SHO

Business Context and Reporting Period

Sunstone Hotel Investors, Inc. (Sunstone) is a Maryland corporation operating as a Real Estate Investment Trust (REIT). As of September 30, 2007, the Company owned 46 hotels (15,987 rooms) and held a 38% equity interest in a joint venture owning the Doubletree Times Square in New York City. The Company leases its properties to a taxable REIT subsidiary (TRS) which contracts with third-party managers, including Sunstone Hotel Properties, Marriott, Hyatt, and others. This filing covers the quarterly period ended September 30, 2007.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 23.2% for the three months and 22.6% for the nine months ended September 30, 2007, compared to the same periods in 2006. This growth was driven by new acquisitions and organic growth in the existing portfolio.
• Profitability: Net income surged 978.6% for the quarter and 131.5% for the nine-month period. The year-over-year comparison for the nine months is significantly impacted by a $57.9 million gain on the sale of six hotels classified as discontinued operations in 2007, compared to $15.1 million in 2006.
• Operating Performance: For the total portfolio, RevPAR increased 11.6% for the quarter and 9.2% for the nine months. Occupancy rose 4.3 percentage points (quarter) and 3.2 percentage points (nine months), while Average Daily Rate (ADR) increased 5.6% and 4.7%, respectively.
• Acquisitions: The Company acquired three major properties in 2007: LAX Renaissance ($65.2M), Marriott Long Wharf ($228.5M), and Marriott Boston Quincy ($117.0M).
• Dispositions: Six hotels were sold in the first nine months of 2007 for net proceeds of $147.4 million, resulting in a net gain of $56.0 million.

Guidance, Outlook, and Risks

• Capital Expenditures: The Company expects total capital expenditures for 2007 to be approximately $130.0 million to $135.0 million, including $103.0 million already spent in the first nine months. A $14 million renovation for the Marriott Long Wharf is expected to commence in Q4 2007.
• Liquidity: As of September 30, 2007, the Company had $188.7 million available under its $200.0 million credit facility (with $11.3 million in letters of credit outstanding). Management believes current capital resources are sufficient for the next 12 months.
• Debt Structure: In June 2007, the Operating Partnership issued $250.0 million of exchangeable senior notes at 4.60% interest. All outstanding debt as of September 30, 2007, carried fixed interest rates.
• Risks: Key risks include general economic conditions affecting travel, rising operating expenses (wages, utilities, insurance), reliance on third-party managers, and the impact of renovations on operations. The Company also faces risks related to its REIT status compliance and debt covenants.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the extent to which the reported net income growth is driven by one-time gains from hotel sales ($56.0M) versus recurring operating performance.
• Acquisition Integration: Assess the performance of the three major 2007 acquisitions (LAX Renaissance, Long Wharf, Boston Quincy) and their contribution to the RevPAR growth.
• Debt Maturity Profile: Review the "Contractual Obligations" table to understand the timing of principal repayments, noting $9.1 million due within one year and significant balances due beyond five years.
• Performance Guaranty Utilization: Note that the $27.0 million performance guaranty from the Hyatt Regency Century Plaza manager was fully utilized by the end of Q3 2007, which may impact future "Other operating revenue" recognition.
• Stock Repurchases: Confirm the remaining capacity under the $100.0 million share repurchase program, of which $86.4 million had been utilized as of September 30, 2007.