Company Presentation November 2013 S U N S T O N E H O T E L I N V - - PowerPoint PPT Presentation

S U N S T O N E H O T E L I N V E S T O R S , I N C

Company Presentation

November 2013

S U N S T O N E H O T E L I N V E S T O R S , I N C C O M P A N Y P R E S E N T A T I O N • P A G E 2

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

• f 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 May 6, 2013, 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, operating or air leases for 10 of the 29 hotels (including the pending acquisition of the Hyatt Regency San Francisco); 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. Information and/or metrics provided on pages 5 and 16 of the presentation are as presented by the Company through either its earnings releases and/or press releases.

Forward‐Looking Statements

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Company Profile

Sunstone is a leading hotel investment company with an enterprise value of approximately $3.8 billion.

Capital Structure / Valuation Metrics Sunstone Portfolio Metrics

Recent Stock Price 1 $13.18 Pro Forma Hotels 3 29 Pro Forma Shares (MM) 2 182.9 Pro Forma Rooms 3 13,744 Equity Market Cap (MM) $2,410 2012 Pro Forma RevPAR 3 $142.06 Total Mortgage Debt (MM) $1,352 2013 Pro Forma RevPAR Guidance 4 +3.5% ‐ 5.5% Total Corporate Debt + Preferred (MM) $1,467 2012 Pro Forma EBITDA (MM) 3 $253 Pro‐Forma Unrestricted Cash (MM) ($112) 2013 Pro Forma EBITDA Guidance (MM) 4 $250 ‐ $260 Total Enterprise Value (MM) $3,766 Implied Value per Key $274,000

Valuation Sensitivity

A change of: Would result in a share price change of: 2014 Consensus SHO EBITDA Multiple 5 12.7x $10,000 / key $0.75 2014 Consensus Industry Peer EBITDA Multiple 5 13.9x 1.0x in EBITDA multiple $1.78

1 Last 50‐day moving average as of November 11, 2013. 2 Reflects full‐year, pro‐forma share count based on 162.9 million shares outstanding as of the end of Q3, plus 20 million shares issued November 1, 2013. 3 2012 figures adjusted to reflect current 28‐hotel portfolio, plus 802‐room Hyatt Regency San Francisco, which is expected to close in early December 2013. 4 Based on Company guidance provided November 11, 2013. Includes the full‐year, pro‐forma EBITDA impact of the Hyatt Regency San Francisco. 5 Based Source: SNL Financial, FactSet. Median figures. Data for Industry Peer group includes DRH, RHP, HST, LHO, PEB, FCH, AHT, HT, BEE, RLJ, CHSP.

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High Quality Urban Portfolio

 29 institutional‐quality, upper‐upscale hotels comprising of 13,744 rooms (including the pending acquisition of the Hyatt Regency San Francisco)  Approximately 82% of hotel EBITDA generated from top U.S. markets (San Francisco, New York, DC/Baltimore, Boston, Chicago, San Diego, Los Angeles/Orange County)

Cycle‐Appropriate Strategy

 Improving our portfolio quality and scale while gradually reducing our financial leverage  Unique quantitative approach to business management  Positioning Sunstone to capitalize on investment opportunities during the next cyclical trough

Near‐term Upside

 Portfolio fundamentals remain highly constructive  Executing on focused capital plans to maximize competitiveness and long‐term value of each hotel  Upgrading portfolio by selling legacy hotels and reinvesting proceeds into high‐quality acquisitions  Building key market “complexes” and leveraging best practices across our portfolio  Low levered capital structure designed to maximize flexibility and minimize WACC  Meaningful exposure to San Francisco market (following the Hyatt Regency San Francisco acquisition)

Sunstone Investment Thesis

High quality portfolio. Disciplined strategy. Near‐term Opportunities.

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 Acquisitions

• Hyatt Chicago Magnificent Mile (June 2012) and Hilton Garden Inn Chicago Downtown (July 2012)
• Hilton St. Charles New Orleans (May 2013)
• Boston Park Plaza (July 2013)
• Hyatt Regency San Francisco (expected to close December 2013)

 Dispositions

• Marriott Del Mar (August 2012)
• Hilton Del Mar, Marriott Troy & Minneapolis Doubletree (September 2012)
• Rochester, Minnesota four‐hotel portfolio & commercial laundry (January 2013)

 Capital Markets

• Redemption of all $58 million outstanding 4.6% Senior Exchangeable Notes (January 2013)
• Completion of follow‐on equity offering with $295 million of net proceeds (February 2013)
• Redemption of all $176 million outstanding 8.00 % Series A Preferred Stock (March 2013)
• Redemption of all $100 million outstanding 6.45 % Series C Preferred Stock (May 2013)
• Completion of follow‐on equity offering with $271 million of net proceeds (November 2013)

 Balance Sheet

• Continued deleveraging with Net Debt+Preferred/EBITDA of 8.9x (Q2 2011) to 5.2x (Q3 2013)

 Capital Investment

• Investment of $109 million into the portfolio during 2012
• Forecast investment of $110 ‐ $120 million into the portfolio during 2013

Sunstone Hotel Investors, Inc.

Recent Highlights.

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High‐Quality Urban Portfolio

Geographically diverse portfolio located primarily in coastal urban markets. 2013 Pro Forma Total EBITDA by Region

(number of hotels in parenthesis)

West (11) 35.1%

• Portland 2% (1)
• San Francisco 6% (1)
• Los Angeles 6% (4)
• Orange County 3% (2)
• San Diego 18% (2)

Mid‐West (3) 7.5%

• Chicago 7% (3)

South (5) 13.3% Northeast (10) 44.1%

• Boston 15% (3)
• NYC 13% (3)
• DC/Baltimore 14% (3)
• Philadelphia 2% (1)
• New Orleans 6% (2)
• Houston 2% (2)
• Orlando 5% (1)

Includes pending acquisition of the Hyatt Regency San Francisco

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 Lodging is Highly Cyclical. While each cycle is unique, historically the greatest opportunities for value creation – and the highest risks of value destruction – occur during cyclical downturns. Companies that take appropriate steps during the growth phase of the cycle stand to capitalize on opportunities during the subsequent cyclical trough.  What we know today: 1. Current State – The current cyclical recovery, which began in December of 2009, has been characterized by relatively strong growth in business transient demand, moderate growth in group demand and low overall supply trends. Industry occupancies are now at or above prior peak levels. Hotel supply additions have ticked up in certain markets, but remain well below historical averages. In general, industry fundamentals remain constructive. 2. Potential Duration – The average duration of prior ‘up‐cycles’ (trough‐to‐peak) has been approximately 70 – 90 months. We are now approximately 46 months into the contemporary recovery. The combination of moderate demand growth and muted supply trends implies a slower‐paced, longer‐term recovery.  Cycle‐Appropriate Strategy. Sunstone’s near‐term strategy is predicated on gradually reducing our financial leverage and increasing our financial flexibility while improving our portfolio quality and scale. We believe this strategy will: 1. Drive superior risk‐adjusted returns during the ongoing growth phase of the current cycle, and 2. Position Sunstone to capitalize on investment opportunities during the next cyclical trough.

Cycle‐Appropriate Strategy

Unique quantitative approach to business management.

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Near‐Term Opportunity – Constructive Fundamentals

Solid demand growth, moderate supply growth. Demand‐to‐Supply: The current U.S. demand‐to‐supply growth rate spread is 160 bps in favor of demand,

well above historical norms. As PKF projects sub‐2% supply growth through 2015, we expect our industry's positive demand‐to‐supply ratio to persist for several years.

Group Productivity / Pace: Group demand and pricing is improving in most of our markets. Sunstone’s Q3

group productivity was strong and our 2014 group pace implies continued growth over 2013:

• Our same‐store group bookings during Q3 increased 2.9% over the third quarter 2012. 1 This is

record‐level group productivity for our portfolio.

• Our 2014 group pace for the 28‐hotel portfolio is up 3.1%. Excluding Renaissance D.C., our 2014 pace

is up 7.0%, and 16 of our hotels are showing acceleration in the rate of group pace growth.

Transient Demand Trends: With occupancy at or near previous peak levels, and a deeper group base, we

expect transient rates to show healthy growth in 2014:

• During Q3, our comparable portfolio was sold out approximately 38% of the time.2 This represents a

21% increase in sold‐out room nights versus the third quarter of 2012.

1 Excludes Boston Park Plaza. 2 Excludes hotels purchased in 2013.

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Near‐Term Opportunity ‐ Renovations

We completed four major renovations in 2013 resulting in approximately $10 million of revenue disruption, largely in H1 2013.

Hilton Times Square Hyatt Chicago Hyatt Newport Beach Renaissance Westchester

Completed: Q2 2013 Q3 RevPAR Growth: 4.5% Total Investment: $15 million Renovation: 460 guestrooms/baths & entrance Expected Benefit: Capture high‐end business transient customers Completed: Q2 2013 Q3 RevPAR Growth: 13.4% Total Investment: $25 million Renovation: Complete hotel re‐concepting including 417 guestrooms Expected Benefit: Capture high‐end business transient and group customers Completed: Q2 2013 Q3 RevPAR Growth: 11.1% Total Investment: $12 million Renovation: All public space & 403 guestrooms/baths Expected Benefit: Capture high‐end group business and leisure travelers Completed: Q2 2013 Q3 RevPAR Growth: 8.6% Total Investment: $12 million Renovation: All public space & 347 guestrooms/baths Expected Benefit: Capture greater share of corporate business and group

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Near‐Term Opportunity ‐ Proactive Portfolio Management

Improving our portfolio through capital recycling, focused capital investment and portfolio‐ wide efficiency initiatives.

 Upgrading portfolio by selling legacy hotels and reinvesting proceeds into high‐ quality acquisitions

• Sold four hotels and a commercial laundry located in a tertiary market and invested those

proceeds to partially fund two higher‐quality hotels in better long‐term growth markets

• Upgraded into core urban real estate through acquisitions in San Francisco, Chicago, New Orleans

and Boston

• Developed market‐specific complexes in Chicago, Boston and New Orleans that allows us to

leverage our asset management efforts, implement joint revenue management strategies and to share operational resources

 Implementing best practices throughout our portfolio driving efficiencies and margins

• Disseminate staffing/productivity benchmarks across the portfolio
• Replicate high‐return energy efficiency projects
• Outsource laundry/parking operations when feasible

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Pending Acquisition – Hyatt Regency San Francisco

Improving the quality and scale of our portfolio.

 Hyatt Regency San Francisco – 802 keys

• The fee‐simple hotel is located within the Embarcadero District of downtown San Francisco, the

city’s Central Business District (CBD), in one of the country’s top five markets.

• $262.5 million off‐market acquisition opportunity. $327k per key acquisition basis, 6.0% NOI cap

rate, 14.2x EBITDA multiple on 2014 pro‐forma.

• 2013 RevPAR of $209 (44% greater than our portfolio average). Annual occupancy +85%.
• Favorable Area of Protection (AOP) with Hyatt through 2050.

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Near‐Term Opportunity – Recent Acquisitions

Improving the quality and scale of our portfolio.

 Boston Park Plaza – 1,053 keys

• $250.0 million acquisition funded with proceeds from non‐core asset sales and the assumption
• f a $119.5 million mortgage (leverage neutral following the repayment of $100 million of

preferred securities)

• Acquisition basis ($237k per key) represents a notable discount‐to‐replacement cost
• Excellent balance of in‐place cash flow (approx. $20 million of EBITDA) and future upside

through numerous asset management opportunities

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Near‐Term Opportunity – Recent Acquisitions

Improving the quality and scale of our portfolio.

 Hilton New Orleans St. Charles Avenue – 250 keys

• $59.4 million acquisition funded with cash on‐hand
• Prominent historic building located in the heart of New Orleans’ central business district
• Fee‐simple; completely “off market” transaction
• Highly accretive valuation – acquired at 11.4x 2013 EBITDA (7.9% NOI cap rate)
• Selective renovations planned for 2014 / 2015

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We have a well staggered debt maturity profile consisting of low‐rated, single‐asset secured mortgage debt. Since 2012, we have reduced our debt and preferred balances by approximately $428 million.

Near‐Term Opportunity – Low Levered Capital Structure

Maximizing Flexibility and Minimizing WACC. $136.9 $410.7 $241.6 $277.1 $244.8

$ in Millions

2013 2014 2015 2016 2017 2018 2019

& Beyond

• No debt maturities through April 2015
• Average interest rate: 4.87%
• 71% Fixed Rate / 29% Floating Rate

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Near‐Term Opportunity – Stock Return Potential

The lodging stock returns of recent cycles implies substantial near‐term opportunity as the current recovery continues its slow‐but‐stead advance.

Source: MVL & Co. November 4, 2013.

We are here

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High Quality Urban Portfolio

 29 institutional‐quality, upper‐upscale hotels comprising of 13,744 rooms (including the pending acquisition of the Hyatt Regency San Francisco)  Approximately 82% of hotel EBITDA generated from top U.S. markets (San Francisco, New York, DC/Baltimore, Boston, Chicago, San Diego, Los Angeles/Orange County)

Cycle‐Appropriate Strategy

 Improving our portfolio quality and scale while gradually reducing our financial leverage  Unique quantitative approach to business management  Positioning Sunstone to capitalize on investment opportunities during the next cyclical trough

Near‐term Upside

 Portfolio fundamentals remain highly constructive  Executing on focused capital plans to maximize competitiveness and long‐term value of each hotel  Upgrading portfolio by selling legacy hotels and reinvesting proceeds into high‐quality acquisitions  Building key market “complexes” and leveraging best practices across our portfolio  Low levered capital structure designed to maximize flexibility and minimize WACC  Meaningful exposure to San Francisco market (following the Hyatt San Francisco acquisition)

Sunstone Investment Thesis

High quality portfolio. Disciplined strategy. Near‐term Opportunities.

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Sunstone Hotel Investors, Inc. 120 Vantis, Suite 350 Aliso Viejo, California 92656 www.sunstonehotels.com