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Sunstone to Forfeit the 258-room W Hotel San Diego to Lenders,
May Pursue Similar Options with Other Mortgaged Hotels

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SAN CLEMENTE, CA – June 7, 2009 – Sunstone Hotel Investors, Inc. (the “Company”) (NYSE: SHO) today provided an update on its recent operating performance and finance transactions. 

Preliminary Operations Update Through May 31, 2009: 

  • May total portfolio RevPAR was $98.91, down 24.4% to prior year. 
  • Quarter-to-date total portfolio RevPAR was $98.73, down 24.5% to prior year. 
  • Year-to-date total portfolio RevPAR was $97.53, down 19.6% to prior year. 
Arthur Buser, President and Chief Executive Officer, stated, “We continue to run our business with the expectation that 2009 will be one of the deepest cyclical troughs the lodging industry has endured. We have used this cyclical decline as an opportunity to implement permanent improvements to our hotel-level operating models. Specifically, we have asked our operators to do as we have done at our corporate office - develop “zero-based” budgets and adjust staffing models for minimum business levels. While we are generally pleased with our results thus far this year, as our recent revenue declines are largely the result of lower rate, rather than reduced occupancy, we expect margin control will become increasingly difficult. On the finance side, we have continued to execute on a comprehensive finance plan designed to reduce corporate risk and increase financial flexibility.” 

Finance Update 
Year-to-date the Company has repurchased $187.5 million of its exchangeable senior notes at a 36.4% weighted average discount to par resulting in $70.7 million of value creation and a blended yield to put of 20.3%; issued common equity for net proceeds of $99.1 million; sold the Marriott Napa for $36.0 million; and amended its exchangeable notes indenture to provide for added flexibility in managing its secured debt. By executing on these transactions, the Company has achieved four critical objectives: 

  • addressed its expected capital needs through 2014; 
  • deleveraged its capital structure; 
  • enhanced its liquidity (to more than $180.0 million in unrestricted cash); and 
  • improved its ability to manage its secured debt portfolio. 


W Hotel San Diego 
As noted above, on May 20, 2009, the Company amended its exchangeable notes indenture to provide that defaults by its subsidiaries on non-recourse indebtedness less than $300.0 million would not result in an acceleration of its exchangeable notes prior to maturity. This amendment was specifically aimed at improving the Company’s ability to manage its secured debt portfolio in the context of the inherent inflexibilities of commercial mortgage backed securities (“CMBS”) debt. 

As a consequence of significant and continuing deterioration in demand for luxury lodging and the introduction of numerous new competitive hotels in the San Diego market (including a number of luxury boutique hotels, two additional Starwood-branded hotels and a 1,190-room convention hotel), the operations of the Company’s 258-room W Hotel San Diego (421 West B Street) have declined materially. In the Company’s estimation the hotel’s operations have been permanently impaired as a result of the aforementioned factors. The hotel is currently forecasting 2009 EBITDA of between $1.8 and $2.2 million. 

The hotel is encumbered by a $65.0 million, fixed-rate CMBS mortgage that bears an interest rate of 6.14%. The mortgage matures January 1, 2018, and is non-recourse to the Company. Scheduled 2009 debt service on the mortgage is approximately $4.0 million. The principal amount of the mortgage equates to more than 30-times the hotel’s 2009 forecasted EBITDA, and more than $250,000 in debt per room. 

Over the last several months, the Company has attempted to work with the hotel’s CMBS special servicer to amend the terms of the mortgage to provide for a reduction in current interest payments. The special servicer has recently declined the Company’s proposed modifications. As a result, the Company has elected not to make the June 1st debt service payment on the hotel’s mortgage. At this point, the Company does not expect further negotiation with the special servicer, and the Company is prepared to convey the hotel to the lender in lieu of repayment. 

While the Company’s elective default of the W San Diego mortgage was precipitated by a number of unique, market and hotel-specific factors, in the future other factors may lead the Company to pursue similar options with certain of its other mortgaged hotels. The Company believes such cases will be limited in number. For perspective, the average mortgage debt per room of the Company’s mortgaged hotels equates to approximately $129,500, approximately half that of the W San Diego. 

Ken Cruse, Chief Financial Officer, stated, “As a result of negative supply and demand fundamentals in the San Diego market, we believe the intrinsic value of the W San Diego is now meaningfully below the principal amount of its debt. While the Company maintains more than adequate liquidity to support or repay this mortgage, we believe a conveyance of this hotel in settlement of the debt would be in the best interest of our stockholders as it would deleverage the Company, and would be accretive to both the Company’s FFO per share and credit profile.” 

Credit Facility Amendment 
The Company expects to close on the previously announced amendment to its revolving credit facility by the end of the second quarter. 
 

About Sunstone Hotel Investors, Inc. 

Sunstone Hotel Investors, Inc. (“Sunstone”) is a lodging real estate investment trust (“REIT”) that, as of the date hereof, has interests in 43 hotels comprised of 14,755 rooms primarily in the upper-upscale segment. Sunstone’s hotels are generally operated under nationally recognized brands, such as Marriott, Hilton, Hyatt, Fairmont and Starwood. For further information, please visit Sunstone’s website at www.sunstonehotels.com. 

Forward-Looking Statements 
This press release contains forward-looking statements within the meaning of federal securities laws and regulations. These forward-looking statements are identified by their use of terms and phrases such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will” and other similar terms and phrases, including references to assumptions and forecasts of future results. Forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially from those anticipated at the time the forward-looking statements are made. These risks include, but are not limited to: volatility in the debt or equity markets affecting our ability to acquire or sell hotel assets; national and local economic and business conditions, including the current U.S. recession which may be prolonged; potential terrorist attacks, which would affect occupancy rates at our hotels and the demand for hotel products and services; operating risks associated with the hotel business; risks associated with the level of our indebtedness and our ability to meet covenants in our debt and equity agreements; relationships with property managers and franchisors; our ability to maintain our properties in a first-class manner, including meeting capital expenditure requirements; our ability to compete effectively in areas such as access, location, quality of accommodations and room rate structures; changes in travel patterns, taxes and government regulations, which influence or determine wages, prices, construction procedures and costs; our ability to identify, successfully compete for and complete acquisitions; the performance of hotels after they are acquired; necessary capital expenditures and our ability to fund them and complete them with minimum disruption; our ability to continue to satisfy complex rules in order for us to qualify as a REIT for federal income tax purposes; our ability to successfully complete negotiations for an amendment to our revolving credit agreement; and other risks and uncertainties associated with our business described in the Company’s filings with the Securities and Exchange Commission. Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that the expectations will be attained or that any deviation will not be material. Unless otherwise noted, all forward-looking information in this release is as of June 7, 2009, and the Company undertakes no obligation to update any forward-looking statement to conform the statement to actual results or changes in the Company’s expectations. 

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Bryan Giglia 
Vice President – Corporate Finance 
Sunstone Hotel Investors, Inc. 
(949) 369-4236 
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Also See: Sunstone Hotel Investors, Inc. Acquires the W San Diego Hotel for Approximately $96 million, or $370,000 per room / June 2006
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