Company Presentation September 2011
Forward-Looking Statements This presentation contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as anticipate, believe, continue, could, estimate, expect, intend, may, plan, predict, project, should, will or the negative of such terms and other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those expressed or implied by these forward-looking statements. In evaluating these statements, you should specifically consider the risks outlined in detail under the heading Risk Factors in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission ( SEC ) on February 23, 2010, as revised by the filing of our Current Report on Form 8-K on January 14, 2011, and under the heading Risk Factors on page 2 of our Registration Statement on Form S-3, filed with the SEC on March 30, 2011, including, but not limited to, the following factors: general economic and business conditions affecting the lodging and travel industry, both nationally and locally, including a prolonged U.S. recession; the need to operate as a REIT and comply with other applicable laws and regulations; rising operating expenses; relationships with and requirements of franchisors and hotel brands; relationships with and the performance of the managers of our hotels; the ground or air leases for 7 of the 32 hotels; our ability to complete acquisitions and dispositions; and competition for the acquisition of hotels. These factors may cause our actual events to differ materially from the expectations expressed or implied by any forward-looking statement. We do not undertake to update any forward-looking statement. This presentation includes non-gaap financial information that the issuer considers useful to investors as a key measure of operating performance. A reconciliation to U.S. GAAP can be found in the Investor Relations section of the company s website at www.sunstonehotels.com. COMPANY PRESENTATION PAGE 2
Company Profile Hotel investment company with an enterprise value of over $2.4 billion Capital Structure / Valuation Metrics Shares 118.3M Stock Price (September 15, 2011) $5.95 Equity Market Cap $704M Total Mortgage Debt $1,551M Total Corporate Debt $63M Total Preferreds $391M Pro Forma Cash (5) ($235M) Total Enterprise Value $2,462M 2010 Pro Forma EBITDA Multiple 12.2x Implied 2011 Pro Forma EBITDA Multiple (6) 11.5x 12.1x 2010 Pro Forma Cap Rate (6) (7) 7.1% Q2 2011 TTM Cap Rate (7) 7.5% Implied Price Per Key $186,000 Sunstone Portfolio Metrics Hotels 32 Rooms 13,206 2010 Pro Forma RevPAR $115.54 2011 Pro Forma RevPAR (1) $122.47 - $124.78 2010 Pro Forma EBITDA (2) (3) $201.9M 2011 EBITDA Guidance (3) (4) $203M - $214M Valuation Sensitivity A change of: Would result in a share price change of: $10,000 / key $1.10 1.0x in EBITDA multiple $1.75 25 bps in capitalization rate $1.15 (1) 2011 RevPAR reflects the guidance data provided on pages 16 and 27 of the Supplemental Financial Information on Form 8-K furnished 8/8/11. (2) Reflects 2010 EBITDA provided on page 14 of the Supplemental Financial Information on Form 8-K furnished 8/8/11. (3) Reflects 75% ownership of Hilton San Diego Bayfront. (4) Adjusted EBITDA reflects the 2011 guidance range provided on page 16 of the Supplemental Financial Information on Form 8-K furnished 8/8/11. Guidance reflects Sunstone's ownership period of all 2011 acquisitions. (5) Reflects unrestricted cash balance of $145M as of 6/30/11 and includes Royal Palm Note face value of $90M. (6) Reflects current guidance range provided on page 16 of the Supplemental Financial Information on Form 8-K furnished 8/8/11. (7) Reflects 4% FF&E reserve. COMPANY PRESENTATION PAGE 3
Deep and Aligned Management Team Newly redefined management team singularly focused on driving shareholder value Ken Cruse President & CEO Hotel/Real Estate: 20 years Marc Hoffman EVP & COO Hotel/Real Estate: 34 years John Arabia EVP & CFO Hotel/Real Estate: 25 years Guy Lindsey SVP Design & Construction Hotel/Real Estate: 27 years Robert Springer SVP Acquisitions Hotel/Real Estate: 12 years Lindsay Monge SVP Treasury & Administration Hotel/Real Estate: 15 years Bryan Giglia SVP Corporate Finance Hotel/Real Estate: 15 years COMPANY PRESENTATION PAGE 4
Institutional Quality Portfolio Exceptional portfolio of thirty-two institutional-quality, primarily upper-upscale hotels 460-room Doubletree Guest Suites Times Square 9.1% of 2010 Hotel EBITDA 1,190-room Hilton San Diego Bayfront 16.0% of 2010 Hotel EBITDA 781-room Renaissance Orlando 5.7% of 2010 Hotel EBITDA 412-room Marriott Long Wharf Boston 6.3% of 2010 Hotel EBITDA * Hotel EBITDA percentages reflect 100% ownership of the Hilton San Diego Bayfront. 807-room Renaissance Washington D.C. 9.0% of 2010 Hotel EBITDA 460-room Hilton Times Square 5.6% of 2010 Hotel EBITDA COMPANY PRESENTATION PAGE 5
Balanced Geographic Distribution Geographically diverse portfolio located primarily in urban markets, particularly concentrated on the coasts 2010 Total EBITDA by Region (number of hotels in parenthesis) Mid-West (7) 12% West (12) 33 % San Diego 22% (4) Los Angeles 5% (4) Orange County 4% (2) Northeast (9) 43% DC/Baltimore 17% (3) NYC 16% (3) Boston 9% (2) * Hotel EBITDA percentages reflect 100% ownership of the Hilton San Diego Bayfront. South (4) 12% COMPANY PRESENTATION PAGE 6
Expanding our Reach We own a geographically diverse portfolio located primarily in urban markets, particularly concentrated on the coasts Hotel Rooms 2010 EBITDA (in millions) Northeast Region Marriott Boston Long Wharf 412 $13.5 Marriott Boston Quincy 464 5.5 Doubletree Guest Suites Times Square 460 19.5 Hilton Times Square 460 12.0 Renaissance Westchester 347 2.0 Marriott West Philadelphia 289 3.4 Renaissance Washington, D.C. 807 19.4 Marriott Tysons Corner 396 6.5 Renaissance Baltimore Harborplace 622 11.5 Northeast Total 4,257 $93.3 Mid-West Region Embassy Suites Chicago 367 $7.5 Marriott Troy 350 2.7 Doubletree Guest Suites Minneapolis 229 2.1 Kahler Grand Rochester 668 5.8 Marriott Rochester 203 3.9 Kahler Inn & Suites 271 2.4 Residence Inn by Marriott Rochester 89 1.5 Mid-West Total 2,177 $25.9 Hotel Rooms 2010 EBITDA (in millions) West Region Renaissance Long Beach 374 $4.4 Renaissance Los Angeles Airport 499 2.4 Courtyard by Marriott Los Angeles Airport 185 2.1 Sheraton Cerritos 203 2.2 Hyatt Regency Newport Beach 403 4.5 Fairmont Newport Beach 444 3.7 Hilton San Diego Bayfront* 1,190 34.3 Embassy Suites La Jolla 340 6.8 Marriott Del Mar 284 2.9 Hilton Del Mar 257 2.3 Marriott Park City 199 1.6 Marriott Portland 249 3.7 West Total 4,627 $72.4 South Region Renaissance Orlando at SeaWorld 781 $12.4 JW Marriott New Orleans 494 7.3 Hilton Houston 480 4.1 Marriott Houston 390 1.3 South Total 2,145 $25.1 Total 13,206 $215.0 * Hotel EBITDA percentages reflect 100% ownership of the Hilton San Diego Bayfront. COMPANY PRESENTATION PAGE 7
Proven Acquisitions Execution Three major urban hotels acquired at attractive spreads to our WACC in off-market deals Doubletree Guest Suites Times Square 2010 Metrics (1) JW Marriott New Orleans Hilton San Diego Bayfront Total No. Keys 460 494 1,190 2,144 RevPAR $302.25 $114.79 $139.51 $168.73 Adjusted EBITDA (millions) $19.5 $7.3 $34.3 $61.1 Adjusted EBITDA per key $42,400 $14,800 $28,900 $28,500 EBITDA Multiple 14.7x 12.8x 13.7x 13.9x (1) As reported in press releases dated 2/17/11 and 3/29/11, available in the investor relations section of the Company s website at http://www.sunstonehotels.com/investor_relations/news_releases.cfm.. Once investment returns notably exceed our cost of capital, we will source future deals based on the following criteria: Beneficial to credit profile Beneficial to portfolio quality / growth $100+ RevPAR 350+ keys Top-25 US markets Upper-upscale in quality COMPANY PRESENTATION PAGE 8
Rapidly Increasing EBITDA Cash flow growth driven by disciplined investments and proactive asset management $225.0 $200.0 Pro Forma Adjusted Corporate EBITDA Buildup $8.1- $19.1 $175.0 $58.6 $150.0 $14.6 $201.9 $210- $221 $125.0 $157.9 $100.0 Actual Adjusted EBITDA Sold Hotels Adjusted EBITDA 2010 Acquired Hotels 2011 Adjusted EBITDA Pro forma 32 hotel portfolio Adjusted EBITDA (1) (1) As presented in the Supplemental Financial Information furnished on 8/8/2011. (2) 2011 Pro Forma Adjusted EBITDA Guidance includes approximately $7 million of EBITDA associated with periods of prior ownership for hotels acquired in 2011. Operations Growth - RevPAR Guidance 6%- 8% Pro forma Adjusted EBITDA Guidance (2) COMPANY PRESENTATION PAGE 9
Mission and Business Plan Mission Sunstone will generate superior, risk-adjusted shareholder returns through disciplined acquisitions of institutional-quality hotels, proactive asset management, and by maximizing financial flexibility and minimizing our cost of capital Balanced and simple business plan focused on driving long-term shareholder value Establish cohesive and aligned team of top industry professionals Improve revenue and cash flow through proactive asset management Reduce risk through measured improvements in credit statistics and reduced leverage Improve investor sentiment / reduce cost of equity through strong communications and consistent execution of the stated plan Enhance portfolio quality, scale and growth potential through value-adding renovations, disciplined acquisitions and select dispositions COMPANY PRESENTATION PAGE 10
Value Enhancing Initiatives Improving portfolio quality and growth through select renovations In 2011, we expect to invest approximately $120 $140 million renovating and repositioning our portfolio. Most of these projects were completed in the first half of 2011, including: Marriott Boston Long Wharf meeting space/restaurant Embassy Suites Chicago guestrooms/bathrooms Marriott Boston Quincy guestrooms/bathrooms/lobby Marriott Tysons Corner guestrooms/bathrooms/exterior Sheraton Cerritos guestrooms Marriott Rochester guestrooms/bathrooms/lobby Marriott Houston guestrooms/bathrooms Kahler Grand guestrooms/bathrooms/meeting space Doubletree Minneapolis guestrooms/bathrooms/lobby COMPANY PRESENTATION PAGE 11
Recent Renovations Improving portfolio quality and growth through select renovations Marriott Boston Long Wharf lobby renderings: COMPANY PRESENTATION PAGE 12
Recent Renovations Improving portfolio quality and growth through select renovations Renaissance Washington D.C. completed lobby renovation: COMPANY PRESENTATION PAGE 13
Recent Renovations Improving portfolio quality and growth through select renovations Philadelphia Marriott completed lobby renovation: COMPANY PRESENTATION PAGE 14
Recent Renovations Improving portfolio quality and growth through select renovations Renaissance Orlando themed pool experience and 10,000 sq. ft. function lawn - completed: COMPANY PRESENTATION PAGE 15
Recent Renovations Improving portfolio quality and growth through select renovations Renaissance Orlando themed pool experience and 10,000 sq. ft. function lawn - completed: COMPANY PRESENTATION PAGE 16
Maximizing Financial Flexibility Maintaining strong liquidity and access to capital. and lowering our cost of capital through a gradual and methodical reduction of our leverage Highly equitized acquisitions that will enhance our growth profile and if investment returns notably exceed our cost of capital Debt reduction through capital recycling and retained earnings Improving cash flow during the cyclical recovery We will not issue equity at prices below our estimate of the intrinsic value of our portfolio simply to achieve our balance sheet objectives. COMPANY PRESENTATION PAGE 17
Maximizing Financial Flexibility 9.0x 8.0x 7.0x 6.0x 5.0x Maintaining strong liquidity and access to capital and lowering our cost of capital through a gradual and methodical reduction of our leverage 2.40x 2.20x 2.00x 1.80x 1.60x 1.40x Measured improvement of leverage profile Cyclical cash flow growth and transactions structured with higher equity content Long-term focus: build strength, flexibility, and positioning over several years 18-month credit target: 1.65x Fixed Charge Coverage, 6.0x Debt to EBITDA Position Sunstone to capitalize on opportunities during the next cyclical trough 4.0x 1.20x Debt to EBITDA (1) Fixed Charge Coverage (1) 3.0x 2007 2008 2009 2010 Pro Forma Mid-2012 Target 2014 Target 1.00x (1) As reported in Compliance Certificates to Series C Preferred Stock dated 3/18/08, 2/20/09, and 11/13/09, respectively. 2010 data is pro forma for the acquisition of the Doubletree Guest Suites Times Square, the JW Marriott New Orleans and the Hilton San Diego Bayfront. COMPANY PRESENTATION PAGE 18
Maximizing Financial Flexibility Well staggered debt maturity schedule consisting of low rated, primarily single-asset secured mortgage debt Following the Doubletree refinance, 12-14 debt maturities of approximately $95M and principal amortization of $70M equate to less than 6% of asset value* $509.8 $473.9 $303.1 $271.8 $251.0 $ in Millions $64.7 2011 2012 2013 2014 2015 2016 2017 2018 2019 & Beyond * Asset value reflects 3/31/11 value of $2.8B adjusted for the acquisition of the 75% interest in the Hilton San Diego Bayfront. COMPANY PRESENTATION PAGE 19
Investment Thesis Sunstone will generate superior, risk-adjusted shareholder returns through disciplined acquisitions of institutional-quality hotels, proactive asset management, and by maximizing financial flexibility and minimizing our cost of capital High-quality portfolio of 32 institutional-quality, upper upscale hotels located in the top U.S. lodging markets Balanced and simple business plan focused on driving long-term shareholder value Establish cohesive and aligned team of top industry professionals Improve revenue and cash flow through proactive asset management Reduce risk through measured improvements in credit statistics and reduced leverage Improve investor sentiment / reduce cost of equity through strong communications and consistent execution of the stated plan Enhance portfolio quality, scale and growth potential through value-adding renovations, disciplined acquisitions and select dispositions COMPANY PRESENTATION PAGE 20
Company Presentation September 2011