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Sunstone Hotel Investors Inc. Reports Operating Results (10-K)

February 17, 2011 | About:
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10qk

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Sunstone Hotel Investors Inc. (SHO) filed Annual Report for the period ended 2010-12-31.

Sunstone Hotel Investors Inc. has a market cap of $1.26 billion; its shares were traded at around $10.69 with a P/E ratio of 19.8 and P/S ratio of 1.8. Hedge Fund Gurus that owns SHO: Michael Dell of MSD Capital, Michael Dell of MSD Capital, John Paulson of Paulson & Co., Paul Tudor Jones of The Tudor Group, Jim Simons of Renaissance Technologies LLC, Steven Cohen of SAC Capital Advisors, Steven Cohen of SAC Capital Advisors.

Highlight of Business Operations:

IHR. Our management agreements with IHR require us to pay a management fee ranging from 1.0% to 2.1% of gross revenues; plus an incentive fee of 10.0% of the excess of net operating income over a threshold. The incentive fee, however, may not exceed a range of 0.5% to 1.9% of the total revenues for all the hotels managed by IHR for any fiscal year. Our TRS Lessee has guaranteed all fees payable to IHR.

Marriott. Our management agreements with Marriott require us to pay Marriott a base management fee between 2.25% and 3.0% of total revenue. These management agreements expire between 2014 and 2055, absent prior termination by either party. Additionally, eight of these management agreements require payment of an incentive fee of 20.0% of the excess of gross operating profit over a certain threshold; one of these management agreements requires payment of an incentive fee of 15.0% of the excess of gross operating profit over a certain threshold through 2011, an incentive fee equal to a fixed sum if gross operating profit is over a certain threshold for years 2012 and 2013 and thereafter 20.0% of the excess of gross operating profit over a certain threshold; one of the management agreements requires payment of an incentive fee of 10.0% of adjusted gross operating profit, limited to 3.0% of gross revenue; and one of the management agreements requires payment of an incentive fee of 20.0% of gross operating profit, subject to deferral if Sunstone does not receive its priority distribution. The management agreements with Marriott may be terminated earlier than the stated term if certain events occur, including the failure of Marriott to satisfy certain performance standards, a condemnation of, a casualty to, or force majeure event involving a hotel, the withdrawal or revocation of any license or permit required in connection with the operation of a hotel and upon a default by Marriott or us that is not cured prior to the expiration of any applicable cure periods. In certain instances, Marriott has rights of first refusal to either purchase or lease hotels, or to terminate the applicable management agreement in the event we sell the respective hotel.

Davidson. Our Embassy Suites Chicago, Illinois hotel is operated under a management agreement with Davidson. The agreement expires in 2015 and provides us with the right to renew for up to two additional terms of five years each, absent a prior termination by either party. The management agreement requires us to pay 2.0% of total revenue as a base management fee and calls for an incentive fee (capped at 1.0% of total revenue) of 15.0% of the excess of net operating income over a certain threshold and an additional incentive fee in the amount of 1.0% of total revenue upon achieving a certain level of net operating income. The base and incentive management fees payable to Davidson under the management agreement have an aggregate cap of 4.0% of total revenue.

Denihan. Our Royal Palm Miami Beach, Florida hotel is operated under a management agreement with Denihan. The agreement expires in 2023 and provides us the right to renew for up to two additional terms of five years each, absent a prior termination by either party. The management agreement requires us to pay a base management fee ranging from 1.0% to 2.5% of gross revenues from 2010 to 2023. In addition, the management agreement calls for payment of a leased food and beverage management fee equal to 2.0% of any leased food and beverage gross revenue. Furthermore, the management agreement calls for payment of an incentive fee of 15.0% of the excess of net operating income over a certain threshold through June 2013, an incentive fee of 20.0% of the excess of net operating income over a certain threshold for July 2013 through December 2014, and an incentive fee of 15.0% of the excess of net operating income over a certain threshold for 2015 through June 2023. During any renewal term, the management agreement calls for payment of a base management fee of 3.0% of gross revenue and an incentive fee equal to 15.0% of the excess of net operating income over $20.0 million. The base and incentive management fees together with the leased food and beverage fee payable to Denihan under the management agreement have an aggregate cap of 4.5% of gross revenue.

Fairmont. Our Fairmont Newport Beach, California hotel is operated under a management agreement with Fairmont. The agreement expires in 2015 (absent early termination by either party) and provides Fairmont with two extension options, the first option having a term of twenty years and the second option having a term of 10 years. The agreement requires us to pay 3.0% of total revenue as a base management fee and calls for payment of incentive fees ranging from 20.0% to 30.0% of the hotels net profit above certain net profit thresholds. The base and incentive management fees payable to Fairmont under the management agreement have an aggregate cap of 6.0% of total revenue. In addition, we entered into an agreement with Fairmont whereby Fairmont will provide us with a limited performance guaranty up to $6.0 million to ensure, subject to certain limitations, a return on equity to us. Under the terms of this agreement, we received $3.5 million of the $6.0 million performance guaranty during 2008, and $2.5 million of the performance guaranty during 2009. As of December 31, 2009, we have fully utilized this $6.0 million performance guaranty.

We and the TRS Lessee must make a joint election with the IRS for the TRS Lessee to be treated as a TRS. A corporation of which a qualifying TRS owns, directly or indirectly, more than 35% of the voting power or value of the corporations stock will automatically be treated as a TRS. Overall, no more than 25% of the value of our assets may consist of securities of one or more TRS, and no more than 25% of the value of our assets may consist of the securities of TRSs and other assets that are not qualifying assets for purposes of the 75% asset test. The 75% asset test generally requires that at least 75% of the value of our total assets be represented by real estate assets, cash, or government securities.

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