassify Predecessor members equity9,990,932$354,7601,742(356,502)Net proceeds from sale of common
293、stock24,459,737$344383,733384,077Record the acquisition of membership units in the Sunstone Hotel Operating Partnership from the Predecessors members(195,921)(195,921)Record minority interests for Predecessor members continuing interests(99,167)(99,167)Issuance of unvested restricted common stockVes
294、ting of restricted common stock67,94711,4411,442CONSOLIDATED AND COMBINED STATEMENTSOF STOCKHOLDERS AND MEMBERS EQUITYSunstone Hotel Investors.Inc.SHI01_Financials.cgla:SHI01 Financials 3/11/07 3:13 PM Page 30FileName:6311.Fin.p30.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3d31Prefe
295、rred StockCommon Stock AccumulatedAdditionalRetainedOtherNumber ofNumber ofPaid inEarningsCumulativeComprehensiveMembersSharesAmountSharesAmountCapital(Deficit)DividendsLossEquityTotal(In thousands,except per share data)Dividends declared and payable at$0.285 per share$(9,962)(9,962)Net loss$(17,897
296、)(17,897)Balance at December 31,200434,518,616345444,846(17,897)(9,962)417,332Net proceeds from sale of Series A preferred stock4,850,000$121,250(3,799)117,451Offering costs from sale of Series C preferred stock(130)(130)Net proceeds from sale of common stock13,936,909140312,100312,240Issuance of un
297、vested restricted common stock35,552Vesting of restricted common stock1,9921,992Common dividends declared and payable at$1.155 per share(51,616)(51,616)Series A preferred dividends declared and payableat$1.578 per share(7,652)(7,652)Series C preferred dividends declared and payableat$0.786 per share
298、(3,225)(3,225)Accretion of discount on Series C preferred stock(96)(96)Conversion of minority interest membership units in the Operating Partnership to common shares3,699,5723743,39143,428Net income30,20530,205Balance at December 31,20054,850,000121,25052,190,649522798,40012,308(72,551)859,929CONSOL
299、IDATED AND COMBINED STATEMENTSOF STOCKHOLDERS AND MEMBERS EQUITY2006 Annual ReportSHI01_Financials.cgla.r1:SHI01 Financials 3/15/07 5:16 PM Page 31FileName:6311.Fin.p31.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3dSunstone Hotel Investors.Inc.32Preferred StockCommon Stock Accumulate
300、dAdditionalRetainedOtherNumber ofNumber ofPaid inEarningsCumulativeComprehensiveMembersSharesAmountSharesAmountCapital(Deficit)DividendsLossEquityTotal(In thousands,except per share data)Net proceeds from sale of Series A preferred stock2,200,00055,000(842)54,158Net proceeds from sale of common stoc
301、k5,500,00055157,652157,707Vesting of restricted common stock84,44013,6773,678Common dividends declared and payable at$1.22 per share(71,277)(71,277)Series A preferred dividends declared and payable at$2.00 per share(13,000)(13,000)Series C preferred dividends declared and payable at$1.572 per share(
302、6,449)(6,449)Accretion of discount on Series C preferred stock(200)(200)Net income53,23753,237Balance at December 31,20067,050,000$176,25057,775,089$578$958,887$65,545$163,477$1,037,783CONSOLIDATED AND COMBINED STATEMENTSOF STOCKHOLDERS AND MEMBERS EQUITYSHI01_Financials.cgla.r1:SHI01 Financials 3/1
303、5/07 5:17 PM Page 32FileName:6311.Fin.p32.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3d2006 Annual ReportConsolidated and Combined Statements of Cash Flows 33The CompanyThe PredecessorPeriodPeriod October 26,January 1,Year EndedYear Ended2004 through2004 throughDecember 31,December
304、31,December 31,October 25,2006200520042004(In thousands)CASH FLOWS FROM OPERATING ACTIVITIESNet income(loss)$53,237$30,205$(17,897)$(18,203)Adjustments to reconcile net income(loss)to net cash provided by(used in)operating activities:Bad debt expense(recovery)796(170)6051,351Minority interest1,761(2
305、,706)(125)(Gain)loss on sale of hotel properties(9,048)(2,431)(592)1,251Loss on early extinguishment of debt9,976Depreciation101,73373,0299,77349,560Amortization of deferred franchise fees1041291,685304Amortization of deferred financing costs4,8313,9955,8184,328Amortization of loan premiums(2,486)(6
306、09)Amortization of deferred stock compensation3,6771,9921,442Impairment lossinvestment in hotel properties,discontinued operations and goodwill4,92024,393(Gain)loss on derivatives311544Equity in earnings of unconsolidated joint venture(140)Distributions of income from unconsolidated joint venture28D
307、eferred income taxes(2,617)Changes in operating assets and liabilities:Restricted cash(9,290)(1,398)(4,739)(1,470)Accounts receivable647(14,695)1,755(13,528)Due from affiliates611(1,847)178(144)Inventories(260)(307)31(44)Prepaid expenses and other assets(32)(628)(1,105)(7,070)Accounts payable and ot
308、her liabilities3,24414,4124,740(5,062)Accrued payroll and employee benefits3,3783,14673941Due to Management Company(2,902)4,09936Accrued pension liability(445)Discontinued operations77(77)Net cash provided by(used in)operating activities163,104113,403(236)33,064CASH FLOWS FROM INVESTING ACTIVITIESPr
309、oceeds from sale of hotel properties157,71831,41220,77237,584Restricted cash replacement reserve(2,074)(26,793)2,8565,907Contributions and advances to unconsolidated joint venture(68,602)Acquisitions of hotel properties(448,373)(907,342)(38,820)Additions to hotel properties and other real estate(139
310、,364)(71,555)(15,273)(50,032)Net cash(used in)provided by investing activities(500,695)(974,278)8,355(45,361)CASH FLOWS FROM FINANCING ACTIVITIESProceeds from preferred stock offering55,000220,250Payment of preferred stock offering costs(842)(3,929)Proceeds from common stock offering158,400320,97936
311、2,011Payment of common stock offering costs(693)(8,739)(28,511)Acquisition of membership units from the Predecessors members(195,921)Proceeds from notes payable440,542701,207396,36460,983Payments on notes payable(212,868)(295,633)(545,979)(74,259)Net proceeds from the exercise of the over-allotment
312、option50,577Purchase of minority interest(50,577)Payments of deferred financing costs(3,726)(4,847)(6,141)(345)Acquisition of interest rate cap agreements(53)Contributions from members25,322Dividends and distributions paid(86,731)(56,841)(9,350)Contributions from minority interest holders105Distribu
313、tions to minority interest holders(40)Net cash provided by(used in)financing activities349,082872,447(18,177)2,363Net increase(decrease)in cash and cash equivalents11,49111,572(10,058)(9,934)Cash and cash equivalents,beginning of year17,5385,96616,02420,229Cash and cash equivalents,end of year$29,02
314、9$17,538$5,966$10,295SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid for interest$92,824$56,265$14,960$41,165NONCASH FINANCING ACTIVITYAssumption of debt in connection with acquisitions of hotel properties$81,000$63,143$Receipt of note receivable$5,600$Dividends and distributions payable$
315、23,826$19,831$11,016$See accompanying notes to consolidated and combined financial statements.CONSOLIDATED AND COMBINEDSTATEMENTS OF CASH FLOWSSHI01_Financials.cgla:SHI01 Financials 3/11/07 3:13 PM Page 33FileName:6311.Fin.p33.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3dSunstone Ho
316、tel Investors.Inc.34 Notes to Consolidated and Combined Financial Statements1.ORGANIZATION AND DESCRIPTION OF BUSINESSSunstone Hotel Investors,Inc.(the“Company”),through its 100%controlling interest in Sunstone Hotel Partnership,LLC(the“Operating Partnership”),of which the Company is the sole managi
317、ng member,and the subsidiaries of the OperatingPartnership,including Sunstone Hotel TRS Lessee,Inc.(the“TRS Lessee”)and its subsidiaries,is currently engaged in owning,acquiring,selling,and renovating hotel properties.The Company operates as a real estate investment trust(“REIT”)for federal income t
318、ax purposes.The Company was formed to succeed the businesses of Sunstone Hotel Investors,L.L.C.(“SHI”),WB Hotel Investors,LLC(“WB”),and Sunstone/WB Hotel Investors IV,LLC(“WB IV”)(collectively,the“Sunstone Predecessor Companies”or the“Predecessor”),which were engaged in owning,acquiring,selling,mana
319、ging,and renovating hotel properties in the UnitedStates.The Company was incorporated in Maryland on June 28,2004,in anticipation of an initial public offering of commonstock(the“IPO”),which was consummated on October 26,2004 concurrently with the consummation of various formationtransactions.These
320、transactions were designed to(i)enable the Company to raise the necessary capital to acquire propertiesfrom the Predecessor and repay certain mortgage debt relating thereto,(ii)provide a vehicle for future acquisitions,(iii)enablethe Company to comply with certain requirements under the federal inco
321、me tax laws and regulations relating to REITs,(iv)facilitate potential financings and(v)preserve certain tax advantages for the Predecessor.From June 28,2004 through October25,2004,the Company did not have any operations.The Predecessor transferred certain of its property and operating interests in
322、the Sunstone Predecessor Companies in exchangefor limited partnership interests in the Operating Partnership and common stock of the Company.The transfer of the properties and operating interests of Sunstone Predecessor Companies for ownership interests in the Operating Partnership and common stock
323、of the Company was accounted for at the historical cost of the Predecessor similarto a pooling of interests as the Sunstone Predecessor Companies were all under common control.On October 26,2004,the Company commenced operations after completing the IPO,which consisted of the sale of21,294,737 shares
324、 of common stock at a price per share of$17.00,generating gross proceeds of approximately$362.0 million.The proceeds to the Company,net of underwriters discount and offering costs,were approximately$333.5 million.Concurrentlywith the IPO,the Company received gross proceeds of$75.0 million from a new
325、 unsecured term loan facility and$10.0 millionfrom a draw on a new$150.0 million revolving credit facility.The Company also entered into a new mortgage loan with oneof its existing lenders and repaid the existing indebtedness.The costs associated with the unsecured term loan facility,revolvingcredit
326、 facility and the new mortgage loan totaled$6.1 million.The proceeds from the IPO and the unsecured term loan facilitywere used to acquire limited partnership interests in the Operating Partnership held by the Predecessors members as a resultof the IPO for$195.9 million,repay secured notes payable o
327、f$210.1 million,and purchase a ground lessors interest in aground lease under one of the properties that was purchased for$6.3 million.On November 23,2004,as a result of the exercise of the underwriters over-allotment option,the Company sold an additional3,165,000 shares of common stock resulting in
328、 gross proceeds of$53.8 million which it used to purchase an additional3,165,000 limited partnership interests in the Operating Partnership from the Predecessor.2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESbasis of presentation The accompanying consolidated financial statements as of December 31,2006
329、 and December 31,2005,and for the yearsended December 31,2006 and 2005,and for the period October 26,2004 through December 31,2004,include the accountsof the Company,the Operating Partnership and the TRS Lessee and their subsidiaries.Property interests contributed to theOperating Partnership by the
330、Predecessor have been accounted for as a reorganization of entities under common control in a manner similar to a pooling-of-interests.Accordingly,the contributed assets and assumed liabilities were recorded at the Predecessors historical cost basis.All significant intercompany balances and transact
331、ions have been eliminated.The accompanying combined financial statements for the period January 1,2004 through October 25,2004 include the accounts of SHI,WB,and WB IV.Significant intercompany accounts and transactions have been eliminated.Minority interestfor the year ended December 31,2005 and for
332、 the period October 26,2004 through December 31,2004 represents the allocation of earnings to outside equity interests of the Operating Partnership.Certain amounts included in the consolidated and combined financial statements for prior years have been reclassified to conform with the most recent fi
333、nancial statement presentation.NOTES TO CONSOLIDATED ANDCOMBINED FINANCIAL STATEMENTSSHI01_Financials.cgla:SHI01 Financials 3/11/07 3:13 PM Page 34FileName:6311.Fin.p34.pdf07-05-01 12:55:01 LoRes PDF8fe1c74c374ba84e8b3ea0509cef0d3d2006 Annual ReportNotes to Consolidated and Combined Financial Statements 35use of estimates The preparation of consolidated and combined financial statements in conform
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