1、Annual Report 2008Sunstone is well prepared for challenging conditions in 2009.The liquidity provided by our excess cash,our absence of near-term debt maturities and our portfolios limited capital needsare critical advantages in todays uncertain environment.Debt Maturity Schedule20192018201720162015
2、20142013201220112010200981.0m248.2m64.5m254.1m267.7m276.3m251.0m65.0m205.0m-+Weighted AverageInterest Rate5.7%5.5%5.5%2006200720085.9%2005CapitalRenovations200620072008200552m100m94m120m90mRevenuesTotal Cash78m220m112m771m962 m20062006200720072008200872m515m20052005969m(1)Assumes the$250.0m exchange
3、able senior notes maturing in 2027 are redeemed upon the first call date.(1)Fairmont,Newport Beach,CAEmbassy Suites Hotel,Chicago,ILMarriott,Rochester,MNRenaissance,Orlando,FLQuality Brands and LocationsCaliforniaCourtyard by Marriott Los Angeles-LAXCourtyard by Marriott San Diego-Old TownEmbassy Su
4、ites Hotel La JollaFairmont Newport BeachHilton Del Mar-San DiegoHoliday Inn Express San Diego-Old TownHoliday Inn San Diego-DowntownHyatt Regency Newport BeachMarriott Del Mar-San DiegoMarriott RiversideMarriott Napa ValleyMarriott OntarioRenaissance Los Angeles-LAX Renaissance Long Beach Residence
5、 Inn by Marriott Manhattan BeachSheraton CerritosW Hotel San DiegoDistrict of ColumbiaRenaissance Washington D.C.FloridaRenaissance Orlando at SeaworldGeorgiaHyatt Regency Suites MariettaRenaissance Atlanta-ConcourseIllinoisEmbassy Suites Hotel ChicagoMassachusettsMarriott Boston-QuincyMarriott Bost
6、on-Long WharfMarylandRenaissance Baltimore-HarborplaceMichiganMarriott TroyMinnesotaDoubletree Guest Suites MinneapolisKahler Grand RochesterInn&Suites RochesterMarriott RochesterResidence Inn by Marriott RochesterNew YorkHilton Long Island-HuntingtonHilton Times SquareRenaissance WestchesterOregonM
7、arriott PortlandValley River Inn EugenePennsylvaniaMarriott PhiladelphiaTexasHilton Houston-NorthMarriott HoustonUtahMarriott Park CityMarriott ProvoMarriott Salt Lake City-University ParkVirginiaMarriott Tysons Corner(1)All but one of these hotels are located in Southern California (2)Includes Mary
8、land,Massachusetts,New York,Pennsylvania,Virginia and Washington D.C.(3)Includes Illinois,Michigan and Minnesota (4)Includes Oregon,Texas and Utah (5)Includes Florida and Georgia.California(1)Middle Atlantic(2)Midwest(3)Other West(4)South(5)43 PropertiesRegionDistributionMarriottHiltonIndependentHya
9、ttStarwoodFairmontInterContinental14,569 RoomsBrand Distribution1797739,0832,4351,196605461444345GalleryMarriott Boston-Long WharfRenaissance Atlanta-ConcourseW Hotel San DiegoRenaissance Washington D.C.During 2008,public REITs underwent a sharp re-pricing as investors struggled to assess the implic
10、ations of the economic crisis on capital costs,growth prospects and the long-term value of real estate.In spite of the adverse conditions,we reflect back on the year with a sense of accomplishment and,more importantly,we look ahead with confidence and optimism.In 2008,we acted quickly and decisively
11、 in the face of softening economic conditions.We harvested significant gains,fortified our balance sheet,improved our operational efficiency and transitioned our team.We harvested significant gains.In May 2008,we sold the Hyatt Regency Century Plaza for nearly$500,000 per room,marking a well-timed c
12、onclusion of this highly successful hotel investment.After acquiring the hotel in October 2005,we implemented a number of asset management initiatives aimed at unlocking new revenue streams and improving profitability.The hotels annual EBITDA nearly tripled during our ownership period and as a resul
13、t,we realized an outstanding return on our investment.We fortified our balance sheet.During 2008,we increased our cash and cash equivalents by$112.9 million,from$66.1 million to$179.0 million.At the end of 2008,the weighted average interest rate of our debt was 5.5%and the weighted average term to m
14、aturity was 8.4 years.We face no debt maturities until December 2010.We believe our higher than historical cash balance and well-staggered maturity schedule provide added balance sheet strength,liquidity and security in these uncertain economic times.We improved our operational efficiency.During 200
15、8,we worked closely with our operators to right-size the cost model of each hotel.We also streamlined our corporate overhead.We believe the operational improvements we implemented in 2008 will result in more efficient portfolio operations for years to come.We transitioned our team.Bob Alter,Sunstone
16、s founder and Executive Chairman of the Board,stepped in as interim Chief Executive Officer in March of 2008.Bob led several critically timed corporate initiatives,including the sale of the Hyatt Regency Century Plaza and the search for a new CEO.Bob has been an exceptional mentor and leader to us a
17、ll,and we deeply appreciate his continuing service to Sunstone.Together we have cultivated a world-class team of industry professionals defined by confidence,integrity,passion and a dedication to excellence.The average industry tenure of our senior leadership team exceeds 25 years and includes exten
18、sive experience in acquisitions,dispositions,asset management and finance.We continue to maintain a cycle-appropriate business plan.In 2009,we are concentrating on efficiency measures,balance sheet improvements and disciplined capital investments.We look ahead with cautious optimism.While we believe
19、 the current economic crisis is largely cyclical in nature,we expect it may bring about fundamental changes to the real estate industry.In contrast to the first half of this decade when capital was abundant and inexpensive,going forward we believe capital will be more costly and available primarily
20、to real estate owners who demonstrate sound investment discipline.These changes will be difficult for some,but beneficial for our industry,as they represent a return to basic and sustainable principles of real estate.Lodging REIT valuations do not currently reflect our industrys increasingly positiv
21、e long-term fundamentals.Supply trends will be favorable for a number of years beginning in 2010,and we believe demand for lodging will strengthen with signs of a broader economic recovery.Unsettling environments bring about opportunities and foster innovation.Our mission remains to provide lodging
22、real estate investors with exceptional performance and low risk.Simply put,Sunstone exists to outperform.We truly appreciate your continued support of Sunstone.We are proud of our accomplishments in 2008,and we look forward to continuing to develop your loyalty and trust in 2009 and beyond.Thank you
23、.To our Stockholders:Arthur L.Buser,Jr.Kenneth E.Cruse President&Chief Financial Officer Chief Executive Officer Table of ContentsSelected Financial Data Managements Discussion and Analysis of Financial Condition and Results of OperationsReport of Independent Registered Public Accounting FirmConsoli
24、dated Balance SheetsConsolidated Income StatementsConsolidated Statements of Stockholders EquityConsolidated Statements of Cash FlowsNotes to Consolidiated Financial StatementsReport of Independent Registered Public Accounting FirmStock InformationCorporate Information56212223242628484950Hilton Time
25、s Square,New YorkRenaissance Los Angeles-LAX,CAHyatt Regency,Newport BeachInternational at the Kahler GrandAnnual Report 20085 The Company Predecessor(1)Year Ended December 31,2008 Year Ended December 31,2007Year Ended December 31,2006Year Ended December 31,2005Period October 26,through December 31,
26、2004 Period January 1,2004 through October 25,2004($in thousands):Operating Data Revenues:Room$640,762$638,119$511,525$332,380$38,652$202,437Food and beverage258,655259,124208,253142,13818,73675,560Other operating 69,74764,49951,44140,6526,59430,891Management and other fees from affiliates 4688 Tota
27、l revenues 969,164961,742771,219515,17063,986309,576 Operating expenses:Room 141,602138,821112,83573,1909,11543,393Food and beverage 185,610186,102145,91698,38212,69852,131Other operating 36,35636,74132,56326,5304,37420,563Advertising and promotion 52,49650,88942,11632,6183,90517,553Repairs and main
28、tenance 38,04936,75131,10421,2652,92112,528Utilities 37,81233,93429,47520,7502,77812,190Franchise costs 36,47935,89329,83918,1002,58014,112Property tax,ground lease and insurance55,53953,35248,44528,4633,68216,921Property general and administrative 110,419110,17790,62259,0648,07125,130Corporate over
29、head 21,67828,04818,85814,4737,17423,109Depreciation and amortization 115,710111,32683,79356,3107,86835,477Goodwill and other impairment losses2,904 1,245 Total operating expenses 834,654822,034665,566449,14565,166274,352 Operating income(loss)134,510139,708105,65366,025(1,180)35,224Equity in net ea
30、rnings(losses)of unconsolidated joint ventures(1,445)(3,588)140 Interest and other income 3,7619,1014,2063,079154478Interest expense(98,289)(92,431)(78,951)(47,700)(13,014)(33,841)Income(loss)before minority interest,income taxes,and discontinued operations38,53752,79031,04821,404(14,040)1,861Minori
31、ty interest (1,761)2,706125Income tax benefit 176Income(loss)from continuing operations38,53752,79031,04819,643(11,334)2,162Income(loss)from discontinued operations36,20672,87322,18910,562(6,563)(20,365)Net income(loss)74,743125,66353,23730,205$(17,897)$(18,203)Preferred stock dividends and accretio
32、n(20,884)(20,795)(19,616)(10,973)Undistributed income allocated to Series C preferred stock (1,583)Income available to common stockholders$53,859$103,285$33,621$19,232 Net income(loss)from continuing operations available to common stockholders per diluted common share$0.33$0.51$0.20$0.21$(0.34)Cash
33、flows provided by operating activities$160,863$213,593$163,575$112,046$120$33,370 Balance sheet data Investment in hotel properties,net$2,452,811$2,450,728$2,146,133$1,741,945$1,108,112 Total assets2,805,6113,049,1522,760,3732,249,1891,253,745 Total debt 1,712,7651,722,1511,499,8281,181,178712,461 T
34、otal liabilities 1,807,6101,856,9061,624,5831,292,228793,367 Equity898,3051,092,7501,036,494857,865415,548(1)In connection with our public offering in 2004,we undertook certain formation and structuring transactions with respect to our operating and capital structure to prepare for operation as a pu
35、blic company.These transactions affect the comparability of our results from and after October 26,2004 and our results prior to that date.Selected Financial Data The Company was formed to succeed to the businesses of Sunstone Hotel Investors,LLC,WB Hotel Investors,LLC,and Sunstone/WB Hotel Investors
36、 IV,LLC(collectively,“Pre-decessor”),which were engaged in owning,acquiring,selling,managing,and renovating hotel properties in the United States.The following table sets forth selected financial information for the Company and the Predecessor,that has been derived from the consolidated and combined
37、 financial statements and notes.This information should be read in conjunction with“Managements Discussion and Analysis of Financial Condition and Results of Operations”and our consolidated and combined financial statements and related notes included elsewhere in this annual report.Sunstone Hotel In
38、vestors,Inc.6Managements Discussion and Analysis of Financial Condition and Results of Operations Overview Sunstone Hotel Investors,Inc.is a Maryland corporation.Sunstone operates as a self-managed and self-administered real estate investment trust,or REIT.A REIT is a legal entity that directly or i
39、ndirectly owns real estate assets.REITs generally are not subject to federal income taxes at the corporate level as long as they pay stockholder dividends equivalent to 100%of their taxable income.REITs are required to distribute to stockholders at least 90%of their taxable income.Sunstone owns,dire
40、ctly or indirectly,100%of the interests of Sunstone Hotel Partnership,LLC,or the Operating Partnership,which is the entity that directly or indirectly owns its hotel properties.Sunstone also owns 100%of the interests of its taxable REIT subsidiary,the TRS Lessee,which leases all of Sunstones hotels
41、from the Operating Partnership,and engages third parties to manage Sunstones hotels.We own primarily upper upscale and upscale hotels in the United States.As of December 31,2008,we owned 43 hotels,of which we classify 38 as upscale or upper upscale,two as luxury and three as mid-scale as defined by
42、Smith Travel Research,Inc.The majority of our hotels are operated under nationally recognized brands such as Marriott,Hyatt,Fairmont,Hilton and Starwood,which are among the most respected and widely recognized brands in the lodging industry.We believe the largest and most stable segment of demand fo
43、r hotel rooms is represented by travelers who prefer the consistent service and quality associated with nationally recognized brands.We seek to own hotels in urban locations that benefit from significant barriers to entry by competitors.Most of our hotels are considered business,convention,or airpor
44、t hotels,as opposed to resort hotels.Our average hotel has 339 rooms.The demand for lodging generally fluctuates with the overall economy.We refer to these changes in demand as the lodging cycle.We seek to employ a cycle-appropriate portfolio management strategy,which emphasizes active investment,bo
45、th in terms of acquisitions of new hotels and selective investments of capital into our portfolio through hotel renovations and repositioning projects during the growth phase of the lodging cycle;net hotel dispositions during the mature phase of the lodging cycle;and capital preservation during cycl
46、ical declines.During all phases of the cycle,we seek to maximize the value of our portfolio through creative and proactive asset management,which entails working closely with our third-party hotel operators to develop plans and actions designed to enhance revenues and minimize operational expenses.D
47、uring 2008,in light of the current cyclical decline,we increased our unrestricted cash balance by$112.9 million from$66.1 million to$179.0 million.We intend to continue to maintain higher than historical cash balances until the lodging cycle begins to enter a new growth phase.We believe that by main
48、taining higher cash balances during the current cyclical decline,we have enhanced our financial security and flexibility and reduced our need to access external capital.All of our debt bears fixed interest at a weighted average rate of 5.5%,and the weighted average term to maturity of our debt is 8.
49、4 years.Of our total debt,approximately$329.2 million matures over the next three years($81.0 million in 2010 and$248.2 million in 2011).Operating Activities Operating Performance Indicators.The following performance indicators are commonly used in the hotel industry:occupancy;average daily rate,or
50、ADR;revenue per available room,or RevPAR,which is the product of occupancy and ADR,but does not include food and beverage revenue,or other operating revenue;comparable RevPAR growth,which we define as the change in RevPAR generated by hotels we owned as of the end of the reporting period,but excludi
51、ng those hotels that experienced material and prolonged business interruption due to renovations,re-branding or property damage during either the most recent calendar year presented or the calendar year immediately preceding it.For hotels that were not owned for the entirety of the comparison period
52、s,comparable RevPAR is calculated using RevPAR generated during periods of prior ownership.We refer to this subset of our hotels used to calculate comparable RevPAR growth as our “Comparable Portfolio”;RevPAR index,which is the quotient of a hotels RevPAR divided by the average RevPAR of its competi
53、tors,multiplied by 100.A RevPAR index in excess of 100 indicates a hotel is achieving higher RevPAR than its competitors.In addition to absolute RevPAR index,we monitor changes in RevPAR index;and operating flow through,which is the quotient of incremental operating income divided by incremental rev
54、enues.Annual Report 20087Revenues.Substantially all of our revenues are derived from the operation of our hotels.Specifically,our revenues consist of the following:Room revenues,which is the product of the number of rooms sold and the ADR;Food and beverage revenues,which is comprised of revenues rea
55、lized in the hotel food and beverage outlets as well as banquet and catering events;and Other operating revenues,which include ancillary hotel revenue such as performance guaranties and other items primarily driven by occupancy such as telephone,transportation,parking,spa,entertainment and other gue
56、st services.Additionally,this category includes,among other things,operating revenue from our two commercial laundry facilities located in Rochester,Minnesota and Salt Lake City,Utah,as well as hotel space leased by third parties.Prior to December 2007,this category also included operating revenue f
57、rom BuyEfficient,LLC(“BuyEfficient”).In December 2007,we entered into a joint venture agreement with Strategic Hotels&Resorts,Inc.(“Strategic”),to own and operate BuyEfficient.Our 50%interest in BuyEfficient is now reflected on our balance sheet as investments in unconsolidated joint ventures,and on
58、 our income statements as equity in net earnings(losses)of unconsolidated joint ventures.Expenses.Our expenses consist of the following:Room expense,which is primarily driven by occupancy and,therefore,has a significant correlation with room revenues;Food and beverage expense,which is primarily driv
59、en by food and beverage sales and banquet and catering bookings and,therefore,has a significant correlation with food and beverage revenues;Other operating expense,which includes the corresponding expense of other operating revenue,advertising and promotion,repairs and maintenance,utilities,and fran
60、chise fees;Property general and administrative expense,which includes our property-level general and administrative expenses,such as payroll and related costs,professional fees,travel expenses,and management fees;Property tax,ground lease and insurance expense,which includes the expenses associated
61、with property tax,ground lease and insurance payments,each of which is primarily a fixed expense;Corporate overhead expense,which includes our corporate-level expenses,such as payroll and related costs,amortization of deferred stock compensation,professional fees,travel expenses and office rent;Depr
62、eciation and amortization expense,which includes depreciation on our hotel buildings,improvements,furniture,fixtures and equipment,along with amortization on our franchise fees and intangibles;and Goodwill and other impairment losses expense,which includes the charges we have recognized to write-off
63、 goodwill in association with our annual impairment evaluation and to reduce the carrying value of assets on our balance sheet to their fair value.Other Revenue and Expense.Other revenue and expense consists of the following:Equity in net earnings(losses)of unconsolidated joint ventures,which includ
64、es our portion of net earnings or losses from our joint ventures;Interest and other income,which includes interest we have earned on our restricted and unrestricted cash accounts,as well as any gains or losses we have recognized on sales of assets other than hotels;Interest expense,which includes in
65、terest expense incurred on our outstanding debt,amortization of deferred financing fees,prepayment penalties and costs associated with early extinguishment of debt;and Preferred stock dividends and accretion,which includes dividends earned on our Series A and Series C preferred stock and redemption
66、value accretion on our Series C preferred stock.Factors Affecting Our Operating Results.The primary factors affecting our operating results include overall demand for hotel rooms,the pace of new hotel development,or supply,and the relative performance of our operators in increasing revenue and contr
67、olling hotel operating expenses.Demand.The demand for lodging generally fluctuates with the overall economy.During 2008,as a result of the U.S.recession and the deterioration of the credit markets,the lodging cycle entered a decline phase,with demand for lodging rooms declining by approximately 1.6%
68、as compared to 2007.As a result of declining demand and increases in new hotel supply,our 2008 total portfolio RevPAR declined by 2.2%as compared to 2007.We anticipate that lodging demand will not improve,and will likely weaken further,until liquidity is restored in the credit markets and the U.S.ec
69、onomy begins to strengthen.We believe such improvements may not occur during 2009,and,therefore,we expect lodging demand to continue to decline in 2009.Historically,periods of declining demand are followed by extended periods of relatively strong demand,during the growth phase of the lodging cycle.A
70、ssuming the current U.S.recession ends in 2009,we expect hotel demand to begin to show year-over-year increases beginning in 2010 and 2011.Sunstone Hotel Investors,Inc.8 Supply.The addition of new competitive hotels affects the ability of existing hotels to drive RevPAR and profits.The development o
71、f new hotels is largely driven by construction costs and expected performance of existing hotels.We believe the lodging industry will eventually benefit from the current economic climate and restrictive financing environment,as new hotel construction projects will be difficult to finance.As a result
72、,we believe the initiation of hotel development will be constrained through 2009,with certain hotel projects currently in the planning stages being postponed or cancelled.Given the one to three year timeline needed to construct a typical hotel,we expect a window of two to four years beginning in 201
73、0 during which the number of new hotel openings will be limited.Revenues and expenses.We believe that marginal improvements in RevPAR index,even in the face of declining revenues,are a good indicator of our operators effectiveness in maximizing revenues.Similarly,we believe that strong operating flo
74、w through is a good indicator of our operators effectiveness in minimizing incremental operating expenses in the context of increasing revenues or,conversely,in reducing operating expenses in the context of declining revenues.With respect to improving RevPAR index,we continue to work with our hotel
75、operators to optimize revenue management tactics while taking into consideration market demand trends and the pricing strategies of competitor hotels in our markets.Our down-market revenue maximization tactics may entail using alternative distribution channels,such as internet wholesalers.Our operat
76、ors may also look to enter into long-term airline crew contracts,or they may accept forms of lower-rated business that we would not typically take during periods of stronger demand.Our revenue management tactics generally are oriented towards maintaining ADR even if the result may be a reduction in
77、occupancy,as reductions in RevPAR attributable to reductions in occupancy may be accompanied by decreases in occupancy-variable expenses,such as housekeeping labor and utilities expense.Reductions in RevPAR attributable to lower ADR typically result in minimal changes in operating costs and expenses
78、(ADR-variable expenses are limited to revenue-based items such as credit card commissions and management and franchise fees).Thus,reductions in RevPAR associated with lower ADR may result in minimal flow through,and as a result,lower operating margins.Reductions in RevPAR associated with lower occup
79、ancy may result in better flow through and,as a result,less impacted operating margins.With respect to maximizing operational flow through,we continue to work with our operators to identify operational efficiencies designed to reduce expenses while minimally affecting guest experience.Key asset mana
80、gement initiatives include reducing hotel staffing levels,taking advantage of relaxed brand standards,such as reducing complimentary amenities,and selectively closing certain food and beverage outlets.Our operational efficiency initiatives can be difficult to implement,as most categories of variable
81、 operating expenses,such as utilities and certain labor costs,such as housekeeping,fluctuate with changes in occupancy.Furthermore,our hotels operate with significant fixed costs,such as general and administrative expense,insurance,property taxes,and other expenses associated with owning hotels that
82、 our operators may not be able to directly control.For example,we have experienced increases in hourly wages,employee benefits(especially health insurance)and utility costs,which have negatively affected our operating margins.Additionally,there are limits to how much our operators can reduce expense
83、s without affecting the competitiveness of our hotels.Operating Results.The following table presents our operating results for 2008 and 2007,including the amount and percentage change in the results between the two periods.The table presents the results of operations included in the consolidated inc
84、ome statements,and includes continuing operating results for 43 hotels(14,569 rooms)as of December 31,2008 and 2007.The results of operations for the two hotels that were sold in 2008 are included in income from discontinued operations for the year ended December 31,2008.The results of operations fo
85、r the two hotels that were sold in 2008 and the seven hotels that were sold in 2007 are included in income from discontinued operations for the year ended December 31,2007.These period amounts can be found in our consolidated financial statements and related notes included elsewhere in this annual r
86、eport.20082007 Change$Change%(dollars in thousands,except statistical data)Revenues Room$640,762$638,119$2,6430.4%Food and beverage 258,655259,124(469)(0.2)%Other operating 69,74764,4995,2488.1%Total revenues 969,164961,7427,4220.8%Operating Expenses Hotel operating 583,943572,48311,4602.0%Property
87、general and administrative 110,419110,177 2420.2%Corporate overhead 21,67828,048(6,370)(22.7)%Depreciation and amortization 115,710111,3264,3843.9%Goodwill and other impairment losses 2,904 2,904100.0%Total operating expenses 834,654822,03412,6201.5%Annual Report 20089 The following table presents o
88、ur operating results for 2007 and 2006,including the amount and percentage change in the results between the two periods.The table presents the results of operations included in the consolidated income statements,and includes continuing operating results for 43 hotels(14,569 rooms)as of December 31,
89、2007 and 40 hotels(13,204 rooms)as of December 31,2006.The results of operations for the two hotels that were sold in 2008 and the seven hotels that were sold in 2007 are included in income from discontinued operations for the year ended December 31,2007.The results of operations for the two hotels
90、that were sold in 2008,the seven hotels that were sold in 2007 and the 15 hotels that were sold in 2006 are included in income from discontinued operations for the year ended December 31,2006.These period amounts can be found in our consolidated financial statements and related notes included elsewh
91、ere in this annual report.Revenues.Total revenue for the year ended December 31,2008 was$969.2 million as compared to$961.7 million for the year ended December 31,2007 and$771.2 million for the year ended December 31,2006.Total revenue for 2008 included room revenue of$640.8 million,food and beverag
92、e revenue of$258.7 million,and other revenue of$69.7 million.Total revenue for 2007 included room revenue of$638.1 million,food and beverage revenue of$259.1 million,and other revenue of$64.5 million.Total revenue for 2006 included room revenue of$511.5 million,food and beverage revenue of$208.3 mil
93、lion,and other revenue of$51.4 million.20082007Change$Change%(dollars in thousands,except statistical data)Operating income 134,510139,708(5,198)(3.7)%Equity in net earnings(losses)of unconsolidated joint ventures(1,445)(3,588)2,14359.7%Interest and other income 3,7619,101(5,340)(58.7)%Interest expe
94、nse(98,289)(92,431)(5,858)6.3%Income from continuing operations 38,53752,790(14,253)(27.0)%Income from discontinued operations 36,20672,873(36,667)(50.3)%Net Income74,743125,663(50,920)(40.5)%Preferred stock dividends and accretion(20,884)(20,795)(89)0.4%Undistributed income allocated to Series C pr
95、eferred stock (1,583)1,583N/A Income Available to Common Stockholders$53,859$103,285$(49,426)(47.9)%20072006Change$Change%(dollars in thousands,except statistical data)Revenues Room$638,119$511,525$126,59424.7%Food and beverage 259,124208,25350,87124.4%Other operating 64,49951,44113,05825.4%Total re
96、venues 961,742771,219190,52324.7%Operating Expenses Hotel operating 572,483472,293100,19021.2%Property general and administrative 110,17790,62219,55521.6%Corporate overhead 28,04818,8589,19048.7%Depreciation and amortization 111,32683,79327,53332.9%Total operating expenses 822,034665,566156,46823.5%
97、Operating income 139,708105,65334,05532.2%Equity in net earnings(losses)of unconsolidated joint venture(3,588)140(3,728)(2,662.9)%Interest and other income 9,1014,2064,895116.4%Interest expense(92,431)(78,951)(13,480)17.1%Income from continuing operations 52,79031,04821,74270.0%Income from discontin
98、ued operations 72,87322,18950,684228.4%Net Income 125,66353,23772,426136.0%Preferred stock dividends and accretion(20,795)(19,616)(1,179)6.0%Undistributed income allocated to Series C preferred stock(1,583)(1,583)N/A Income Available to Common Stockholders$103,285$33,621$69,664207.2%Sunstone Hotel I
99、nvestors,Inc.10Included in the following tables are comparisons of the key operating metrics for our hotel portfolio for the years ended December 31,2008,2007 and 2006.The comparisons do not include the results of operations for the two hotels sold in 2008,the seven hotels sold in 2007,and the 15 ho
100、tels sold in 2006.Because seven of our hotels owned as of December 31,2008 were acquired during 2006 and 2007,the key operating metrics for the total hotel portfolio and the comparable hotel portfolio reflect the results of operations of those seven hotels under previous ownership for a portion of t
101、he periods presented.(1)Includes hotel properties owned on December 31,2008,excluding hotels that experienced material disruption during the reporting periods(Renaissance Baltimore and Renaissance Orlando).(2)Includes hotel properties owned on December 31,2008,excluding hotels that experienced mater
102、ial disruption during the reporting periods(Fairmont Newport Beach,Renaissance Baltimore and Renaissance Orlando).For the year ended December 31,2008,RevPAR for our pro forma total portfolio decreased 2.2%from 2007 to$119.45.Occupancy decreased 250 basis points to 74.2%,while ADR increased 1.1%to$16
103、0.99.For our pro forma comparable hotel portfolio,RevPAR decreased 2.3%from 2007 to$119.18.Occupancy decreased 270 basis points to 74.7%,while ADR increased 1.2%to$159.54.For the year ended December 31,2007,RevPAR for our pro forma total portfolio increased 8.7%from 2006 to$122.09.Occupancy increase
104、d 270 basis points to 76.7%,while ADR increased 4.9%to$159.18.For our pro forma comparable hotel portfolio,RevPAR increased 7.8%from 2006 to$121.94.Occupancy increased 200 basis points to 77.3%,while ADR increased 5.0%to$157.75.The increase in our RevPAR for the year ended December 31,2007 was signi
105、ficantly affected by increases in RevPAR at several of our recently renovated hotels.Room revenue.Room revenue increased$2.6 million,or 0.4%,for the year ended December 31,2008 as compared to the year ended December 31,2007.We acquired three hotels during the period from January 1,2007 to December 3
106、1,2008:Renaissance LAX,Marriott Long Wharf,and Marriott Boston Quincy(the“three hotels”).The three hotels contributed$10.9 million to room revenue during 2008.In addition,room revenue generated by the hotels we acquired prior to January 1,2007(our“existing portfolio”)decreased$8.3 million during 200
107、8 due to a decrease in occupancy($17.2 million)partially offset by an increase in ADR($8.9 million).Room revenue increased$126.6 million,or 24.7%for the year ended December 31,2007 as compared to the year ended December 31,2006.We acquired seven hotels during the period from January 1,2006 to Decemb
108、er 31,2007:Marriott Del Mar,Hilton Times Square,Embassy Suites La Jolla,W Hotel San Diego,Renaissance LAX,Marriott Long Wharf,and Marriott Boston Quincy(the“seven hotels”).The seven hotels contributed$85.5 million to room revenue during 2007.In addition,growth in the hotels we acquired prior to Janu
109、ary 1,2006(our“2007 existing portfolio”)contributed$41.1 million to room revenue during 2007 due to increases in both occupancy($15.8 million)and ADR($25.3 million).Food and beverage revenue.Food and beverage revenue decreased$0.5 million,or 0.2%,for the year ended December 31,2008 as compared to th
110、e year ended December 31,2007.The three hotels contributed$3.2 million to food and beverage revenue during 2008.Food and beverage revenue generated from our existing portfolio decreased$3.7 million during 2008 as compared to 2007,due primarily to a decrease in banquet revenue as businesses and group
111、s scaled back their conferences and meetings due to the struggling economy.This decreased revenue was slightly offset by an increase in outlet revenue as 2007 included renovation disruption at the Renaissance Baltimore,the Renaissance Long Beach and the Renaissance Orlando.Food and beverage revenue
112、increased$50.9 million,or 24.4%,for the year ended December 31,2007 as compared to the year ended December 31,2006.The seven hotels contributed$26.7 million to food and beverage revenue during 2007.Food and beverage revenue generated from our 2007 existing portfolio increased$24.2 million during 200
113、7 as compared to 2006,due primarily to higher occupancy levels at the hotels.2008 2007 Change Occ%ADR RevPAROcc%ADR RevPAR Occ%ADR RevPAR Total Hotel Portfolio(43 hotels)74.2%$160.99$119.45 76.7%$159.18$122.09(250)bps 1.1%(2.2)%Comparable Hotel Portfolio(41 hotels)(1)74.7%$159.54$119.18 77.4%$157.63
114、$122.01(270)bps 1.2%(2.3)%2007 2006 Change Occ%ADR RevPAROcc%ADR RevPAR Occ%ADR RevPAR Total Hotel Portfolio(43 hotels)76.7%$159.18$122.09 74.0%$151.81$112.34270 bps 4.9%8.7%Comparable Hotel Portfolio(40 hotels)(2)77.3%$157.75$121.94 75.3%$150.25$113.14200 bps 5.0%7.8%Annual Report 200811Other opera
115、ting revenue.Other operating revenue increased$5.2 million,or 8.1%,for the year ended December 31,2008 as compared to the year ended December 31,2007.The three hotels contributed$1.2 million to other operating revenue during 2008.Other operating revenue generated from our existing portfolio increase
116、d$4.0 million during 2008.A substantial portion of our other operating revenue in 2008 resulted from a performance guaranty provided by the manager of the Fairmont Newport Beach.We recognized$3.5 million of the$6.0 million performance guaranty during the year ended December 31,2008,and recognized no
117、 guaranty amount during the year ended December 31,2007.We have used a total of$3.5 million of this guaranty,and we expect to fully utilize the remaining amount of this guaranty in 2009.Other revenue generated from our existing portfolio also increased during 2008 as compared to 2007 due to an incre
118、ase in transportation and parking revenue generated by several of our hotels due to changes in parking management agreements,combined with an increase in revenue at both of our laundry facilities.These increases were partially offset by the reclassification of BuyEfficients operations to equity in n
119、et earnings(losses)of unconsolidated joint ventures,combined with a decrease in telephone revenue.Other operating revenue increased$13.1 million,or 25.4%,for the year ended December 31,2007 as compared to the year ended December 31,2006.The seven hotels contributed$6.3 million to other operating rev
120、enue during 2007.Other operating revenue generated from our 2007 existing portfolio increased$6.8 million during 2007 as compared to 2006 primarily due to increased internet usage,telephone,transportation and parking revenue caused by the increased occupancy,combined with attrition fees collected by
121、 our hotels,as well as increased revenue generated by BuyEfficient and by one of our laundry facilities.Hotel operating expenses.Hotel operating expenses,which are comprised of room,food and beverage,advertising and promotion,repairs and maintenance,utilities,and other hotel operating expenses incre
122、ased$11.5 million,or 2.0%,for the year ended December 31,2008 as compared to the year ended December 31,2007.The three hotels contributed$11.5 million to hotel operating expenses during 2008.Hotel operating expense in our existing portfolio remained flat during 2008 as compared to 2007.More specific
123、ally,hotel operating expenses in our existing portfolio decreased in correlation to the decreases in related room,food and beverage and other revenue,combined with decreased property insurance expense due to lower premiums,as well as decreased ground lease expense due to our purchase of the land und
124、erlying our Renaissance Orlando hotel.Prior to our acquisition,the land had been leased from a third party.We expect our ground lease expense to decrease by approximately$2.0 million in 2009 due to this acquisition.These decreases were mostly offset during the year ended December 31,2008 as compared
125、 to 2007,by increased utility expenses due to higher energy costs,advertising and promotion expenses due to higher complimentary promotional food and beverage expenditures,and property taxes due to supplemental property tax bills assessed to several of our hotels.Hotel operating expenses increased$1
126、00.2 million,or 21.2%,during the year ended December 31,2007 as compared to the year ended December 31,2006.The seven hotels contributed$66.1 million in other operating expenses during 2007.In addition,hotel operating expenses in our 2007 existing portfolio increased$34.1 million during 2007 as comp
127、ared to 2006.These higher costs in our 2007 existing portfolio during 2007 were driven by our increases in related revenues,the direct result of higher occupancy as well as an increase in advertising cost.Property general and administrative expense.Property general and administrative expense increas
128、ed$0.2 million,or 0.2%,for the year ended December 31,2008 as compared to the year ended December 31,2007.The three hotels contributed$1.8 million to property general and administrative expense.Property general and administrative expense in our existing portfolio decreased$1.6 million primarily due
129、to the reclassification of BuyEfficients operations to equity in net earnings(losses)of unconsolidated joint ventures.In addition,property general and administrative expense decreased during the year ended December 31,2008 as compared to the same period in 2007 due to decreased payroll expenses and
130、management fees associated with the decrease in revenue,partially offset by increased contract and professional services,bad debt expense and credit card commissions.Property general and administrative expenses for the year ended December 31,2008 also includes$0.9 million in severance and restructur
131、ing charges as our hotels worked to control costs during the current economic slowdown.Property general and administrative expense increased$19.6 million,or 21.6%,for the year ended December 31,2007 as compared to the year ended December 31,2006.The seven hotels contributed$13.7 million to property
132、general and administrative expense during 2007.In addition,property general and administrative expense in our 2007 existing portfolio increased$5.9 million primarily due to wage increases and to other hotel-specific expenses,such as increased credit card commissions and management fees,associated wi
133、th the overall increase in revenue.Corporate overhead expense.Corporate overhead expense decreased$6.4 million,or 22.7%,during the year ended December 31,2008 as compared to the year ended December 31,2007,primarily due to additional costs incurred in 2007 for severance related to the chief executiv
134、e officer succession and the senior management team transition.Corporate overhead expenses during 2008 were also reduced as compared to 2007 due to our elimination of a separate Chief Accounting Officer position,which we have combined with the Chief Financial Officer position.These decreases were pa
135、rtially offset by$0.2 million in severance costs recorded in 2008 combined with increased costs associated with exploring potential hotel acquisitions and dispositions,entity level state franchise and minimum tax payments,sales tax expense,and legal expense.Sunstone Hotel Investors,Inc.12Corporate o
136、verhead expense increased$9.2 million,or 48.7%,during the year ended December 31,2007 as compared to the year ended December 31,2006,due to executive officer severance costs which totaled$3.5 million and costs related to the chief executive officer succession which totaled$1.5 million,as well as inc
137、reases in compensation,including bonus accruals,deferred stock compensation and related payroll expenses,and increases in other corporate expenses.Depreciation and amortization expense.Depreciation and amortization expense increased$4.4 million,or 3.9%during the year ended December 31,2008 as compar
138、ed to the year ended December 31,2007.The three hotels contributed$3.7 million in depreciation and amortization expense during 2008.Depreciation and amortization expense in our existing portfolio increased$0.7 million.Depreciation and amortization expense increased$27.5 million,or 32.9%,during the y
139、ear ended December 31,2007 as compared to the year ended December 31,2006.The seven hotels contributed$15.7 million in depreciation and amortization expense during 2007.Depreciation and amortization expense in our 2007 existing portfolio increased by$11.8 million.Goodwill and other impairment losses
140、.Goodwill and other impairment losses totaled$2.9 million for the year ended December 31,2008 as compared to zero for both the years ended December 31,2007 and 2006.In conjunction with our 2008 annual goodwill impairment evaluation,we wrote off$2.8 million of goodwill associated with our Marriott Na
141、pa Valley hotel.In addition,we recognized a$0.1 million impairment loss on a vacant parcel of land in anticipation of its sale in January 2009.Equity in net earnings(losses)of unconsolidated joint ventures.Equity in net earnings(losses)of unconsolidated joint ventures totaled a net loss of$1.4 milli
142、on for the year ended December 31,2008 as compared to a net loss of$3.6 million for the year ended December 31,2007,and income of$0.1 million for the year ended December 31,2006.In 2008,we recognized a$1.6 million loss on our Doubletree Guest Suites Hotel Times Square joint venture,which we original
143、ly purchased in December 2006,and income of$0.2 million on our BuyEfficient joint venture which began to be accounted for as an unconsolidated joint venture in December 2007 following our sale of a 50%interest in BuyEfficient.In 2007,we recognized a$3.6 million loss on our Doubletree Guest Suites Ho
144、tel Times Square joint venture,and nominal income on our BuyEfficient joint venture.In 2006,we recognized income of$0.1 million on our Doubletree Guest Suites Hotel Times Square joint venture.Interest and other income.Interest and other income totaled$3.8 million for the year ended December 31,2008,
145、$9.1 million for the year ended December 31,2007 and$4.2 million for the year ended December 31,2006.In 2008,we recognized$3.6 million in interest income,and$0.2 million in other miscellaneous income.In 2007,we recognized a$6.1 million gain on our sale of BuyEfficient,$2.9 million in interest income
146、,and$0.1 in other miscellaneous income.In 2006,we recognized$3.9 million in interest income and$0.3 million in other miscellaneous income.Interest expense.Interest expense is as follows(in thousands):Interest expense increased$5.9 million,or 6.3%,during the year ended December 31,2008 as compared to
147、 the year ended December 31,2007.Interest expense includes an additional$5.9 million incurred during 2008 as compared to 2007 as a result of a mortgage loan obtained to finance our acquisition of the Marriott Long Wharf in March 2007,combined with the issuance by the Operating Partnership of exchang
148、eable senior notes in June 2007 and an increase in interest expense incurred on our credit facility,which was partially offset by our repayment of three mortgages during 2007.In addition,interest expense increased in 2008 as compared to 2007 due to an increase in amortization of deferred financing f
149、ees of$0.3 million,and to a credit of$0.5 million recorded in 2007 to write-off a loan premium as a result of the repayment of a mortgage loan before its maturity date.Partially offsetting these increases,interest expense was reduced in 2008 as compared to 2007 due to an$0.8 million loss on early ex
150、tinguishment of debt recorded in 2007.Interest expense increased$13.5 million,or 17.1%,during the year ended December 31,2007 as compared to the year ended December 31,2006.Interest expense includes an additional$24.0 million incurred during the year ended December 31,2007 as compared to the year en
151、ded December 31,2006,as a result of mortgage loans obtained during 2006 to finance our acquisitions of the Del Mar Marriott,Hilton Times Square,Embassy Suites La Jolla,and W Hotel San Diego,combined with an additional draw on the mortgage loan of the Renaissance Orlando,a mortgage loan obtained duri
152、ng 2007 to finance our acquisition of Year Ended December 31,2008 Year Ended December 31,2007 Year Ended December 31,2006 Interest expense$96,587$90,625$66,662Deferred financing fees 1,702 1,389 1,451Write-off deferred financing fees 64 2,765Write-off loan premium (465)(1,903)Costs associated with e
153、arly extinguishments of debt 818 9,976$98,289$92,431$78,951 Annual Report 200813the Marriott Long Wharf and the issuance by the Operating Partnership of exchangeable senior notes in June 2007.These increases were partially offset by our repayment of three mortgages during 2007 and a reduction in int
154、erest expense incurred on our credit facility in 2007 as compared to 2006.In addition,interest expense in 2007 includes$0.8 million in loss on early extinguishment of debt,and a credit of$0.5 million due to the write-off of a loan premium as a result of the repayment of a mortgage loan before its ma
155、turity date.Partially offsetting these items,interest expense was affected in 2007 as compared to 2006 by a$10.0 million loss on early extinguishment of debt and a credit of$1.9 million incurred in 2006 associated with the defeasance of debt.In addition,amortization of deferred financing fees decrea
156、sed$2.7 million during 2007 as compared to 2006 primarily due to the write-off of deferred financing fees associated with debt refinanced during 2006.Our weighted average interest rate per annum was approximately 5.5%at both December 31,2008 and 2007,and 5.7%at December 31,2006.At December 31,2008,a
157、ll of our outstanding notes payable had fixed interest rates.Income from discontinued operations.Income from discontinued operations totaled$36.2 million for the year ended December 31,2008,$72.9 million for the year ended December 31,2007,and$22.2 million for the year ended December 31,2006.As desc
158、ribed under“Investing ActivitiesDispositions,”we sold two hotels in 2008,seven hotels in 2007,and 15 hotels in 2006.Consistent with the requirements of Financial Accounting Standards Board(“FASB”)Statement No.144,“Accounting for the Impairment or Disposal of Long-Lived Assets”(“FAS 144”),we have cla
159、ssified the gains and losses on sale as discontinued operations and reclassified the results of operations for these hotels as discontinued operations.Preferred stock dividends and accretion.Preferred stock dividends and accretion increased$0.1 million,or 0.4%during the year ended December 31,2008 a
160、s compared to the year ended December 31,2007,due to an increase in the dividend rate for our Series C preferred stock to$1.605 per share in 2008 from$1.583 per share in 2007.Preferred stock dividends and accretion increased$1.2 million,or 6.0%during the year ended December 31,2007 as compared to th
161、e year ended December 31,2006,due to 2.2 million shares of Series A preferred stock that were issued in April 2006.Investing Activities Acquisitions.Consistent with our cycle-appropriate strategy,we did not acquire any hotel properties during 2008.In September 2008,we acquired 32.6 acres of land und
162、erlying our Renaissance Orlando hotel using available cash on hand for$30.7 million,including costs of the acquisition.Prior to our acquisition,the land had been leased from a third party.As a result of this acquisition,property tax,ground lease and insurance has been reduced by$0.7 million for the
163、year ended December 31,2008.We expect to make few hotel acquisitions until the early growth phase of the lodging cycle.We generally expect acquisition opportunities will continue to be limited in 2009 due to the state of the credit markets and uncertainty regarding near-term business operations.The
164、following table sets forth the hotels we have acquired since January 1,2006:(1)Subsequent to this acquisition,the Company added an additional 10 rooms to this hotel,increasing the room count to 412.(2)Subsequent to this acquisition,the Company converted 1 room in this hotel to an alternate use,decre
165、asing the room count to 258.(3)Subsequent to this acquisition,the Company added an additional 5 rooms to this hotel,increasing the room count to 340.(4)Subsequent to this acquisition,the Company added an additional 16 rooms to this hotel,increasing the room count to 460.The combined cost for these s
166、even hotel acquisitions was approximately$934.0 million,or$348,000 per room.HotelsRooms Acquisition Date2008:No hotel acquisitions 2007:Marriott Boston Quincy,Quincy,Massachusetts 464 May 1,2007Marriott Long Wharf,Boston,Massachusetts(1)402 March 23,2007Renaissance LAX,Los Angeles,California 499 Jan
167、uary 4,20072006:W Hotel,San Diego,California(2)259 June 26,2006Embassy Suites,La Jolla,California(3)335 May 17,2006Hilton Times Square,New York City,New York(4)444 March 17,2006Marriott Del Mar,San Diego,California 284 January 10,2006 Total January 1,2006 to December 31,2008 2,687 Sunstone Hotel Inv
168、estors,Inc.14Dispositions.Consistent with our cycle-appropriate strategy,we were a net seller of hotels in 2008.In May 2008,we sold the Hyatt Regency Century Plaza for net proceeds of$358.8 million,and a net gain of$42.1 million.In July 2008,we used a portion of the net proceeds to repay amounts out
169、standing under our credit facility,which had been used to fund the repurchase of 7,374,179 shares of our common stock for$129.0 million(excluding fees and costs)in a modified“Dutch Auction”tender offer(the“Tender Offer”).Although our current intention is to retain a substantial portion of the remain
170、ing proceeds until a recovery of the lodging cycle begins,we continue to analyze alternatives for the reinvestment of the remaining proceeds,which,depending on market conditions,may include hotel acquisitions,debt repayments,securities repurchases,other types of investments,or other general corporat
171、e needs.In December 2008,we sold the Crowne Plaza in Grand Rapids,Michigan for net proceeds of$3.6 million,including a$2.0 million note receivable,and a net loss of$16.1 million.Consistent with our strategic plan,we continue to evaluate the potential divestiture of certain non-core hotels,which may
172、be completed as a portfolio sale,single asset sales,or not at all,depending on market conditions.The following table sets forth the hotels we have sold since January 1,2006:The aggregate net sale proceeds for the 24 hotel dispositions through December 31,2008 was$704.8 million,or$129,000 per room.Th
173、e results of operations of all of the hotels identified above and the gains or losses on dispositions through December 31,2008 are included in discontinued operations for all periods presented through the time of sale.The proceeds from the sales are included in our cash flows from investing activiti
174、es for the respective periods.Hotels Rooms Disposition Date 2008:Crowne Plaza,Grand Rapids,Michigan 320December 10,2008Hyatt Regency,Los Angeles(Century City),California 726May 30,20082007:Sheraton,Salt Lake City,Utah 362December 20,2007Courtyard by Marriott,Oxnard,California 166June 29,2007Courtyar
175、d by Marriott,Riverside,California 163June 29,2007Hawthorn Suites,Sacramento,California 272June 29,2007Hilton Garden Inn,Lake Oswego,Oregon 179June 29,2007Residence Inn by Marriott,Oxnard,California 251June 29,2007Residence Inn by Marriott,Sacramento,California 126June 29,20072006:Holiday Inn,Roches
176、ter,Minnesota 170December 21,2006Courtyard by Marriott,Fresno,California 116September 13,2006Courtyard by Marriott,Lynnwood,Washington 164September 13,2006Courtyard by Marriott,Santa Fe,New Mexico 213September 13,2006Crowne Plaza,Englewood,New Jersey 194September 13,2006Crowne Plaza,Williamsburg,Vir
177、ginia 303September 13,2006Hawthorn Suites,Kent,Washington 152September 13,2006Holiday Inn,Boise,Idaho 265September 13,2006Holiday Inn,Craig,Colorado 152September 13,2006Holiday Inn,Price,Utah 151September 13,2006Holiday Inn,Renton,Washington 226September 13,2006Holiday Inn,San Diego(Stadium),Califor
178、nia 175September 13,2006Marriott,Ogden,Utah 292September 13,2006Marriott,Pueblo,Colorado 164September 13,2006Holiday Inn,Hollywood,California 160March 15,2006 Total January 1,2006 to December 31,2008 5,462 Annual Report 200815The following table summarizes our portfolio and room data from the beginn
179、ing of 2006 through December 31,2008,adjusted for the hotels acquired and sold during the respective periods.Renovations.During 2008,we invested$94.7 million in capital improvements to our hotel portfolio.Liquidity and Capital Resources Historical.During the periods presented,our sources of cash inc
180、luded our operating activities,working capital,sales of hotel properties and other assets,distributions received from our unconsolidated joint ventures,proceeds from notes payable including our Operating Partnerships debt securities and our credit facility,and proceeds from our public and private of
181、ferings of common and preferred stock.Our primary uses for cash were for hotel acquisitions,capital expenditures for hotels,operating expenses,repayment of notes payable,repurchases of our common stock,and dividends on our common and preferred stock.Among other things,recently the capital markets ha
182、ve experienced extreme price volatility,dislocations and liquidity disruptions,all of which have exerted downward pressure on stock prices,widened credit spreads on prospective debt financing and led to declines in the market values of U.S.and foreign stock exchanges.Accordingly,we cannot be certain
183、 that traditional sources of cash flow will be available in the future.Operating activities.Our cash provided by(used in)operating activities fluctuates primarily as a result of changes in RevPAR and operating flow through of our hotels.Our net cash provided by(used in)operating activities may also
184、be affected by changes in our portfolio resulting from hotel acquisitions,dispositions or renovations.Net cash provided by operating activities was$160.9 million for 2008 compared to$213.6 million for 2007,and$163.6 million in 2006.The decrease in 2008 as compared to 2007 was primarily due to decrea
185、sed earnings at our hotels during 2008,combined with a decrease in accounts payable and other liabilities.In addition,net cash provided by operating activities decreased in 2008 as compared to 2007 because operating cash in 2007 includes the receipt of previously restricted cash held by a lender in
186、conjunction with our early pay-off of a mortgage loan.The increase in 2007 as compared to 2006 was primarily due to decreases in our restricted cash accounts because we had received previously restricted cash held by lenders in conjunction with our early pay-off of two mortgage loans,combined with i
187、ncreased earnings of our hotels during 2007.Investing activities.Our cash provided by(used in)investing activities fluctuates primarily as a result of acquisitions,dispositions and renovations of hotels.Net cash provided by(used)in investing activities in 2008,2007 and 2006 was as follows(in thousan
188、ds):20082007 2006 Portfolio DataHotels Number of hotelsbeginning of period 45 4960Add:Acquisitions 3 4Less:Dispositions(2)(7)(15)Number of hotelsend of period 434549Portfolio DataRooms Number of roomsbeginning of period15,62515,75817,333Add:Acquisitions 1,3651,322Add:Room expansions 21 Less:Disposit
189、ions(1,046)(1,519)(2,897)Less:Rooms converted to other usage(10)Number of roomsend of period 14,56915,62515,758Average rooms per hotelend of period 339347322 Year Ended December 31,2008 Year Ended December 31,2007 Year Ended December 31,2006 Proceeds from sale of hotel properties,other real estate a
190、nd 50%interest in subsidiary$360,395$185,728$157,718Restricted cash replacement reserve 5,1365,993(2,074)Proceeds received from sale of note receivable 29,047 Cash received from(contributed to)unconsolidated joint ventures 5,675426(68,574)Acquisitions of hotel properties and land(30,695)(403,249)(44
191、8,373)Renovations and additions to hotel properties and other real estate(94,697)(135,231)(139,364)Net cash provided by(used in)investing activities$245,814$(317,286)$(500,667)Sunstone Hotel Investors,Inc.16 Pursuant to our cycle-appropriate strategy,we did not acquire any hotels and we sold two hot
192、els in 2008.Net cash provided by investing activities was$245.8 million as compared to net cash used of$317.3 million in 2007 and$500.7 million in 2006.During 2008,we received net proceeds of$360.4 million from the sale of the two hotels,decreased the balance in our restricted cash replacement reser
193、ve accounts by$5.1 million,and received$5.7 million from one of our unconsolidated joint ventures.During 2008,we also acquired the land underlying one of our hotels for$30.7 million,paid an additional$14,000 for two hotels acquired in 2007,and received a$35,000 deposit paid in 2007 for a total cash
194、outlay of$30.7 million.In addition,we paid cash of$94.7 million for renovations to our hotels.During 2007,we acquired three hotels for$410.7 million,including an$8.4 million deposit paid at the end of 2006,and paid an additional$0.9 million for a hotel acquired in 2006,for a total cash outlay of$403
195、.2 million.In addition,we received net proceeds of$179.3 million from the sale of seven hotels,$6.3 million from the sale of a 50%interest in our subsidiary BuyEfficient,of which$0.3 million was contributed to the new joint venture with Strategic to operate BuyEfficient,and$0.4 million from the sale
196、 of a vacant land parcel for a total of$185.7 million in net proceeds received.During 2007,we also paid cash of$135.2 million for renovations to our hotels,received$29.0 million from the sale of a note receivable,decreased the balance in our restricted cash replacement reserve accounts by$6.0 millio
197、n,and received$0.4 million from our unconsolidated joint ventures.During 2006,we acquired four hotels for$522.2 million,including the assumption of$81.0 million in debt and a$6.5 million deposit paid at the end of 2005,acquired an office building and land adjacent to one of our hotels for$4.4 millio
198、n,incurred additional costs of$0.8 million related to our 2005 acquisitions,and paid an$8.5 million deposit for a hotel purchased in 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
199、 an additional hotel,$139.4 million for renovations to our hotels,increased the balance in our restricted cash replacement reserve accounts by$2.1 million,and received net proceeds of$157.7 million from the sale of 15 hotels combined with the collection of additional proceeds from a hotel we sold in
200、 2004.Financing activities.Our cash(used in)provided by financing activities fluctuates primarily as a result of our issuance and repayment of notes payable,draws and repayments on our credit facility and by the issuance and repurchase of other forms of capital,including preferred equity and common
201、stock.Net cash used in financing activities was$293.7 million in 2008 as compared to net cash provided of$141.7 million in 2007 and$349.1 million in 2006.Net cash used in financing activities in 2008 consisted primarily of$190.3 million of principal payments on our credit facility and notes payable,
202、$184.5 million used to repurchase shares of our common stock,$99.8 million of dividends paid to our stockholders,and$0.1 million in deferred financing costs partially offset by$181.0 million in proceeds received from draws on our credit facility.Net cash provided by financing activities for 2007 con
203、sisted primarily of proceeds from the issuance of notes payable and draws on our credit facility of$609.0 million,including our Operating Partnerships debt securities,and net proceeds from the settlement of a forward sale agreement(with an affiliate of Citigroup Global Markets Inc.as the forward cou
204、nterparty,relating to 4,000,000 shares of our common stock)of$110.4 million,partially offset by$387.5 million of principal payments on notes payable and our credit facility,$86.4 million used to repurchase shares of our common stock,$96.3 million of dividends paid to our stockholders,and$7.5 million
205、 in deferred financing costs.Net cash provided by financing activities in 2006 consisted primarily of proceeds from notes payable and draws on our credit facility of$604.5 million,and net proceeds from our preferred and common stock offerings of$54.1 million and$157.7 million,respectively,partially
206、offset by$366.9 million of principal payments on notes payable and our credit facility 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.Future.We expect our primary uses of cash to be for
207、acquisitions of hotels,capital expenditures for hotels,operating expenses,repayment of principal on our notes payable and credit facility,interest expense and dividends.We expect our primary sources of cash will continue to be our operating activities,working capital,notes payable,sales of hotel pro
208、perties,including the net remaining proceeds from the sale of the Hyatt Regency Century Plaza,and proceeds from public and private offerings of debt securities and common and preferred stock.Our ability to incur additional debt depends on a number of financial factors,including our leverage,the valu
209、e of our unencumbered assets,borrowing restrictions imposed by lenders under our existing notes payable and our credit facility,as well as other factors affecting the general willingness or ability of lenders to provide loans.Our ability to raise funds through the issuance of equity securities depen
210、ds on,among other things,general market conditions for hotel companies and REITs and market perceptions about us.We will continue to analyze alternate sources of capital in an effort to minimize our capital costs and maximize our financial flexibility.However,when needed,the capital markets may not
211、be available to us on favorable terms or at all.Annual Report 200817We believe that our current cash balance,our cash flow from operations,and our unencumbered properties will provide us with sufficient liquidity to meet our current operating expenses and other expenses directly associated with our
212、business(including payment of dividends on our capital stock,if declared)for the foreseeable future,and in any event for at least the next 12 months.As of December 31,2008,our credit facility had no amount outstanding,and had$3.5 million backing outstanding irrevocable letters of credit,leaving up t
213、o$196.5 million available under the credit facility.Debt.As of December 31,2008 we had$1.7 billion of debt,$220.2 million of cash and cash equivalents,including restricted cash,and total assets of$2.8 billion.We believe that by controlling debt levels,we can achieve lower capital costs than more hig
214、hly leveraged companies.As of December 31,2008,all of our outstanding debt had fixed interest rates.The majority of our mortgage debt is in the form of single asset loans.We believe this structure is appropriate for the operating characteristics of our business and provides flexibility for assets to
215、 be sold subject to the existing debt.The weighted average term to maturity of our debt is 8.4 years,and the weighted average interest rate on our debt is 5.5%.Our first loan maturity,the$81.0 million mortgage on the New York Hilton Times Square,is in December 2010.Financial Covenants.We are subject
216、 to compliance with various covenants under both the credit facility and the Series C preferred stock.If we fail to meet the credit facilitys covenants,we will be in default of the credit facility,which may result in a reduction in,or the elimination of,funds available under the credit facility.If w
217、e fail to meet certain financial covenants with respect to our Series C preferred stock,the Series C holder would be entitled to elect one member to our board of directors and to receive a default dividend of 0.50%of its liquidation preference(as defined in the articles supplementary for the Series
218、C preferred stock)in addition to any other dividend to which it is entitled,and we would be restricted from paying dividends on our common stock.We believe if economic trends continue to negatively affect the demand for our hotels,we may fail to meet our financial covenants under the credit facility
219、 and the Series C preferred stock within the next 12 to 24 months.If it becomes likely that such a failure may occur with respect to our credit facility,we may seek to renegotiate the terms of our credit facility,or we may elect to terminate the credit facility.If we fail to meet the financial coven
220、ants with respect to the Series C preferred stock,we may seek an agreement with the holder of the Series C preferred stock to amend the financial covenants,although there is no assurance that we would be successful in such negotiations.We believe we could obtain mortgages on,or pledge to a secured f
221、acility,one or more of our ten unencumbered hotels.These ten hotels had an aggregate of 3,119 rooms as of December 31,2008,and generated$189.4 million in revenue during 2008.In addition,we have decided to maintain higher than historical cash levels for working capital due to current economic and bus
222、iness trends.Cash Balance.During 2008,we increased our unrestricted cash balance by$112.9 million from$66.1 million to$179.0 million.We intend to continue to maintain higher than historical cash balances until such time as we believe the cyclical recovery of the lodging cycle is evident.We believe t
223、hat by minimizing our need to access external capital by maintaining higher than typical cash balances during the current cyclical decline,our financial security and flexibility have been meaningfully enhanced.Contractual Obligations The following table summarizes our payment obligations and commitm
224、ents as of December 31,2008(in thousands):Capital Expenditures and Reserve Funds We believe we maintain each of our hotels in good repair and condition and in general conformity with applicable franchise and management agreements,ground and air leases,laws and regulations.Our capital expenditures pr
225、imarily relate to the ongoing maintenance of our hotels and are budgeted in the reserve accounts described in the following paragraph.We also incur capital expenditures for renovation and development.We invested$94.7 million during 2008 in our hotels.As of December 31,2008,our renovation budget for
226、2009 includes$12.5 million of contractual construction commitments.If we acquire,renovate or develop additional hotels in the future,our capital expenditures will increase.Payment due by period Total Less than 1 year 1 to 3 years 3 to 5 yearsMore than 5 years (in thousands)Notes payable$1,712,765$13
227、,002$360,982$97,045$1,241,736Interest obligations on notes payable 755,61095,019174,091140,106346,394Operating lease obligations 310,1134,9578,8538,606287,697Construction commitments12,50612,506 Employment obligations 3,0507751,300975 Total$2,794,044$126,259$545,226$246,732$1,875,827 Sunstone Hotel
228、Investors,Inc.18With respect to our hotels that are operated under management or franchise agreements with major national hotel brands and for all of our hotels subject to first mortgage liens,we are obligated to maintain a furniture,fixture and equipment(“FF&E”)reserve account for future planned an
229、d emergency-related capital expenditures at these hotels.The amount funded into each of these reserve accounts is determined pursuant to the management,franchise and loan agreements for each of the respective hotels,ranging between 2.0%and 5.0%of the respective hotels total annual revenue.As of Dece
230、mber 31,2008,$25.5 million was held in FF&E reserve accounts for future capital expenditures at our hotels.According to the respective loan agreements,the reserve funds are to be held by the lenders or managers in restricted cash accounts.We generally are not required to spend the entire amount in t
231、he FF&E reserve accounts each year.Off-Balance Sheet Arrangements Our off-balance sheet arrangements consist of our ownership interest in two joint ventures.For further discussion of these joint ventures and their effect on our financial condition,results of operations and cash flows,see Note 6 to t
232、he consolidated financial statements.Seasonality As is typical of the lodging industry,we experience some seasonality in our business as indicated in the table below.Revenue for certain of our hotels is generally affected by seasonal business patterns(e.g.,the first quarter is strong in Orlando,the
233、second quarter is strong for the Mid-Atlantic business hotels,and the fourth quarter is strong for New York City).Quarterly revenue also may be adversely affected by renovations,our managers ability to generate business and by events beyond our control,such as extreme weather conditions,terrorist at
234、tacks or alerts,public health concerns,airline strikes or reduced airline capacity,economic factors and other considerations affecting travel.Revenues for our comparable hotel portfolio by quarter during 2007 and 2008 were as follows(dollars in thousands):Inflation Inflation may affect our expenses,
235、including,without limitation,by increasing such costs as labor,food,taxes,property and casualty insurance and utilities.Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements,which have been pr
236、epared in accordance with accounting principles generally accepted in the United States(“GAAP”).The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets,liabilities,revenue and expenses and related disclosure of contingent a
237、ssets and liabilities.We evaluate our estimates on an ongoing basis.We base our estimates on historical experience,information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances.Actual results may differ from these estimates unde
238、r different assumptions or conditions.We believe the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our consolidated financial statements.Impairment of long-lived assets and goodwill.We periodically review each property and any r
239、elated goodwill 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 to be impaired,the impairment recognized is me
240、asured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets.In this analysis of fair value,we use discounted cash flow analysis to estimate the fair value of our properties taking into account each propertys expected cash flow from operations,holdin
241、g period and proceeds from the disposition of the property.The factors addressed in determining estimated proceeds from disposition include anticipated operating cash flow in the year of disposition and terminal capitalization rate.Our judgment is required in determining the discount rate applied to
242、 estimated cash 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 recording of these assets at their estimated fair value less estimated
243、selling costs which can affect the amount of impairment recorded.We account for goodwill in accordance with FASB Statement No.142,“Goodwill and Other Intangible Assets,”which First QuarterSecond QuarterThird Quarter Fourth Quarter Total Revenues 2007$189,516$215,346$212,371$238,610$855,8432007 reven
244、ues as a percentage of total 22.1%25.2%24.8%27.9%2008$192,056$219,866$209,307$218,495$839,7242008 revenues as a percentage of total 22.9%26.2%24.9%26.0%Annual Report 200819states that goodwill has an indefinite useful life that should not be amortized but should be reviewed annually for impairment,o
245、r more frequently if events or changes in circumstances indicate that goodwill might be impaired.The review of any potential goodwill impairment requires estimates of fair value for our properties that have goodwill arising from unallocated acquisition costs.These estimates of fair value are prepare
246、d using the procedures described above.Depreciation and amortization expense.Depreciation expense is based on the estimated useful life of our assets.The life of the assets is based on a number of assumptions,including the cost and timing of capital expenditures to maintain and refurbish our hotels,
247、as well as specific market and economic conditions.Hotel properties and other completed real estate investments are depreciated using the straight-line method over estimated useful lives ranging from five to 35 years for buildings and improvements and three to 12 years for furniture,fixtures and equ
248、ipment.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 sale of any of our hotels.We have not changed the estimated useful lives of any of our assets during the periods discussed.New Acc
249、ounting Standards and Accounting Changes In September 2006,the FASB issued Statement No.157,“Fair Value Measurements”(“FAS 157”).FAS 157 defines fair value,establishes a framework for measuring fair value in GAAP,and expands disclosures about fair value measurements.FAS 157 is effective for financia
250、l statements issued for fiscal years beginning after November 15,2007.In February 2008,the FASB issued Staff Position No.FAS 157-2,“Effective Date of FASB Statement No.157”(“FSP FAS 157-2”).FSP FAS 157-2 amends FAS 157 to delay the effective date of FAS 157 for nonfinancial assets and nonfinancial l
251、iabilities,except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis(that is,at least annually).For items within its scope,FSP FAS 157-2 defers the effective date of FAS 157 to fiscal years beginning after November 15,2008,and interim periods wi
252、thin those fiscal years.The adoption of FAS 157 related to financial assets and liabilities did not have any impact on our consolidated financial statements.We are currently evaluating the impact,if any,that FAS 157 may have on our future consolidated financial statements related to non-financial as
253、sets and liabilities.In February 2007,the FASB issued Statement No.159,“The Fair Value Option for Financial Assets and Financial Liabilities”(“FAS 159”).FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value.The objective is to improve financia
254、l reporting by providing entities with the opportunities to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.FAS 159 is effective as of the beginning of an entitys first fiscal year tha
255、t begins after November 15,2007.The adoption of FAS 159 did not have any impact on our financial condition,results of operations or cash flow.In December 2007,the FASB issued revised Statement No.141,“Business Combinations”(“FAS 141R”).FAS 141R will change the accounting for business combinations.Un
256、der FAS 141R,an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions.FAS 141R will change the accounting treatment and disclosure for certain specific items in a business combination
257、.FAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15,2008.FAS 141R will have an impact on accounting for business combinations once adopted but the effect is depende
258、nt upon acquisitions at that time.In December 2007,the FASB issued Statement No.160,“Noncontrolling Interests in Consolidated Financial StatementsAn Amendment of ARB No.51”(“FAS 160”).FAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for
259、the deconsolidation of a subsidiary.FAS 160 is effective for fiscal years beginning on or after December 15,2008.We do not currently expect the adoption of FAS 160 to have a material impact on our consolidated financial condition,results of operations or cash flow.In March 2008,the FASB issued State
260、ment No.161,“Disclosures about Derivative Instruments and Hedging Activities”(“FAS 161”).FAS 161 is intended to improve financial reporting of derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entitys financia
261、l condition,financial performance,and cash flows.It is effective for financial statements issued for fiscal years and interim periods beginning after November 15,2008.FAS 161 will impact disclosures only and will not have a material impact on our consolidated financial condition,results of operation
262、s or cash flow.In May 2008,the FASB issued Staff Position No.APB 14-1,“Accounting for Convertible Debt Instruments that may be Settled in Cash Upon Conversion”(“FSP APB 14-1”).FSP APB 14-1 requires that the liability and equity components of convertible debt instruments that may be settled in cash u
263、pon conversion(including partial cash settlement)be separately accounted for in a manner that reflects an issuers nonconvertible debt borrowing rate.As a result,the liability component would be recorded at a discount reflecting its below market coupon interest rate,and would subsequently be accreted
264、 to its par value over its Sunstone Hotel Investors,Inc.20expected life,with the rate of interest that reflects the market rate at issuance being reflected in the results of operations.FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15,2008,and int
265、erim periods within those fiscal years.Retrospective application to all periods presented is required and early adoption is prohibited.The Operating Partnerships$250.0 million 4.60%senior exchangeable notes are within the scope of FSP APB 14-1.This change in methodology will affect the calculations
266、of net income and earnings per share,but will not increase our cash interest payments.We anticipate that as a result of the application of this standard,we will retrospectively increase our interest expense by$1.8 million and$3.5 million for 2007 and 2008,respectively.In 2009 through 2013,we anticip
267、ate that our interest expense will increase on an annual basis from between$3.7 million and$4.4 million.In June 2008,the FASB issued Staff Position No.EITF 03-6-1,“Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities”(“FSP EITF 03-6-1”)which states
268、 that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents(whether paid or unpaid)are participating securities and shall be included in the computation of earnings per share under the two-class method.The guidance is effective for financial stat
269、ements issued for fiscal years beginning after December 15,2008,and interim periods within those years.We have concluded that the unvested shares of the Companys common stock granted to our employees and to our board of directors are participating securities under FSP EITF 03-6-1,and are currently e
270、valuating the effect the adoption of FSP EITF 03-6-1 will have on our financial condition,results of operations and cash flow.Quantitative and Qualitative Disclosures About Market Risk To the extent that we incur debt with variable interest rates,our future income,cash flows and fair values relevant
271、 to financial instruments are dependent upon prevailing market interest rates.Market risk refers to the risk of loss from adverse changes in market prices and interest rates.At December 31,2008,none of our outstanding debt was subject to variable interest rates.Controls and Procedures(a)Evaluation o
272、f Disclosure Controls and Procedures Based upon an evaluation of the effectiveness of disclosure controls and procedures,our Chief Executive Officer(CEO)and Chief Financial Officer(CFO)have concluded that as of the end of the period covered by this annual report our disclosure controls and procedure
273、s(as defined in Rules 13a-15(e)or 15d-15(e)under the Exchange Act)were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded,processed,summarized and reported within the time periods specified by the rules and forms of the SEC and
274、 is accumulated and communicated to management,including the 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
275、over financial reporting(as defined in Rule 13a-15(f)under the Exchange Act)to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.Due to its in
276、herent limitations,internal control over financial reporting may not prevent or detect misstatements.Also,projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in conditions,or that the degree of compliance with th
277、e policies or procedures may deteriorate.Under the supervision and with the participation of our management,including our CEO and CFO,we conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizat
278、ions of the Treadway Commission in Internal ControlIntegrated Framework.Based on its evaluation,our management concluded that our internal control over financial reporting was effective as of December 31,2008.Ernst&Young LLP,an independent registered public accounting firm,has audited the Consolidat
279、ed Financial Statements included in this annual report and,as part of its audit,has issued its reports,included herein,on the effectiveness of our internal control over financial reporting.(c)Changes in Internal Control over Financial Reporting There was no change in our internal control over financ
280、ial reporting that occurred during the most recently completed fiscal quarter that has materially affected,or is reasonably likely to materially affect,our internal control over financial reporting.Annual Report 200821Report of Independent Registered Public Accounting Firm The Board of Directors and
281、 Stockholders Sunstone Hotel Investors,Inc.We have audited Sunstone Hotel Investors,Inc.s internal control over financial reporting as of December 31,2008,based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commiss
282、ion(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 financial reporting included in the accompanying Managements Report on Internal Con
283、trol over Financial Reporting.Our responsibility is to express an opinion on 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 Board(United States).Those standards require that
284、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 understanding of internal control over financial reporting,assessing the risk that a material weaknes
285、s exists,testing and evaluating the design and operating effectiveness of internal control based on the assessed risk,and performing such other procedures as we considered necessary in the circumstances.We believe that our audit provides a reasonable basis for our opinion.A companys internal control
286、 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 generally accepted accounting principles.A companys internal control over financial re
287、porting includes those policies and procedures that(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 permit pre
288、paration of financial statements in accordance with generally accepted accounting principles,and that receipts and expenditures of 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 t
289、imely detection of unauthorized acquisition,use,or disposition of the companys 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
290、 of effectiveness 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,Sunstone Hotel Investors,Inc.maintained,in all material respects,effective
291、internal control over financial reporting as of December 31,2008,based on the 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.as of December 31,2008 and
292、 2007,and the related consolidated statements of income,stockholders equity,and cash flows for each of the years ended December 31,2008,2007,and 2006 of Sunstone Hotel Investors,Inc.and our report dated February 9,2009 expressed an unqualified opinion thereon./s/Ernst&Young LLPIrvine,California Febr
293、uary 9,2009 Sunstone Hotel Investors,Inc.22Consolidated Balance Sheets See accompanying notes to consolidated financial statements.December 31,2008 December 31,2007(In thousands,except per share data)ASSETS Current assets:Cash and cash equivalents$179,042$66,088Restricted cash 41,176 45,515Accounts
294、receivable,net 35,428 32,723Due from affiliates 109 932Inventories 3,183 3,005Prepaid expenses 7,431 8,709Investment in hotel properties of discontinued operations,net 336,093Other current assets of discontinued operations,net 9,010 Total current assets 266,369 502,075Investment in hotel properties,
295、net 2,452,811 2,450,728Other real estate,net 14,640 14,526Investments in unconsolidated joint ventures 28,770 35,816Deferred financing costs,net 11,379 12,964Goodwill 13,404 16,251Other assets,net 18,238 16,792 Total assets$2,805,611$3,049,152 LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities:
296、Accounts payable and accrued expenses$18,396$26,376Accrued payroll and employee benefits 8,878 15,026Due to Interstate SHP 16,088 16,236Dividends payable 12,499 25,995Other current liabilities 32,439 35,220Current portion of notes payable 13,002 9,815Other current liabilities of discontinued operati
297、ons 9,908 Total current liabilities 101,302 138,576Notes payable,less current portion 1,699,763 1,712,336Other liabilities 6,545 5,994 Total liabilities 1,807,610 1,856,906Commitments and contingencies(Note 14)Preferred stock,Series C Cumulative Convertible Redeemable Preferred Stock,$0.01 par value
298、,4,102,564 shares authorized,issued and outstanding at December 31,2008 and 2007,liquidation preference of$24.375 per share 99,696 99,496Stockholders equity:Preferred stock,$0.01 par value,100,000,000 shares authorized.8.0%Series A Cumulative Redeemable Preferred Stock,7,050,000 shares issued and ou
299、tstanding at December 31,2008 and 2007,stated at liquidation preference of$25.00 per share 176,250 176,250Common stock,$0.01 par value,500,000,000 shares authorized,47,864,654 shares issued and outstanding at December 31,2008 and 58,815,271 shares issued and outstanding at December 31,2007 479 588Ad
300、ditional paid in capital 807,475 987,554Retained earnings 265,951 191,208Cumulative dividends (347,922)(261,665)Accumulated other comprehensive loss (3,928)(1,185)Total stockholders equity 898,305 1,092,750 Total liabilities and stockholders equity$2,805,611$3,049,152 Annual Report 200823 Consolidat
301、ed Income StatementsSee accompanying notes to consolidated financial statements.Year Ended December 31,2008 Year Ended December 31,2007 Year Ended December 31,2006(In thousands,except per share data)REVENUES Room$640,762$638,119$511,525Food and beverage 258,655 259,124 208,253Other operating 69,747
302、64,499 51,441 Total revenues 969,164 961,742 771,219 OPERATING EXPENSES Room 141,602 138,821 112,835Food and beverage 185,610 186,102 145,916Other operating 36,356 36,741 32,563Advertising and promotion 52,496 50,889 42,116Repairs and maintenance 38,049 36,751 31,104Utilities 37,812 33,934 29,475Fra
303、nchise costs 36,479 35,893 29,839Property tax,ground lease,and insurance 55,539 53,352 48,445Property general and administrative 110,419 110,177 90,622Corporate overhead 21,678 28,048 18,858Depreciation and amortization 115,710 111,326 83,793Goodwill and other impairment losses 2,904 Total operating
304、 expenses 834,654 822,034 665,566 Operating income 134,510 139,708 105,653Equity in net earnings(losses)of unconsolidated joint ventures(1,445)(3,588)140Interest and other income 3,761 9,101 4,206Interest expense (98,289)(92,431)(78,951)Income from continuing operations 38,537 52,790 31,048Income fr
305、om discontinued operations 36,206 72,873 22,189 NET INCOME 74,743 125,663 53,237Preferred stock dividends and accretion (20,884)(20,795)(19,616)Undistributed income allocated to Series C preferred stock (1,583)INCOME AVAILABLE TO COMMON STOCKHOLDERS$53,859$103,285$33,621 Basic per share amounts:Inco
306、me from continuing operations available to common stockholders$0.33$0.54$0.20Income from discontinued operations 0.67 1.21 0.39 Basic income available to common stockholders per common share$1.00$1.75$0.59 Diluted per share amounts:Income from continuing operations available to common stockholders$0
307、.33$0.51$0.20Income from discontinued operations 0.67 1.24 0.39 Diluted income available to common stockholders per common share$1.00$1.75$0.59 Weighted average common shares outstanding:Basic 53,633 58,998 57,247 Diluted 53,662 59,139 57,409 Dividends paid per common share$1.40$1.28$1.20 Sunstone H
308、otel Investors,Inc.24 Preferred Stock Common Stock Additional Paid in Capital Retained Earnings Cumulative Dividend Accumulated Other Comprehensive Loss Total Number of Shares Amount Number of Shares Amount(In thousands,except per share data)Balance at December 31,2005 4,850,000$121,250 52,190,649$5
309、22$798,304$12,308$(72,455)$(2,064)$857,865Net proceeds from sale of Series A preferred stock2,200,00055,000 (842)54,158Net proceeds from sale of common stock 5,500,00055157,652 157,707Vesting of restricted common stock 84,44013,677 3,678Common dividends and dividends payable at$1.22 per share (71,27
310、7)(71,277)Series A preferred dividends and dividends payable at$2.00 per share (13,000)(13,000)Series C preferred dividends and dividends payable at$1.572 per share (6,449)(6,449)Accretion of discount on Series C preferred stock (200)(200)Net income 53,237 53,237Pension liability adjustment 775775 C
311、omprehensive income 54,012 Consolidated Statements of Stockholders EquityAnnual Report 200825Preferred StockCommon StockAdditional Paid in CapitalRetained EarningsCumulative DividendsAccumulated Other Comprehensive LossTotal Number of SharesAmountNumber of SharesAmountBalance at December 31,2006 7,0
312、50,000$176,25057,775,089$578$958,591$65,545$(163,181)$(1,289)$1,036,494Net proceeds from sale of common stock 4,000,00040110,388 110,428Vesting of restricted common stock 169,99215,167 5,168Repurchase of outstanding common stock (3,129,810)(31)(86,392)834(85,589)Common dividends and dividends payabl
313、e at$1.31 per share (78,723)(78,723)Series A preferred dividends and dividends payable at$2.00 per share (14,100)(14,100)Series C preferred dividends and dividends payable at$1.583 per share (6,495)(6,495)Accretion of discount on Series C preferred stock (200)(200)Net income 125,663 125,663Pension l
314、iability adjustment 104104 Comprehensive income 125,767 Balance at December 31,20077,050,000176,25058,815,271588987,554191,208(261,665)(1,185)1,092,750Vesting of restricted common stock 157,86924,477 4,479Repurchase of outstanding common stock (11,108,486)(111)(184,356)(184,467)Common dividends and
315、dividends payable at$1.20 per share (65,573)(65,573)Series A preferred dividends and dividends payable at$2.00 per share (14,100)(14,100)Series C preferred dividends and dividends payable at$1.605 per share (6,584)(6,584)Accretion of discount on Series C preferred stock (200)(200)Net income 74,743 7
316、4,743Pension liability adjustment (2,743)(2,743)Comprehensive income 72,000 Balance at December 31,2008 7,050,000$176,25047,864,654$479$807,475$265,951$(347,922)$(3,928)$898,305 See accompanying notes to consolidated financial statementsConsolidated Statements of Stockholders Equity(continued)Sunsto
317、ne Hotel Investors,Inc.26Consolidated Statements of Cash Flows Year Ended December 31,2008 Year Ended December 31,2007Year Ended December 31,2006(In thousands)CASH FLOWS FROM OPERATING ACTIVITIES Net income$74,743$125,663$53,237Adjustments to reconcile net income to net cash provided by operating ac
318、tivities:Bad debt expense 671 538 796Gains on sale of hotel properties,other real estate and 50%interest in subsidiary (26,013)(66,019)(9,048)Loss on early extinguishment of debt 8189,976Depreciation 117,137117,544101,486Amortization of deferred franchise fees and other intangibles 2,277 5,701 351Am
319、ortization of deferred financing costs 1,702 1,923 4,834Amortization of loan premiums (709)(2,486)Amortization of deferred stock compensation 3,975 5,168 3,677Impairment loss goodwill,discontinued operations and other 2,904 4,920Equity in net(earnings)losses of unconsolidated joint ventures 1,445 3,
320、588 (140)Changes in operating assets and liabilities:Restricted cash 2,130 11,234 (9,290)Accounts receivable 604 3,707 647Due from affiliates 823 451 611Inventories 7 (104)(260)Prepaid expenses and other assets 1,555 (6,748)(32)Accounts payable and other liabilities(12,249)6,643 3,244Accrued payroll
321、 and employee benefits (9,281)6,137 3,378Due to Interstate SHP(2,891)(1,556)(2,902)Discontinued operations 1,324 (386)576 Net cash provided by operating activities 160,863213,593163,575 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of hotel properties,other real estate and 50%interest in s
322、ubsidiary 360,395 185,728 157,718Restricted cash replacement reserve 5,136 5,993 (2,074)Proceeds received from sale of note receivable 29,047 Cash received from(contributed to)unconsolidated joint ventures 5,675 426(68,574)Acquisitions of hotel properties and land(30,695)(403,249)(448,373)Renovation
323、s and additions to hotel properties and other real estate(94,697)(135,231)(139,364)Net cash provided by(used in)investing activities 245,814(317,286)(500,667)CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from preferred stock offering 55,000Payment of preferred stock offering costs (842)Proceeds from
324、 common stock offering 110,895158,400Payment of common stock offering costs (467)(693)Payment for repurchases of outstanding common stock(184,467)(86,423)Proceeds from notes payable 181,000609,000604,542Payments on notes payable(190,386)(387,494)(376,868)Payments of deferred financing costs (117)(7,
325、506)(3,726)Dividends and distributions paid(99,753)(96,315)(86,731)Net cash(used in)provided by financing activities(293,723)141,690349,082 Net increase in cash and cash equivalents 112,954 37,997 11,990Cash and cash equivalents,beginning of year 66,088 28,091 16,101 Cash and cash equivalents,end of
326、 year$179,042$66,088$28,091 Annual Report 200827Consolidated Statements of Cash Flows(continued)See accompanying notes to consolidated financial statements.Year Ended December 31,2008 Year Ended December 31,2007 Year Ended December 31,2006(In thousands)SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATI
327、ON Cash paid for interest$97,431$94,648$92,824 NONCASH INVESTING ACTIVITY Amortization of deferred stock compensation construction activities$457$Amortization of deferred stock compensation unconsolidated joint venture$47$Sale of 50%interest in subsidiary Assets$1,235$Liabilities$908$NONCASH FINANCI
328、NG ACTIVITY Assumption of debt in connection with acquisitions of hotel properties$81,000 Receipt of note receivable$2,000$5,600 Dividends and distributions payable$12,499$25,995$23,826 Sunstone Hotel Investors,Inc.28Notes to Consolidated Financial Statements1.Organization and Description of Busines
329、s Sunstone Hotel Investors,Inc.(the“Company”)was incorporated in Maryland on June 28,2004 in anticipation of an initial public offering of common stock,which was consummated on October 26,2004.The Company,through its 100%controlling interest in Sunstone Hotel Partnership,LLC(the“Operating Partnershi
330、p”),of which the Company is the sole managing member,and the subsidiaries of the Operating Partnership,including Sunstone Hotel TRS Lessee,Inc.(the“TRS Lessee”)and its subsidiaries,is currently engaged in acquiring,owning,asset managing and renovating hotel properties.The Company may also sell certa
331、in hotel properties from time to time.The Company operates as a real estate investment trust(“REIT”)for federal income tax purposes.As a REIT,certain tax laws limit the amount of“non-qualifying”income the Company can earn,including income derived directly from the operation of hotels.As a result,the
332、 Company leases all of its hotels to its TRS Lessee,which in turn enters into long-term management agreements with third parties to manage the operations of the Companys hotels.As of December 31,2008,the Company owned 43 hotels,and its third-party managers included Sunstone Hotel Properties,Inc.,a d
333、ivision of Interstate Hotels&Resorts,Inc.(“Interstate SHP”),manager of 25 of the Companys hotels;subsidiaries of Marriott International,Inc.or Marriott Hotel Services,Inc.(collectively,“Marriott”),managers of 13 of the Companys hotels;and Hyatt Corporation(“Hyatt”),Fairmont Hotels&Resorts(“Fairmont”),Hilton Hotels Corporation(“Hilton”)and Starwood Hotels&Resorts Worldwide,Inc.(“Starwood”),collecti
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