Welcome to the Sunstone Hotel Investors fourth quarter 2009 earnings call. At this time all participants are in listen only mode. Following today’s prepared remarks instructions will be given for the question and answer session. (Operator Instructions) I would now like to turn the conference over to Mr. Bryan Giglia, Senior Vice President of Corporate Finance of Sunstone Hotel Investors. Please go ahead, Sir.

Thank you. Good afternoon everyone and thank you for joining us today. By now you should have all received a copy of our earnings release which was released this afternoon. If you do not yet have a copy you can access it on the investor relations section of our website at www.SunstoneHotels.com. Before we begin this conference I would like to remind everyone that this call contains forward-looking statements that are subject to risks and uncertainties including those described in our prospectuses, 10Qs, 10Ks and other filings with the SEC which could cause actual results to differ materially from those projected. We caution you to consider those factors in evaluating our forward-looking statements. We also note that this call may contain non-GAAP financial information including EBITDA, adjusted EBITDA, FFO, adjusted FFO and hotel EBITDA margins. We are providing that information as a supplement to information prepared in accordance with generally accepted accounting principles. With us today are Art Buser, President and Chief Executive Officer; Ken Cruse, Chief Financial Officer and Mark Hoffman, will be available to answer questions during the question and answer period. To begin our discussion today I would like to turn the call over to Art. Art please go ahead.

Thanks Bryan. Good afternoon everybody and thank you for joining us today. In today’s call I will review our fourth quarter and full-year performance and share some insights into the current operating environment. Following that, provide a status update on our acquisitions program and our Independent Hotel Management RFP process. Finally, Ken will provide additional detail on our finance initiatives including our proposed release of three properties from the Mass Mutual Portfolio and our decision to terminate the credit facility. Ken will also provide an update on corporate covenant compliance, impairment charges taken in the fourth quarter and provide some 2010 expense estimates. Over the past year the Sunstone team accomplished a lot so I would like to start today’s call with a recap. If you look back to our 2008 fourth quarter call, a year ago we were in a very different situation. Our shares were trading at approximately $2. Common equity market cap was about $90 million. Sunstone owed $1.7 billion in debt and we held approximately $200 million in cash. During 2009 we focused on improving our balance sheet, refining our portfolio and improving our operational efficiency. On the balance sheet front we took a number of positive steps during 2009. We capitalized on market conditions by repurchasing approximately $188 million of our exchangeable notes at an average discount to par of 38% resulting in a plus 20% yield to put and generated economic gain of nearly $70 million. We also amended our exchangeable notes debenture to provide for flexibility in restructuring our secured debt. We equitized our balance sheet by issuing $269 million of common equity. We restructured our secured debt portfolio by addressing deficits among five of our nonrecourse mortgage loans collateralized by 15 hotels and totaling $470 million in indebtedness. As part of that…

Thanks Art. Good afternoon everyone. Thank you for joining us today. Today I will provide a status report on our finance initiatives including our proposed release of three hotels from the Mass Mutual loan. I will also discuss our decision to terminate our credit facility and summarize the one-time charges we recorded in the fourth quarter. Finally I will provide some information related to certain 2010 expense items and metrics. The first topic is secured debt. As we have previously disclosed we are in the process of completing our secured debt restructuring program and we also previously noted we were proceeding with the deed back of all 11 hotels securing a $246 million loan with Mass Mutual. Recently we reached an agreement in principle with Mass Mutual to secure the release of three of the 11 hotels comprising the collateral pool. The assets we are working to release are the 179 room Courtyard by Marriott Los Angeles, the 271 room [inaudible] Inn and Suites in Rochester, Minnesota and the 203 room Marriott Rochester, Minnesota, collectively representing a total of 653 rooms. We chose to retain these three assets because Sunstone is uniquely positioned to retain market efficiencies by keeping our Rochester and LAX portfolios intact. The remaining 8 hotels will be deeded back to Mass Mutual in satisfaction of the debt balance that will remain after the payment of a release price. We expect this transaction to be completed in the first quarter but no assurances can be given at this time as to timing, final terms or if the transaction will close at all. Under the terms of our agreement with Mass Mutual we are unable to take questions on this transaction during today’s call. I would like to thank Mass Mutual and its co-lenders for their continued efforts…

Thanks Ken. We are all looking forward to the next phase of this cycle and how. As I mentioned we are now seeing early signs of firming demand even as ongoing dysfunction in the property level mortgage markets might lead to attractive acquisition opportunities. As a result, we believe we are moving to a phase of the cycle where well capitalized, proactive public companies may have opportunities to create significant value through acquisitions. We believe the backgrounds and skill set of the Sunstone team make us well qualified to capitalize on those emerging opportunities. Let me reiterate we continue to run our business with a single focus. We exist to outperform. It has been our strategy to create long-term stockholder value by capitalizing on cyclical opportunities and market inefficiencies. As a result, we have made decisions which may have at the time appeared contrarian but which have proven to be correct. 2009 was a transformational year for Sunstone and we have set the bar even higher for ourselves in 2010. Before I turn the call over to Q&A I would like to share with you how we would like you to think about Sunstone in 2010 and beyond. That is first, our company is poised for growth and outperformance from a position of strength. We have an exceptional high quality portfolio located in many of the top U.S. markets in addition to the growth potential already embedded in our existing portfolio we have approximately $400 million of cash providing fuel for growth. With the conclusion of our secured debt restructuring program we can now focus more resources on acquisitions. I am very excited about the deals we are seeing and I am optimistic about our ability to succeed in acquiring hotels and overall Sunstone’s prospects for 2010 and beyond. Two,…

(Operator Instructions) The first question comes from the line of Jeffrey Donnelly – Wells Fargo. Jeffrey Donnelly – Wells Fargo : You talked about some of the markets that present some challenges in 2010. How are you thinking about New York City this year? There is a lot of supply growth in Manhattan that comes on the heels of a good chunk of supply growth last year. Do you think New York City is one of the markets that maybe could be a best performing this year or do you think it maybe has higher risk that will keep it maybe middle of the pack?

The former. While New York City is often treated as a market, the Times Square sub-market historically has been the highest performer in terms of occupancy. So it feels like as New York City recovers our Times Square markets are going to recover first and we see that in occupancy. While the overall market might not have robust numbers we are fairly bullish and particularly when you hear RevPAR numbers of up over 14% year-over-year in February, listen half a month doesn’t make a month nor a year, but it certainly seems like that sub-market within New York should be an outperformer. Jeffrey Donnelly – Wells Fargo : A bit more broad, there is a lot of talk on the benefit of a mix shift and maybe driving rates this year. Can you hazard a guess on the percentage mix of your overall portfolio in 2009 between leisure and corporate and group and where you think those percentages would move to in 2010?

I am going to dish it to Mark. Historically we have been a 70% transient house, 30% group. I don’t think that is going to change much over the 200 basis points. Mark?

What is going to happen is you are filling in a lot of the transient these days is filling in with discount transient as expected. We do expect to see improvement in our group portfolio but I don’t think it will make a meaningful shift because it takes a lot of percentage to change that. We should continue to see strengthening in group and what we hope to see is a lessening of the opaque’s and a lessening of the discounts in the transient sector.

What I would add to that is what we are bullish on is historical recovery show that companies with a lower percentage of group which might have been booked in the future at a lower rate are going to have higher [bade] in the recovery because you are filling up and the market is going to take the last rates available. Jeffrey Donnelly – Wells Fargo : Maybe to ask that a bit differently, within that transient category the focus is the thinking may be if 2009 was full of airline crews, [low rated] online business, in 2010 you are going to see a swing back to a higher priced corporate traveler. Are you able to kind of talk a bit about that split between leisure and corporate in 2009 and your thinking in 2010? Or do you think that will be fairly constant too?

I am pretty sure that would be constant. I don’t have that number at my fingertips but we can call you back with that. Jeffrey Donnelly – Wells Fargo : I recognize that you said you won’t take questions on this but I am going to try and ask them anyways. The three hotels you said you were contemplating holding back from Mass Mutual, I guess I’d think of that as in effect you are sort of repurchasing them from Mass Mutual?

Yes. Jeffrey Donnelly – Wells Fargo : Are you going to at least give us some rough indication of the magnitude of the payment you are contemplating? Separate from Mass Mutual you did own and operate those last year, are you able to give us some indication on what those three hotels did in 2009 for EBITDA and whether or not they will be cash flow positive in 2010?

I wish I could. I would say stay tuned. Things are moving well with Mass Mutual so we expect to be in a position where we can report the final outcome of this transaction here in the next month or so. Jeffrey Donnelly – Wells Fargo : I know you didn’t give specific earnings guidance but in some past quarters you have commented on what you have thought about analyst consensus EBITDA and earnings per share estimates. Do you have any thoughts on where consensus is standing today?

Why don’t we just be consistent with our last couple of calls and say we think that the analysts may prove to be overly optimistic this year although we are very early in the process.

Before you jump off, back to that 70%, of that 70 35% or about half is business traveler. Leisure is about 20%, government is about 5% and contract and other are 10%. We would expect that to be the same kind of 2009 to 2010.

The next question comes from the line of David Loeb – Robert W. Baird & Co., Inc. David Loeb – Robert W. Baird & Co., Inc.: Before I bring up the forbidden topic I thought it was appropriate to comment Art on the [inaudible] by your comp. We don’t see very many CEOs who earned bonuses refusing them. I think your shareholders are appreciative of that.

Thanks. David Loeb – Robert W. Baird & Co., Inc.: Of the three assets you are not going to talk about I also was thinking this was essentially a repurchase so I am glad Jeff brought that up. Can you talk a little about the accounting? Have you got all of the debt in the non-sale disposition line or have you parsed that out as well?

Good question. The way we have accounted for the Mass Mutual Portfolio is based on its contractually allocated debt amounts. So you will see about $60 million of debt that is on continuing debt related to the three assets. That is by no means reflective of the release price for these assets. If you look at the last page of the press release you will see the existing debt that is in place net of all debt associated with the secured debt restructuring program. That is the $1.145 billion total. Again if you look at the 10K you will see a total amount of basically $1.2 billion and again that is inclusive of the allocated loan amounts for those three, not the amount we are negotiating to pay as a release price. David Loeb – Robert W. Baird & Co., Inc.: From a theoretical perspective how do you look at acquiring three hotels for example two in Rochester and one in L.A.? How would you look to value those three hotels? Is that negotiation or that analytical process any different because of the fact you are negotiating with Mass Mutual and I guess as part of that would you consider or would they consider leaving some debt in place?

Again, I can’t speak and shouldn’t speak for the lender but our approach to evaluating those assets is the same as if we were buying them. Looking at what RevPAR growths were and flow through and there is clearly as Ken pointed out synergy between those assets that has to be considered.

Our plan would be to own those assets with no debt in place at this point. David Loeb – Robert W. Baird & Co., Inc.: What I am hearing if I am reading between the lines correctly is $60 million is the attributable debt. You will have to pay that down and probably pay something in excess of that in order to carve those out of the agreement. Is that fair?

That is fair. David Loeb – Robert W. Baird & Co., Inc.: The note payable write off or the note receivable write off, was that taken through the corporate overhead line?

Yes. David Loeb – Robert W. Baird & Co., Inc.: You talked about the 50% save through. When you start seeing hotels having positive revenue gains, first question is how much revenue gain does there need to be on a property by property basis for you to actually start seeing EBITDA grow. The second question is once you are in the growth phase what do you think the flow through would be from incremental revenues?

Historically to the first part of the question is a 2-3% increase in RevPAR is generally where you see some growth but then you take a look at our Renaissance D.C. that had a reduction in revenue and an increase in EBITDA. I can’t say that is true for all of the hotels but when you get the cost model right you would assume that is possible that other hotels with flat to shrinking revenue could see some EBITDA growth. In terms of flow through going forward, I am going to give you the popular answer. It depends a lot of that on how much of that is rate and how much of that is occupancy. Let’s assume kind of 50/50 and so you would see flow throughs of 60% thereabout to 80%. Again it really depends a lot market by market and what the mix is. I wouldn’t hold anybody to that number because as we have seen hotel by hotel it varies a lot. In particular, this year we see increases in occupancy and declines in rate, it is going to be difficult to preserve margins. David Loeb – Robert W. Baird & Co., Inc.: So looking ahead to 2011 and 2012 you think that as the mix changes to the equivalent rate and occupancy thereabout it should be over 50%?

One should expect that is the case. That is a reasonable expectation. It is certainly ours.

The next question comes from the line of Chris Woronka – Deutsche Bank Securities. Chris Woronka – Deutsche Bank Securities: When we kind of drill down and read through some of the regional data we get weekly and monthly it looks as though the recovery is unfolding a little bit faster across the east coast relative to the west. You obviously have exposure to both coasts. I am curious as to what some of the dynamics driving that are. Also not that you have a ton of group accounts but do you think Las Vegas is impacting some of the other group markets?

To the last part of the question unsure. I have read a lot and we have heard a lot about kind of Vegas and it may keep rates down for awhile going forward. We don’t have anecdotal data from our hotels that they say we are losing group rooms particularly in D.C. and other markets where they are more locationally driven. In terms of the markets, it is really a function of convention calendar and supply. So when I look at the west coast versus the east coast New York is clearly having a good run up. Then there is anomalies like D.C. with the inauguration. You had two college bowls in the L.A. area in January and so you had some hotels really outperform there. I think it is kind of early in the year where there is a lot of anomalies. I agree with you in one way. I do think we are going to come out of this where some markets are going to greatly outperform others and there is only so much you can do about that. Chris Woronka – Deutsche Bank Securities: Shifting gears over to the asset side, it looks like we have picked up in the last couple of weeks in some situations banks are starting to actually get a little bit more aggressive in terms of pursuing action on these distressed assets. Is that your opinion as well? I heard you comment earlier about maybe not seeing quite as many opportunities as you initially thought. Where is the middle ground? What are some of the really big sticky issues on why things aren’t moving a little bit quicker than a lot of us might have thought?

Pricing optimism. I would ask you to take a poll of yourself, how do you feel today versus October or November and most people feel maybe though guarded a little more optimistic with that optimism. I think many people in the business community have already changed their RevPAR predictions for the rest of this year after just one month. If you take year one and you increase RevPAR by a couple of hundred basis points and flow that over four years you are going to have a pretty significant increase in calculated price. So I think it is the optimism that ebbs and flows and then works in a calculated value that is really the difference.

The next question comes from the line of William Crow – Raymond James. William Crow – Raymond James: You are [inaudible], I think you pointed out in the call. Is this a better time to sell than to buy?

Based on the number of buyers allegedly lining up there we have asked ourselves the same question. If somebody was going to pay us significantly more than we thought an asset would be worth we should consider it. That doesn’t go unnoticed by us. We are not actively selling assets. We respond to inbound calls. I think you have caught on something that might be true here and there for some companies. William Crow – Raymond James: I was interested in your comments about Chicago. You think it is a very good long-term market. Isn’t Chicago kind of on the precipice of potentially going through a secular change where the environment for conventions has gotten so harsh or unattractive they are losing auto conventions? I am trying to see what your longer term view is.

When I worked at the Chicago Hilton in 1994 it was similar. Chicago has kind of gone through these cycles where the leverage of whether the buying or selling community feels a little more robust then clearly the buying community now feels that they can push around some cities and maybe rightly so. I think San Francisco has a bit of this as well because it is an expensive city to operate in. So Chicago is at kind of a tipping point where there is a lot of shows, RSNA, NRA, the Restaurant Show and some others, the toy show that have been there forever that are bidding out in other cities. The question is are they doing that just to get the best deal or are they really intent on moving? If some of those major shows pulled out of October and some of those even go around kind of the Thanksgiving period Chicago as a city would never be able to fill those and if you are figuring you are going to lost 10-15 nights that were otherwise 100% occupancy you could say that Chicago is forever lost three points in occupancy city wide or thereabouts. I would say there is that potential. But Chicago and other markets have been there before. I think Chicago is the sort of market that realizes that and is probably marshalling all of their resources on both sides of the aisle to find a way to make things work.

The next question comes from the line of David Katz – Oppenheimer & Co. David Katz – Oppenheimer & Co.: In the commentary there was some notion that competition for portfolios is somewhat less than either for debt or I guess individual properties. Can you elaborate on that a bit as to why that is and why you are seeing that?

Two reasons, people are risk averse so they want to take on transactions that are smaller in scale. You look at the size of the funds and cash available no one is going to use all of that on one deal. Those are really the two drivers as to why people are looking smaller. We just left an environment where in 2005, 2006 and 2007 a lot of people said if it not to be [inaudible] I am not going to look at it. I think they learned the dangers of that. The last reason is larger deals probably by definition have a lot of debt and debt people have a great aversion to, particularly if the maturities are two years out how does one reserve sufficient cash or a deal with maturities two years out? If you hold that cash today it certainly is a drag on your IRR. I think those are the three reasons that really we notice make less competition. David Katz – Oppenheimer & Co.: The $5.6 million note, have you told us who that is with?

No we haven’t. David Katz – Oppenheimer & Co.: I assume that is intentional, that is not disclosable?

That is correct.

I take that back. In our release in 2006 we did reveal who that was with and it was with Trinity Hotel Investors.

The next question comes from the line of Mike Salinsky – RBC Capital Markets. Mike Salinsky – RBC Capital Markets: On the line of credit you terminated, how close were you in proximity to the covenants on that? It sounds like you are freeing up substantial capacity by terminating that. I just wondered how much capacity and how close you were?

Good question. We do expect that during the course of 2010 we would have bumped up against one or more of the covenants in the facility. There was a one-time fixed charge coverage ratio limit that was probably going to see the company bumping into that at some point. Mike Salinsky – RBC Capital Markets: In the press release you provide a good amount of detail on the portfolio assets of Mass Mutual. I am just curious as to what the margins actually would look like if you go back and exclude that from the portfolio?

We have a pro forma analysis for you that shows the EBITDA after the portfolio. This is in the back of the press release. Look at page 11. Mike Salinsky – RBC Capital Markets: I will check on that. Switching over to the Doubletree, with the impairment during the quarter is that hotel still compliant with its debt covenants then? Also, when is the debt maturity on that?

The hotel has about $300 million worth of secured debt in place. It is in a cash sweep so the partnership is not taking money out. There are no covenants beyond that. It is a sweeping loan that matures in 2012. Mike Salinsky – RBC Capital Markets: It sounds like you are pretty much done with the repositioning of the balance sheet. You seem to have a pretty good handle on where your operations are. Why not provide guidance at this point? What is the additional things that could add a lot of volatility?

Our belief is we should provide guidance when we are getting numbers we can rely on. In December we sat around and had our 2010 budget presentations. In the vast majority of hotels I think all but one beat their budgets for January. So we are continuing to see here we aren’t getting numbers we can rely on. I think when we get numbers we can rely on we are going to do that. I think the variance to budget was double digit, maybe 15% and that was only a month later. So I think it doesn’t serve a lot of purpose to give you numbers and a month later say the view has changed. Here is my anecdotal comment for this, 1.5 years ago as things started to drop off and Ken personally noticed this, people were overly optimistic and operations were well below expectations. Now that we have had over a year run down people are more pessimistic and they are projecting off a tangent and so they are still somewhat pessimistic in their view while their operations get better. Our jobs as owners is to push them from a revenue standpoint to say listen we think it is going to be better, start to yield towards higher occupancy and higher rates. So when we get numbers we can rely on and are accurate we will share those.

The next question comes from the line of Bryan Mahr – Collins Stewart. Bryan Mahr – Collins Stewart: The credit facility, what was the breakage cost on that?

We are expensing out $1.6 million. Those are deferred financing charges though. Those are costs associated with the initiation of the facility. There is really no cost to terminate the facility. Bryan Mahr – Collins Stewart: On the Doubletree and I don’t want to beat a dead horse here but can you tell us what the new valuation is on that property according to the partner?

No we cannot. Bryan Mahr – Collins Stewart: Can you tell us what the initial investment by Sunstone in the property was?

Yes, we made a $40 million investment in the deal. Our investment prior to the write down was $26 million so we took…that was after money we had taken out. Bryan Mahr – Collins Stewart: When was the $40 million made?

2006. Bryan Mahr – Collins Stewart: Is there any chance you could lose the hotel like it could just be taken away?

The Doubletree Times Square? Bryan Mahr – Collins Stewart: Yes.

As we have noted, we have written our investment to zero in the partnership. Bryan Mahr – Collins Stewart: But you had hedged further upside if everything improves. So there is upside there and there is no real downside. I want to see if there is any potential upside if you lose the note?

You can take the fact that we have written it down to zero to mean there is a chance the hotel would go away. For our purposes it has gone away. I think you can also take there is a potential that as you said this hotel could revalue and you could see a nice recovery in the New York market and there could actually be value there.

The next question comes from the line of Ryan Meliker – Morgan Stanley. Ryan Meliker – Morgan Stanley: Getting back to market mix, can you give us any color on the percentage of your group demand or what you are expecting for 2010 that is currently on the books and what that rate is relative to 2009?

In terms of what the pace is? Ryan Meliker – Morgan Stanley: Do you have 70% of your group on the books right now. What are you looking for in 2010 on the books and is that rate at the same level as 2009?

Right now for group, pace is down 18% with 14% reduction in occupied rooms and a 4% reduction in rate but what we need to caution you with is the rooms that were on the books that we are comping against for last year are what we would characterize as much softer. We saw a great deal of attrition against the rooms that were on the books last year as the market continued to be soft or maybe it just didn’t materialize the way they were booked. This year we think the quality of the bookings is considerably better.

I would add to that generally we turn the year with over half of the business on the books. We were in a similar place but as we pointed out on the call the activity in January was 30% higher than the previous January. So it seems like the amount of the bookings are increasing and how that is to be played out is to be seen. Ryan Meliker – Morgan Stanley: Along those lines, maybe I am wrong but if I am just correct me, you don’t seem to be in a deteriorating rate environment and the group bookings that would be occurring now would probably be coming in at rates lower than the ones that were booked over the past year or two. If that is correct, looking at January was a very strong month for group bookings for you guys, how much of a discount in January did group bookings get versus what you have on the books right now?

It varies greatly. It varies a lot by time as well. 4% overall is where the discount in terms of rate.

The next question comes from the line of David Loeb – Robert W. Baird & Co., Inc. David Loeb – Robert W. Baird & Co., Inc.: In that original release on the Times Square asset you had mentioned a $28.5 million mezzanine loan that was part of the initial $68.5 million investment. Was that also either paid off or refi’d out or refi’d in to debt?

Actually we sold that for a profit shortly after we closed on the deal. David Loeb – Robert W. Baird & Co., Inc.: So the net investment was just the $40 million preferred equity investment and you pulled some cash out of that as well?

Yes.

I am showing no further questions in the queue. Please continue.

We appreciate everybody’s time today as well as your continued interest. It looks like about 105 people logged in today. We look forward to speaking with you at our mid-quarter update call in April and a variety of conferences we will be attending in the next month. Thank you again for your support of Sunstone.

Ladies and gentlemen this concludes the Sunstone Hotel Investors fourth quarter 2009 earnings call. You may now disconnect. Thank you for your participation.