Sunstone Hotel Investors Reports Results of Operations for Third Quarter 2005

Sunstone Hotel Investors, Inc. (the "Company") (NYSE: SHO) today announced results of operations for the third quarter and nine months ended September 30, 2005. Q3 2005 HIGHLIGHTS: * Same-store revenue per available room ("RevPAR") growth of 9.0% ove 3 2004; * Adjusted EBITDA of $45.2 million (31.0% increase over Q3 2004); * Adjusted Funds from operations ("FFO") to common stockholders(including OP unit holders) of $26.2 million (31.0% increase ove 3 2004); * Adjusted FFO per diluted share (including OP units) of $0.52; and * Hotel Operating Margin growth of 170 bps (27.5% to 29.2%) over Q3 2004. Robert A. Alter, Chief Executive Officer, stated, "Our hotels continue to post strong results with a 9.0% year over year same-store RevPAR increase, highlighted by the 15.5% RevPAR increase over the prior year period in the Middle Atlantic region that includes the newly acquired Renaissance Baltimore Harborplace and Renaissance Washington, D.C. We continued to improve the overall quality of our portfolio with the acquisition of the Hyatt Regency Century Plaza in October." SELECTED FINANCIAL RESULTS ($ in millions, except RevPAR and per share amounts) Three Months Ended Sept. 30 Nine Months Ended Sept. 30 Item 2005 2004 % Change2005 2004 % Change Revenues $181.9 $132.2 37.6%$430.6 $368.7 16.8% RevPAR (1)$88.11 $80.829.0%$85.01 $78.238.7% Income (loss) available to common stockholders (including OP unit holders) (2) $4.1 $4.6 -10.9% $12.4 ($17.1)n/a Income per share available to common stockholders (including OP unit holders) (3) $0.09n/a n/a $0.30n/a n/a FFO available to common stockholders $26.2 $20.0 31.0% $60.8 $27.7 119.5% Adjusted FFO available to common stockholders (including OP unit holders) (4) $26.2 $20.0 31.0% $66.6 $52.1 27.8% FFO per fully diluted share available to common stockholders (including OP unit holders) (4) (6) $0.52n/a n/a $1.42n/a n/a Adjusted FFO per fully diluted share available to common stockholders (including OP unit holders) (4) (6) $0.52n/a n/a $1.55n/a n/a EBITDA (4) $45.3 $33.7 34.4%$114.5 $69.5 64.7% Adjusted EBITDA (4)$45.2 $34.5 31.0%$114.2 $95.2 20.0% Hotel Operating Margin (5)29.2% 27.5% 170 bps 29.0% 27.1% 190 bps (1) Same store for 60 hotels owned during Q3 2005 (including prior ownership). (2) 2005 income to available stockholders includes series C preferred stock dividends. (3) 2005 income per share available to common stockholders does not assume conversion of the series C convertible preferred stock to common stock as the effect of the conversion would not be as dilutive as the current presentation. (4) Please refer to the definitions of Adjusted FFO, Adjusted EBITDA and Hotel Operating Margin on page 12 and to the reconciliation schedules on pages 13 - 15 for a tabular presentation of our results and a reconciliation to GAAP measures. (5) Please refer to page 16 for hotel operating margin results. (6) Reflects Series C convertible preferred shares on an "as-converted" basis. The Company has filed contemporaneously with this press release the Form 10-Q with the SEC for the quarterly period ended September 30, 2005. In addition to the required financial information included in the Form 10-Q, the Company has included an unaudited pro forma balance sheet as of September 30, 2005 and pro forma income statements for the quarter and nine months ended September 30, 2005 that include the impact of the recent acquisitions, as well as the related financings, of the six Renaissance Hotels, the Sheraton Cerritos, the Fairmont Newport Beach and the Hyatt Regency Century Plaza as if they incurred as of the beginning of the respective periods. Disclosure regarding the non-GAAP financial measures included in this release is included as an attachment to this release, along with a reconciliation to the most comparable GAAP measure during each of the periods presented. Third Quarter Highlights: Listed below are certain highlights from the Company's unaudited financial statements. Please refer to the reconciliation schedule on page 13 for a tabular presentation of our results. * Total revenue was $181.9 million for the quarter ended September 30,2005, compared to $132.2 for the quarter ended September 30, 2004. * Income available to common stockholders (including OP unit holders) was$4.1 million for the quarter ended September 30, 2005, compared to$4.6 million for the quarter ended September 30, 2004. * Income available to common stockholders (including OP unit holders) pe iluted share (including OP units) was $0.09 for the quarter ende eptember 30, 2005. * EBITDA was $45.3 million for the quarter ended September 30, 2005,compared to $33.7 million for the quarter ended September 30, 2004. * Adjusted EBITDA (as defined on page 12), was $45.2 million for th uarter ended September 30, 2005, compared to Adjusted EBITDA of$34.5 million for the quarter ended September 30, 2004. * FFO and Adjusted FFO available to common stockholders (including O nit holders) (as defined on page 12), was $26.2 million for th uarter ended September 30, 2005, compared to $20.0 million for th uarter ended September 30, 2004. * FFO and Adjusted FFO available to common stockholders per diluted share(including OP units) was $0.52 for the quarter ended September 30,2005. * Total capital expenditures were $18.9 million for the quarter ende eptember 30, 2005. Performance Relative to Guidance: The following table reflects our prior guidance for the third quarter compared to our actual results. GuidanceActual Q3 2005 RevPAR Growth 7.0% - 9.0% 9.0% Adjusted EBITDA$42.0 - $45.0 million $45.2 million Adjusted FFO per share available $0.46 - $0.52 $0.52 to common stockholders Hotel Operating Margin + 150 - 200 bps + 170 bps Third quarter results were negatively impacted by the mid-period close of the Renaissance acquisitions resulting in $0.7 million of third quarter EBITDA not being recognized in the Company's financials and by timing issues related to the issuance of 6.7 million common shares resulting in an increase to the weighted average share count by approximately 0.7 million shares for the quarter. Comparable pro forma hotel RevPAR for the 60 hotels owned during the third quarter (including prior ownership periods for acquisitions that closed during the third quarter) increased 9.0% as compared to the pro forma third quarter of 2004, driven by a decrease in occupancy of 0.3 percentage points and a 9.4% increase in average room rate. Comparable operating profit margins for the third quarter increased 170 basis points (from 27.5% to 29.2%) (see page 16 for a reconciliation of hotel operating income to the comparable GAAP measure). First Nine Months Highlights: Listed below are certain highlights from the Company's historical and unaudited pro forma financial statements. Please refer to the reconciliation schedule on page 13 for a tabular presentation of our results. * Total revenue was $430.6 million for the nine months ende eptember 30, 2005, compared to total revenue of $368.7 million for th ine months ended September 30, 2004. * Income available to common stockholders (including OP unit holders) was$12.4 million for the nine months ended September 30, 2005, compared t net loss of ($17.1) million for the nine months ended September 30,2004. * Income available to common stockholders (including OP unit holders) pe iluted share (including OP units) was $0.30 for the nine months ende eptember 30, 2005. * EBITDA was $114.5 million for the nine months ended September 30, 2005compared to $69.5 million for the nine months ended September 30, 2004. * Adjusted EBITDA was $114.2 million for the nine months ende eptember 30, 2005 compared to $95.2 million for the nine months ende eptember 30, 2004. Adjusted EBITDA for the nine months ende eptember 30, 2005 excludes a $2.5 million gain on sale of assets and a$2.1 million reserve taken due to a pending contract issue. Adjuste BITDA for the nine months ended September 30, 2004 excludes a$1.2 million loss on the sale of assets, $7.4 million of impairmen osses from continuing operations and $17.0 million of impairmen osses on discontinued operations. * FFO available to common stockholders (including OP unit holders) was$60.8 million for the nine months ended September 30, 2005 compared to$27.7 million for the nine months ended September 30, 2004. * Adjusted FFO available to common stockholders (including OP uni olders) was $66.6 million for the nine months ended September 30, 2005compared to $52.1 million for the nine months ended September 30, 2004.Adjusted FFO for the nine months ended September 30, 2005 exclude a$2.5 million gain on sale of assets, $3.6 million of prepaymen enalties and written-off deferred financing costs attributed to th ebt refinancing completed in April 2005 and a $2.1 million reserv aken due to a pending contract issue. Adjusted FFO for the nine month nded September 30, 2004 excludes a $1.2 million loss on the sale o ssets, $7.4 million of impairment losses from continuing operation nd $17.0 million of impairment losses on discontinued operations. * FFO available to common stockholders per diluted share (including O nit holders) was $1.42 for the nine months ended September 30, 2005. * Adjusted FFO available to common stockholders per diluted share(including OP units) was $1.55 for the nine months ended September 30,2005. Adjusted FFO for the nine months ended September 30, 2005excludes a $0.06 gain on sale of assets, $0.08 of prepayment penaltie nd written-off deferred financing costs attributed to the deb efinancing completed in April 2005 and a $0.05 reserve taken due to ending contract issue. * Total capital expenditures were $42.4 million for the nine months ende eptember 30, 2005. The period was negatively impacted by the delayed closing of the Fairmont Newport Beach acquisition, the mid-period closing of the Renaissance acquisition and timing issues related to the June and September equity offerings, each being completed prior to the proceeds being deployed. Comparable pro forma hotel RevPAR for the 60 hotels owned during the first nine months of 2005 (including prior ownership periods for hotels that closed during the third quarter) increased 8.7% as compared to the first nine months of 2004, driven by an increase in occupancy of 0.7 percentage points and a 7.7% increase in average room rate. Comparable hotel adjusted operating profit margins for the nine months increased 190 basis points (from 27.1% to 29.0%). Pro forma Third Quarter 2005 Highlights: Due to the materiality of the recent acquisitions and financings, the Company has provided pro forma third quarter highlights that reflect all 2005 acquisition and financing transactions as if they occurred as of the beginning of the quarter. The Company estimates that for the pro forma third quarter 2005 its: * Pro forma income available to common stockholders (including OP uni olders) would have been approximately $5.9 million; * Pro forma Adjusted EBITDA would have been approximately $51.9 million; * Pro forma Adjusted FFO available to common stockholders (including O nit holders) would have been approximately $30.1 million; and * Pro forma Adjusted FFO available to common stockholders per dilute hare (including OP units) would have been approximately $0.54. Disclosure regarding the non-GAAP financial measures included in this press release is included as an attachment to this release, along with reconciliation to the most comparable GAAP measure. Please refer to the reconciliation schedule on page 14 for a tabular presentation of our results. Pro forma Nine Months 2005 Highlights: Due to the materiality of the recent acquisitions and financings, the Company has provided pro forma highlights for the nine month period ended September 30, 2005 that reflect all 2005 acquisition and financing transactions as if they occurred on January 1, 2005. The Company estimates that for the pro forma period ended September 30, 2005 its: * Pro forma income available to common stockholders (including OP uni olders) would have been approximately $24.3 million; * Pro forma Adjusted EBITDA would have been approximately $160.1 million; * Pro forma Adjusted FFO available to common stockholders (including O nit holders) would have been approximately $94.7 million; and * Pro forma Adjusted FFO available to common stockholders per dilute hare (including OP units) would have been approximately $1.69. Disclosure regarding the non-GAAP financial measures included in this press release is included as an attachment to this release, along with reconciliation to the most comparable GAAP measure. Please refer to the reconciliation schedule on page 14 for a tabular presentation of our results. Outlook The Company is providing guidance at this time but does not undertake to update it for any developments in its business. Achievement of the anticipated results is subject to the risks disclosed in the Company's filings with the Securities and Exchange Commission. The Company has provided guidance for both the fourth quarter and full year 2005 as well as guidance for a pro forma full year 2005 which reflects all 2005 acquisition and financing transactions as if they occurred on January 1, 2005. Fourth Quarter 2005 Outlook The Company expects comparable hotel RevPAR for the fourth quarter of 2005 to increase approximately 8.0% to 10.0% over the fourth quarter of 2004. Based upon this guidance, the Company estimates that for the fourth quarter 2005 its: * Income available to common stockholders (including OP unit holders)should be approximately $5.6 million to $7.7 million; * Income available to common stockholders per diluted share (including O nits) should be approximately $0.10 to $0.14; * Adjusted EBITDA should be approximately $52.1 million to $54.2 million; * Adjusted FFO available to common stockholders (including OP uni olders) should be approximately $30.2 million to $32.3 million; * Adjusted FFO available to common stockholders per diluted share(including OP units) should be approximately $0.54 to $0.58; * Hotel operating margins should increase approximately 150 basis point o 200 basis points over the fourth quarter of 2004; and * Total capital expenditures for the portfolio should be $23.0 million to$28.0 million. Full Year 2005 Outlook The Company expects comparable hotel RevPAR for the full year 2005 to increase approximately 8.0% to 9.0% over the full year 2004. Based upon this guidance, the Company estimates that for the full year 2005 its: * Income available to common stockholders (including OP unit holders)should be approximately $18.1 million to $20.2 million; * Income available to common stockholders per diluted share (including O nits) should be approximately $0.39 to $0.44; * Adjusted EBITDA should be approximately $166.3 million to$168.4 million; * Adjusted FFO available to common stockholders (including OP uni olders) should be approximately $96.8 million to $98.9 million; * Adjusted FFO available to common stockholders per diluted share(including OP units) should be approximately $2.09 to $2.14; * Hotel operating margins should increase approximately 180 basis point o 200 basis points over 2004; and * Total capital expenditures for the portfolio should be $65.0 million to$70.0 million, including expenditures on the Fairmont Newport Beach an he acquired Renaissance Hotels. Full year Adjusted EBITDA and Adjusted FFO guidance exclude a $2.5 million gain on sale of assets, $3.6 million of prepayment penalties and write-off of deferred financing costs associated with the early retirement of debt and a $2.1 million reserve taken due to a pending contract issue. Pro forma Full Year 2005 Outlook Due to the materiality of the recent acquisitions and financings, the Company has provided pro forma full year guidance that reflects all 2005 acquisition and financing transactions as if they occurred on January 1, 2005. Full year pro forma Adjusted EBITDA and Adjusted FFO guidance exclude a $2.5 million gain on sale of assets, $3.6 million of prepayment penalties and write-off of deferred financing fess associated with the early retirement of debt and a $2.1 million reserve taken due to a pending contract issue. Based upon this guidance, the Company estimates that for the pro forma full year 2005 its: * Pro forma income available to common stockholders (including OP uni olders) should be approximately $29.9 million to $32.0 million; * Pro forma Adjusted EBITDA should be approximately $212.2 million to$214.3 million; * Pro forma Adjusted FFO available to common stockholders (including O nit holders) should be approximately $124.9 million to $127.0 million;and * Pro forma Adjusted FFO available to common stockholders per dilute hare (including OP units) should be approximately $2.23 to $2.27. Disclosure regarding the non-GAAP financial measures included in this press release is included as an attachment to this release, along with reconciliation to the most comparable GAAP measure. Full Year 2006 Guidance The Company expects comparable hotel RevPAR to increase approximately 7.0% to 9.0% over 2005. Management will provide detailed guidance for the 2006 year in its fourth quarter earnings release. Recent Developments - Acquisitions The Company completed several acquisitions during the quarter: * Fairmont Newport Beach (444 rooms) for a purchase price of$72.0 million. * 75% interest in Renaissance Washington, D.C. (807 rooms), together wit he 25% interest acquired in June 2005, for an aggregate purchase pric f approximately $160.0 million. The six hotel Renaissance acquisition completed in June 2005 closed approximately one week into the fiscal Q3 for those hotels. Based on the "economic close" of June 17, 2005, we received a credit for the cash flow during the period from June 17, 2005 through the date of our close (June 23, 2005) of approximately $700,000. This would have been reflected in our earnings absent the delay. In October 2005, the Company completed the previously announced acquisition of the 728-room Hyatt Regency Century Plaza located in Century City, California for $293.0 million. The Company has commenced the renovation of the hotel's guestrooms. Balance Sheet / Liquidity Update As of September 30, 2005, the Company had approximately $190.0 million of cash and cash equivalents (including restricted cash). Total assets were $2.1 billion, including $1.8 billion of net investments in hotel properties, total debt of $1.0 billion, and stockholders' equity of approximately $800.0 million. In September 2005, the Company and selling stockholders closed a public offering of 6.7 million shares of common stock for gross proceeds of $163.1 million, including $145.9 million of gross proceeds to the Company. In addition to the 6.0 million primary shares sold by the company, 0.7 million secondary shares were sold by affiliates of Westbrook Real Estate Partners, L.L.C., reducing their fully diluted ownership interest in the Company to approximately 6.6%. The Company has also agreed to sell to Security Capital Preferred Growth Incorporated 599,355 of common stock at a purchase price of $23.85 per share, for an aggregate purchase price of $14.3 million. The closing of the sale of these shares is scheduled to occur on the first business day prior to the next record date with respect to any dividend on the Company's common stock. In October 2005, concurrent with the closing of the Hyatt Regency Century Plaza, the Company closed on a fixed rate loan totaling $175.0 million with a maturity in 2014 and an average rate of 6.12%. Pro forma for the Century Plaza acquisition and associated financing, the Company had $1.2 billion of debt and approximately $70.0 million of cash and cash equivalents (including restricted cash). We have been working toward a resolution of the contract interpretation issue that led to the $2.1 million reserve taken in the second quarter and expect a resolution prior to December 31, 2005. Capital Expenditures In the third quarter of 2005, the Company invested $18.9 million in capital expenditures across its portfolio of which $2.8 million was spent on the Fairmont Newport Beach. Dividend Update During the second quarter, the Company declared a dividend of $0.285 per share payable to its common stockholders (including OP unit holders), a dividend of $0.50 per share payable to its Series A cumulative redeemable preferred stockholders and a dividend of $0.393 per share payable to its Series C cumulative redeemable preferred stockholders of record at the close of business on September 30, 2005. The dividends were paid on October 14, 2005. The Board of Directors has elected to increase the quarterly dividend payable to its common stockholders (including OP unit holders) for the fourth quarter from $0.285 to $0.30 per share. The dividend will be payable on January 13, 2006 to shareholders of record on December 30, 2005. The level of future dividends will be determined by the Company's quarterly operating results and expected capital requirements. Earnings Call The Company will host a conference call to discuss third quarter results on Thursday, November 10, 2005, at 11:00 a.m. EST. A live webcast of the call will be available via the Investor Relations section of the Sunstone Hotel Investors' website at http://www.sunstonehotels.com. To participate in the live call, investors are invited to dial 1-800-240-2430 (for domestic callers) or 303-205-0066 (for international callers). A replay of the webcast will also be archived on the website. Sunstone Hotel Investors, Inc. is a lodging real estate investment trust ("REIT") that, as of the date hereof, owns 61 hotels with an aggregate of 17,411 rooms primarily in the upper-upscale segment operated under brands owned by nationally-recognized companies, such as Marriott, Hilton, InterContinental, Hyatt and Fairmont. For further information, please visit the Company's website at http://www.sunstonehotels.com. This press release contains forward-looking statements within the meaning of federal securities laws and regulations. These forward looking statements are identified by their use of terms and phrases such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "should," "will," "continue" 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 which 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: national and local economic and business conditions, including the potential for additional terrorist attacks, that will 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 agreements; relationships with property managers; 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 complete acquisitions; the performance of acquired properties after they are acquired; necessary capital expenditures on the acquired properties; and our ability to continue to satisfy complex rules in order for us to qualify as a REIT for federal income tax purposes; and other risks and uncertainties associated with our business described in the Company's filings with the SEC. 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. All information in this release is as of November 9, 2005, 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. ***Tables to Follow*** Non-GAAP Financial Measures We present the following non-GAAP financial measures that we believe are useful to investors as key measures of our operating performance: (1) Earnings Before Interest Expense, Taxes, Depreciation and Amortization, or EBITDA; (2) Funds From Operations, or FFO; and (3) Hotel Operating Income for the purpose of our operating margins. EBITDA represents income (loss) available to common stockholders before minority interest excluding: (1) preferred stock dividends; (2) interest expense (including prepayment penalties, if any); (3) provision for income taxes, including income taxes applicable to sale of assets; and (4) depreciation and amortization. In addition, we have presented Adjusted EBITDA, which excludes: (1) the impact of any gain or loss from asset sales: (2) impairment charges; and (3) other expenses we have identified in this release. We believe EBITDA and Adjusted EBITDA are useful to an investor in evaluating our operating performance because they help investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest expense and preferred stock dividends) and our asset base (primarily depreciation and amortization) from our operating results. We also use EBITDA and Adjusted EBITDA as measures in determining the value of hotel acquisitions and dispositions. A reconciliation and the components of hotel operating income are set forth on page 16. We believe hotel operating income is also useful to investors in evaluating our property level operating performance. We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group. The Board of Governors of NAREIT in its March 1995 White Paper (as clarified in November 1999 and April 2002) defines FFO to mean net income (loss) (computed in accordance with GAAP), excluding gains and losses from sales of property, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs), and after adjustment for unconsolidated partnerships and joint ventures. We believe that the presentation of FFO provides useful information to investors regarding our operating performance because it is a measure of our operations without regard to specified non-cash items, such as real estate depreciation and amortization and gain or loss on sale of assets. We believe that these items are more representative of our asset base and our acquisition and disposition activities than our ongoing operations. We also use FFO as one measure in determining our results after taking into account the impact of our capital structure. Our presentation of Adjusted FFO excludes prepayment penalties, written-off deferred financing costs, impairment losses and other expenses we have identified in this release. We caution investors that amounts presented in accordance with our definitions of EBITDA, Adjusted EBITDA, FFO, Adjusted FFO and hotel operating income may not be comparable to similar measures disclosed by other companies, since not all companies calculate these non-GAAP measures in the same manner. EBITDA, Adjusted EBITDA, FFO, Adjusted FFO and hotel operating income should not be considered as an alternative measure of our net income (loss), operating performance, cash flow or liquidity. EBITDA, Adjusted EBITDA, FFO, Adjusted FFO and hotel operating income may include funds that may not be available for our discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions and other commitments and uncertainties. Although we believe that EBITDA, Adjusted EBITDA, FFO, Adjusted FFO and hotel operating income can enhance your understanding of our results of operations, these non-GAAP financial measures, when viewed individually, are not necessarily a better indicator of any trend as compared to GAAP measures such as net income (loss) or cash flow from operations. In addition, you should be aware that adverse economic and market conditions may harm our cash flow. For Additional Information: Bryan Giglia Director of Finance Sunstone Hotel Investors, Inc. (949) 369-4204 Amy Cozamanis Investor/Analyst Information Financial Relations Board (310) 854-8314 Laurie Berman General Information Financial Relations Board (310) 854-8315 SUNSTONE HOTEL INVESTORS, INC. Reconciliation of Net Income (Loss) to Non-GAAP Financial Measures (Unaudited) Reconciliation of Net Income (Loss) to EBITDA Three Months Ended Sept. 30, Nine Months Ended Sept. 30, 2005 2004 2005 2004 Income (loss) available to common stockholders $3,801 $4,520 $11,328$(16,970) Minority interest (OP unit holders) 321 39 1,115 (127) Income (loss) available to common stockholders (including OP unit holders) 4,122 4,55912,443 (17,097) Preferred stock dividends 4,084 -- 6,886 -- Depreciation and amortization - continuing operations20,779 14,46949,784 42,201 Depreciation and amortization - discontinued operations --456 291 2,513 Amortization of deferred stock compensation 466 -- 1,480 -- Interest expense - continuing operations15,331 12,44837,536 36,492 Interest expense - discontinued operations --481 281 1,792 Depreciation and amortization - deferred financing fees 544 1,287 2,226 3,796 Prepayment penalties-- -- 2,834 -- Write-off of deferred financing costs -- -- 761 -- Income taxes - continuing operations --437 --238 Income taxes - discontinued operations -- (454) -- (394) EBITDA45,326 33,683 114,522 69,541 (Gain)/loss on sale of assets (92) 838(2,476) 1,220 Impairment loss - continuing operations -- -- -- 7,439 Impairment loss - discontinued operations -- -- -- 16,954 Reserve for contract interpretation issue -- -- 2,136 -- (92) 838 (340) 25,613 Adjusted EBITDA$45,234 $34,521 $114,182 $95,154 Reconciliation of Net Income (Loss) to FFO Income (loss) available to common stockholders $3,801 $4,520 $11,328$(16,970) Minority interest (OP unit holders) 321 39 1,115 (127) Income (loss) available to common stockholders (including OP unit holders) 4,122 4,55912,443 (17,097) Series C preferred stock dividends 1,658 -- 1,658 -- Real estate depreciation and amortization - continuing operations20,495 14,13748,921 41,069 Real estate depreciation and amortization - discontinued operations --456 291 2,513 (Gain)/loss on sale of assets (92) 838(2,476) 1,220 FFO available to common stockholders 26,183 19,99060,837 27,705 (including OP unit holders) Prepayment penalties-- -- 2,834 -- Write-off of deferred financing costs -- -- 761 -- Impairment loss - continuing operations -- -- -- 7,439 Impairment loss - discontinued operations -- -- -- 16,954 Reserve for contract interpretation issue -- -- 2,136 -- -- -- 5,731 24,393 Adjusted FFO available to common stockholders $26,183 $19,990 $66,568 $52,098 (including OP unit holders) FFO available to common stockholders per share $0.52 $1.42 Adjusted FFO available to common stockholders per share $0.52 $1.55 Diluted weighted average shares outstanding, including OP units 50,399 42,881 SUNSTONE HOTEL INVESTORS, INC. Reconciliation of Net Income (Loss) to Non-GAAP Financial Measures (Unaudited) Reconciliation of Net Income (Loss) to Pro Forma EBITDA Pro Forma Pro Forma Three Months Ended Sept. 30, Nine Months Ended Sept. 30, 2005 2005 Income (loss) available to common stockholders $5,456 $22,577 Minority interest (OP unit holders) 4211,744 Income (loss) available to common stockholders (including OP unit holders) 5,877 24,321 Series A Preferred stock dividends 2,4267,275 Series C Preferred stock dividends 1,6584,982 Depreciation and amortization - continuing operations22,811 63,867 Depreciation and amortization - discontinued operations -- -- Amortization of deferred stock compensation 4661,480 Interest expense - continuing operations17,985 53,955 Interest expense - discontinued operations -- -- Depreciation and amortization - deferred financing fees 7002,100 Prepayment penalties-- -- Write-off of deferred financing costs -- -- Hyatt Subsidy -- -- Income taxes - discontinued operations -- -- EBITDA51,923 157,980 (Gain)/loss on sale of assets-- -- Impairment loss - continuing operations -- -- Impairment loss - discontinued operations -- -- Reserve for contract interpretation issue --2,136 --2,136 Adjusted EBITDA$51,923 $160,116 Reconciliation of Net Income (Loss) to FFO Income (loss) available to common stockholders $5,456 $22,577 Minority interest (OP unit holders) 4211,744 Income (loss) available to common stockholders (including OP unit holders) 5,877 24,321 Series C preferred stock dividends 1,6584,982 Real estate depreciation and amortization - continuing operations22,611 63,267 Real estate depreciation and amortization - discontinued operations -- -- (Gain)/loss on sale of assets-- -- FFO available to common stockholders 30,146 92,570 (including OP unit holders) Prepayment penalties-- -- Write-off of deferred financing costs -- -- Impairment loss - continuing operations -- -- Impairment loss - discontinued operations -- -- Reserve for contract interpretation issue --2,136 --2,136 Adjusted FFO available to common stockholders $30,146 $94,706 (including OP unit holders) FFO available to common stockholders per share $0.54$1.65 Adjusted FFO available to common stockholders per share $0.54$1.69 Diluted weighted average shares outstanding, including OP units (1) 56,040 56,040 (1) Includes common shares, OP units and Series C convertible preferred on an "as-converted" basis. SUNSTONE HOTEL INVESTORS, INC. Reconciliation of Net Income to Non-GAAP Financial Measure uarter Ended December 31, 2005 and Year Ended 2005 (Unaudited) Reconciliation of Net Income to EBITDA and EBITDA as adjusted Pro Forma 2005 (1) Quarter Ended Dec. 31, Year Ended Dec. 31, Year Ended Dec. 31, Low End High End Low End High End Low End High End of ofof ofof o angeRange RangeRange Range Range Income available to common stock- holders$5,221 $7,121 $16,549 $18,449 $27,798 $29,698 Minority interest 400 600 1,515 1,715 2,144 2,344 Income (loss) available to common stock- holders (including OP unit holders)5,6217,72118,06420,16429,94232,042 Series A preferred stock dividends 2,4252,425 7,652 7,652 9,700 9,700 Series C convertible preferred stock dividends 1,6591,659 3,318 3,318 6,641 6,641 Depreciation and amorti- zation - continuing operations 23,195 23,19573,27073,27087,06287,062 Depreciation and amorti- zation - deferred financing fees 700 700 2,926 2,926 2,800 2,800 Amortization of deferred stock compensation 500 500 1,980 1,980 1,980 1,980 Interest expense - continuing operations 18,000 18,00055,81755,81771,95571,955 Prepayment penalties, write-off of deferred financing costs associated with the early retirement of debt -- -- 3,595 3,595 EBITDA $52,100 $54,200 $166,622 $168,722 $210,080 $212,180 (Gain)/loss on sale of assets $-- $-- $(2,476) $(2,476) $-- $-- Reserve for contract interpre- tation issue -- -- 2,136 2,136 2,136 2,136 Adjusted EBITDA$52,100 $54,200 $166,282 $168,382 $212,216 $214,316 Reconciliation of Net Income to FFO and FFO as adjusted Income available to common stock- holders$5,221 $7,121 $16,549 $18,449 $27,798 $29,698 Minority interest 400 600 1,515 1,715 2,144 2,344 Income (loss) available to common stockholders (including OP unit holders)5,6217,72118,06420,16429,94232,042 Series C convertible preferred stock dividends 1,6591,659 3,318 3,318 6,641 6,641 Real estate depreciation and amorti- zation - continuing operations 22,920 22,92072,13272,13286,18786,187 (Gain)/loss on sale of assets -- --(2,476) (2,476) -- -- FFO available to common stockholders (including OP unit holders) 30,200 32,30091,03893,138 122,770 124,870 Prepayment penalties, write-off of deferred financing costs associated with the early retirement of debt -- -- 3,595 3,595 Reserve for contract interpretation issue -- -- 2,136 2,136 2,136 2,136 Adjusted FFO available to common stockholders (including OP unit holders) $30,200 $32,300 $96,769 $98,869 $124,906 $127,006 Diluted weighted average shares outstanding, including OP units (2) 56,01956,01946,19346,193 56,01956,019 Adjusted FFO available to common stockholders (including OP unit holders) per share and unit (2)$0.54 $0.58 $2.09 $2.14$2.23 $2.27 (1) Pro forma EBITDA & FFO include the acquisition hotels, including those closed in July 2005, as if they were acquired, and the related financings were completed, on January 1, 2005. (2) Diluted weighted average shares outstanding includes Series C Convertible Preferred on an as-converted basis. SUNSTONE HOTEL INVESTORS, INC. Pro Forma Hotel Operating Results (unaudited) Quarter Ended Historical Acquired Properties (1) Properties (2) Total Pro Forma (3) Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2005 2005 2005 2004 Number of Hotels 52 8 60 54 Number of Rooms 12,710 3,973 16,683 13,183 Hotel operating profit margin (7) (8) 29.2% 17.4% 26.1% 27.5% Hotel Revenues Room revenue97,959 30,337 128,296 92,064 Food and beverag evenue 26,304 15,383 41,687 26,156 Other operatin evenue 10,320 1,590 11,910 11,038 Total Hotel Revenues 134,583 47,310 181,893 129,258 Hotel Expenses Room expense20,290 7,934 28,224 20,063 Food and beverag xpense 19,014 12,379 31,393 18,768 Other hotel expense 41,059 12,695 53,754 40,016 General an dministrativ xpense (9)14,968 6,066 21,034 14,825 Total Hotel Expenses 95,331 39,074 134,405 93,672 Hotel Operating Income 39,252 8,236 47,488 35,586 General and administrative - corporate 3,137(65) 3,072 2,500 Depreciation and amortization 15,095 6,150 21,245 14,104 Impairment loss -- -- -- 0 Operating Income 21,020 2,151 23,171 18,982 Interest and other income898 12910302 Interest expense (11,758) (4,117)(15,875)(10,244) Minority interest (321)-- (321) (1,624) Benefit from (provision for) income tax 2 (2) -- Gain from discontinued operations -- -- -- -- Reserve for contract dispute (9) -- -- -- -- NET INCOME (LOSS) 9,841 (1,956) 7,885 7,416 (10) Nine Months Ended Historical Acquired Properties (4) Properties (5) Total Pro Forma (6) Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2005 2005 2005 2004 Number of Hotels 51 9 60 54 Number of Rooms 12,630 4,053 16,683 13,183 Hotel operating profit margin (7) (8) 29.0% 18.0% 27.2% 27.1% Hotel Revenues Roo evenue 268,241 32,272 300,513 253,898 Food an everag evenue 81,026 15,422 96,448 80,102 Othe peratin evenue 31,944 1,739 33,683 32,238 Total Hotel Revenues 381,211 49,433 430,644 366,238 Hotel Expenses Roo xpense 57,118 8,339 65,457 56,218 Food an everag xpense 56,862 12,401 69,263 55,942 Othe ote xpense 115,237 13,495 128,732 113,654 General an dminis.expense (9)41,599 6,300 50,035 41,199 Total Hotel Expenses 270,816 40,535 313,487 267,013 Hotel Operating Income 110,395 8,898 117,157 99,225 General and adminis. - corp. 8,884(61) 8,823 7,500 Depreciation and amort. 44,214 7,050 51,264 41,483 Impairment loss 0 -- -- 7,439 Operating Income 57,297 1,909 57,070 42,803 Interest and other income 2,602 12 2,614518 Interest expense(38,696) (4,594)(43,290)(31,448) Minority interest(1,115)-- (1,115) (2,133) Benefit from (provision for) income tax 2 (2) -- Gain from discontinued operations 2,935 -- 2,935 -- Reserve for contract dispute (9) (2,136)-- -- -- NET INCOME (LOSS) 20,889 (2,675) 18,214 9,740 (10) (1) Represents 52 hotels owned for the entire quarter ended September 30, 2005. (2) Represents our ownership period of the 8 hotels acquired during the nine month period ended September 30, 2005. (3) Represents 54 hotels owned for the entire quarter ended September 30, 2004. 2 of these hotels were sold in Q2 of 2005. For the quarter ended September 30, 2005, these 2 hotels contributed $2.6 million in revenues and $404,000 in hotel operating income. (4) Represents 51 hotels owned for the entire nine month period ended September 30, 2005. (5) Represents 1 hotel which opened in June 2004 and 8 hotels acquired during 2005. (6) Represents 54 hotels owned for the entire quarter ended September 30, 2004. 2 of these hotels were sold in Q2 of 2005. For the quarter ended September 30, 2005, these 2 hotels contributed $8.6 million in revenues and $1.9 million in hotel operating income. (7) Quarter and nine months ended September 30, 2005 hotel operating profit margin is calculated as the hotel adjusted operating income divided by the hotel revenues per the schedule above. We use hotel operating income for the same reasons as EBITDA, which are more fully set forth on page 11 of this release. (8) Quarter and nine months ended September 30, 2004 Pro forma hotel operating profit margin is calculated as the pro forma hotel adjusted operating income divided by the pro forma hotel revenues per the schedule above. We use hotel operating income for the same reasons as EBITDA, which are more fully set forth on page 11 of this release. (9) Total reserve of $2.1 million that was recorded in Q2 of 2005 has been excluded from the nine month period ended September 30, 2005. (10) Pro forma income from continuing operations. SUNSTONE HOTEL INVESTORS, Inc. Pro Forma Hotel Operating Statistics by Region (unaudited) Quarter ended September 30, 2005 Number of Number of Occupancy Averag EGION Hotels Rooms Percentages Daily Rate RevPar California 21 4,844 80.4%$118.28 $95.06 Other West (1)16 3,440 78.5% $84.32 $66.18 Midwest (2) 9 2,694 67.3%$122.29 $82.25 Middle Atlantic (3) 6 2,568 77.9%$161.07$125.42 South (4) 5 2,062 71.3%$115.44 $82.30 Southwest (5) 3 1,075 76.2% $91.16 $69.44 Tota ortfolio 60 16,683 76.1%$115.75 $88.11 Quarter ended September 30, 2004 Percen umber Number Average Change of ofOccupancyDaily i EGION Hotels Rooms Percentages Rate RevPar RevPAR California214,844 82.5%$108.58 $89.606.1% Other West (1) 163,440 75.7% $79.23 $59.96 10.4% Midwest (2)92,694 68.5%$110.98 $76.028.2% Middle Atlantic (3) 62,568 74.4%$145.94 $108.56 15.5% South (4) 52,062 69.2%$107.68 $74.47 10.5% Southwest (5) 31,075 88.1% $79.69 $70.18 -1.1% Total Portfolio 60 16,683 76.4%$105.82 $80.829.0% Nine months ended September 30, 2005 Number of Number of Occupancy Averag EGION Hotels RoomsPercentages Daily Rate RevPar California 21 4,844 79.6%$112.48 $89.55 Other West (1)16 3,440 72.0% $84.55 $60.85 Midwest (2) 9 2,694 63.7%$119.15 $75.88 Middle Atlantic (3) 6 2,568 73.3%$165.32$121.14 South (4) 5 2,062 71.9%$128.30 $92.24 Southwest (5) 3 1,075 78.3% $90.51 $70.91 Tota ortfolio 60 16,683 73.5%$115.71 $85.01 Nine months ended September 30, 2004 Percen umber NumberAverage Change of ofOccupancy Daily i EGION Hotels Rooms Percentages RateRevPar RevPAR California214,844 77.8% $104.63 $81.37 10.1% Other West (1) 163,440 69.1%$80.05 $55.31 10.0% Midwest (2)92,694 63.9% $109.46 $69.928.5% Middle Atlantic (3) 62,568 74.5% $150.95 $112.437.7% South (4) 52,062 70.7% $119.39 $84.469.2% Southwest (5) 31,075 84.4%$83.34 $70.320.8% Tota ortfolio 60 16,683 72.8% $107.43 $78.238.7% (1) Includes Colorado, Idaho, Oregon, Utah and Washington. (2) Includes Illinois, Michigan and Minnesota. (3) Includes District of Columbia, Maryland, New Jersey, New York and Pennsylvania. (4) Includes Florida, Georgia and Virginia. (5) Includes New Mexico and Texas. SUNSTONE HOTEL INVESTORS, Inc. Pro Forma Hotel Operating Statistic y Brand (unaudited) Quarter ended September 30, 2005 (1) Number of Number of Occupancy Averag randHotels Rooms Percentages Daily Rate RevPar Marriott 31 9,066 76.7%$125.88$96.51 Hilton 5 1,333 79.5%$154.45 $122.72 InterContinental13 2,539 75.8% $86.25$65.39 Hyatt 4 1,029 81.6%$118.92$97.00 Other Franchise Affiliations (2)4 1,481 74.3% $90.47$67.22 Independent 3 1,235 66.9% $83.79$56.03 Total Portfolio 60 16,683 76.1%$115.75$88.11 Quarter ende eptember 30, 2004 (1) Percen umber NumberAverage Change of ofOccupancy Dailyi randHotels Rooms Percentages RateRevPar RevPAR Marriott 319,066 75.8%$115.07 $87.2110.7% Hilton 51,333 78.9%$137.23 $108.3113.3% Inter- Continental 132,539 76.2% $79.46 $60.51 8.1% Hyatt41,029 79.9%$107.43 $85.8513.0% Other Franchise Affiliations (2) 41,481 82.4% $87.65 $72.20-6.9% Independent 31,235 68.1% $79.40 $54.11 3.5% Tota ortfolio 60 16,683 76.4%$105.82 $80.82 9.0% Nine months ended September 30, 2005 (1) Number of Number of Occupancy Averag randHotels Rooms Percentages Daily Rate RevPar Marriott 31 9,066 74.6%$128.97$96.27 Hilton 5 1,333 74.4%$140.31 $104.41 InterContinental13 2,539 70.9% $82.85$58.75 Hyatt 4 1,029 76.6%$113.10$86.63 Other Franchise Affiliations (2)4 1,481 77.7% $93.60$72.72 Independent 3 1,235 61.8% $84.04$51.90 Total Portfolio 60 16,683 73.5%$115.71$85.01 Nine months ended September 30, 2004 (1) Percen umber NumberAverage Change of ofOccupancy Dailyi randHotels Rooms Percentages RateRevPar RevPAR Marriott 319,066 73.9%$119.83 $88.54 8.7% Hilton 51,333 72.2%$129.22 $93.2512.0% Inter- Continental 132,539 71.1% $77.06 $54.76 7.3% Hyatt41,029 72.5%$102.58 $74.3616.5% Other Franchise Affiliations (2) 41,481 78.9% $90.51 $71.40 1.9% Independent 31,235 62.7% $78.72 $49.33 5.2% Tota ortfolio 60 16,683 72.8%$107.43 $78.23 8.7% (1) Includes the 60 hotels we owned as of September 30, 2005 including prior ownership. (2) Includes Fairmont, Sheraton and Wyndham. SUNSTONE HOTEL INVESTORS, Inc. Debt Summary Interest Maturity Q3 2005 Recent31-Oct-05Debt Collateral Rate/Date Ending Events (2) Endin pread Balance Balance Fixed Rate Debt Secured Mortgage Debt 1 hotel 8.51% 2007 13,794,660 13,794,660 Secured Mortgage Debt 1 hotel 8.25% 2008 37,224,811 37,224,811 Secured Mortgage Debt 1 hotel 8.25% 2008 36,170,795 36,170,795 Secured Mortgage Debt (3) 26 hotels 5.95% 2011 250,000,000 250,000,000 Secured Mortgage Debt Rocheste aundry facility 9.88% 2013 6,165,512 6,165,512 Secured Mortgage Debt 10 hotels -- indivi- dual, non cross- colla- teralized loans 5.34% 2015 276,000,000 276,000,000 Secured Mortgage Debt 2 hotels -- indivi- dual, non cross- colla- teralized loans 4.98% 2012 65,000,000 65,000,000 Secured Mortgage Debt 2 hotels -- indivi- dual, non cross- colla- teralized loans 5.20% 2016 185,000,000 185,000,000 Secured Mortgage Debt 1 hotel 8.78% 2009 9,129,025 9,129,025 Secured Mortgage Debt 1 hotel 7.50% 2008 53,741,316 53,741,316 Secured Mortgage Debt 1 hotel 6.12% 2017 175,000,000 175,000,000 Total Fixed Rate Debt932,226,119 1,107,226,119 Floating Rate Debt Secured Mortgage Debt (3) 26 hotels L + 2.35% 2007 13,085,440 -- 13,085,440 Unsecured Term Loan Facility No mortgages L + 2.25% 2008 $75,000,000 $75,000,000 Total Floating Rate Debt 88,085,440 88,085,440 TOTAL MORTGAGE DEBT $1,020,311,558 $1,195,311,558 Secured Revolving Credit Facility 8 hotels L + 1.50% - 2.00% 2007 ---- TOTAL DEBT $1,020,311,558 $1,195,311,558 Preferred / Convertible Stock Series A & B8.00% perpe- tual $121,250,000$121,250,000 Series C 6.45% perpe- tual $100,000,000$100,000,000 % Fixed 91.4% 92.6% % Floating 8.6% 7.4% Average Interest Rate (1) 5.89% 5.92% Weighted Average Maturity of Debt 7.19 years 7.89 years (1) Assumes LIBOR of 3.35% (2) Reflects acquisition debt on the Hyatt Regency Century Plaza (3) Cross-collateralized loan with life insurance company

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