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Sunstone Hotel Investors, Inc.

Sunstone Hotel Investors, Amanecer, Suite 100 San Clemente, CA 92673(949) 369-400004 Sunstone Hotel Investors, reportSunstone Hotel Investors, Annual 4/1/05 2:37 AM Page $ rate$ $ par$ of DirectorsLewis N. WolffChairman,Wolff DiNapoli, LLCR obert A. AlterChief Executive Officer, Sunstone Hotel Investors, Jamie BeharPortfolio Manager,General Motors InvestmentManagement CorporationBarbara S. BrownSenior Managing Director,Newlin Capital Partners, LLCA nthony W. DonaPartner,Thackeray PartnersPaul D. KazilionisManaging Principal,Westbrook Real Estate Partners, LLCJ onathan H. PaulManaging Principal,Rockpoint Group, LLCK eith P. RussellPresident,Russell Financial, M. SiegelPrincipal,DMS Financial ServicesExecutive OfficersRobert A. AlterChief Executive OfficerJon D. KlineExecutive Vice President &Chief Financial OfficerGary A. StougaardExecutive Vice President &Chief Investment OfficerAnnual Meeting of ShareholdersThe Annual Meeting will be held at 8:30 May 10, 2005at:Embassy Suites Hotel600 North State StreetChicago, Ilinois 60610 Transfer AgentAmerican Stock Transfer & Trust LaneNew York, New York 10038(800)937-5449 Stock ListingCommon stock of the Company is traded onthe New York Stock Exchange under thesymbol SHO.

1 Sunstone’s strategy is to maximize shareholder value by acquiring underperforming hotels and significantly improving their financial performance through redevelopment, renovation and rebranding.

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Transcription of Sunstone Hotel Investors, Inc.

1 Sunstone Hotel Investors, Amanecer, Suite 100 San Clemente, CA 92673(949) 369-400004 Sunstone Hotel Investors, reportSunstone Hotel Investors, Annual 4/1/05 2:37 AM Page $ rate$ $ par$ of DirectorsLewis N. WolffChairman,Wolff DiNapoli, LLCR obert A. AlterChief Executive Officer, Sunstone Hotel Investors, Jamie BeharPortfolio Manager,General Motors InvestmentManagement CorporationBarbara S. BrownSenior Managing Director,Newlin Capital Partners, LLCA nthony W. DonaPartner,Thackeray PartnersPaul D. KazilionisManaging Principal,Westbrook Real Estate Partners, LLCJ onathan H. PaulManaging Principal,Rockpoint Group, LLCK eith P. RussellPresident,Russell Financial, M. SiegelPrincipal,DMS Financial ServicesExecutive OfficersRobert A. AlterChief Executive OfficerJon D. KlineExecutive Vice President &Chief Financial OfficerGary A. StougaardExecutive Vice President &Chief Investment OfficerAnnual Meeting of ShareholdersThe Annual Meeting will be held at 8:30 May 10, 2005at:Embassy Suites Hotel600 North State StreetChicago, Ilinois 60610 Transfer AgentAmerican Stock Transfer & Trust LaneNew York, New York 10038(800)937-5449 Stock ListingCommon stock of the Company is traded onthe New York Stock Exchange under thesymbol SHO.

2 Independent AuditorsErnst & Young, LLCForm 10-kand other materialsA copy of the Company s Annual Report onForm 10-kas filed with the Securities andExchange Commission, is available free ofcharge to its stockholders. Such requestsshould be made to: investor RelationsSunstone Hotel Investors, Amanecer, Suite 100 San Clemente, California 92673-6212(949) 4/1/05 2:39 AM Page 21 Sunstone s strategy is to maximize shareholder value by acquiringunderperforming hotels and significantly improving their financialperformance through redevelopment, renovation and / iAbout Sunstone / 1 Letter to Shareholders / 2 Hotel Revenue / 4 Diversified Portfolio / 5 Form 10- 4/1/05 2:55 AM Page 1I am pleased to welcome you as fellow shareholders of Sunstone Hotel Investors, Inc. We completed ourinitial public offering in October 2004, in which we raised $415 million. I am proud to say that ourinitial public offering was the largest Hotel IPO ever.

3 2004 was a strong year for Sunstone and the firstmeaningfully positive year for the lodging industry since 2000. We enter 2005 with great enthusiasm andsee significant opportunity to drive growth and increase believe that there are five fundamental reasons that Sunstone is poised to deliver strong resultsto our shareholders in 2005. I. High Quality Portfolio: The Sunstone portfolio currently consists of 54 predominantlyupper-upscale and upscale hotels. In fact, 89% of our 2004 pro-forma revenue was generated from these segments. Nearly all of our hotels are operated under franchises granted by the leading lodging companies,including Marriott International, Hilton Hotels, Intercontinental Hotel Group, and Hyatt. Historically,the upper-upscale and upscale segments have outperformed industry averages during strong cyclical periods,and we expect these segments will again outperform other lodging segments during the current strongindustry cycle.

4 II. Significant Recent Capital Investment in Our Hotels: Hotel ownership is a capital-intensivebusiness. We have invested significant capital into our portfolio over the past several years. In particular,we have focused our expenditures on hotels that we recently acquired, as well as on hotels where weexpect the investment to generate a strong return on investment. We invested approximately $65 in 2004and $60 million in 2003, equating to more that 13% of revenue during that timeframe. As a result, ourhotels are in excellent physical condition and are primed to capture strong operating gains in Proven Acquisition & Disposition Capabilities: Sunstone has been among the most activebuyers and sellers of Hotel real estate over the last several years. We have bought more than $600 millionof hotels since 2002 and sold more than $300 million. In the process, our portfolio has evolved into oneof higher quality with a greater emphasis on upper-upscale and upscale hotels.

5 Our acquisition focus willremain consistent with the philosophy that has driven our success over the past several years using adisciplined approach focusing on hotels in major markets, with strong locations and multiple demandTo Our 4/1/05 2:55 AM Page 2generators, with leading brands, and at a discount to replacement cost. Furthermore, we will continueto evaluate the sale of non-core assets that are located in slower-growth markets or do not meet ourlong-term Attractive Management Agreement: Sunstone has an attractive relationship with InterstateHotels & Resorts for the management of 49 of our 54 hotels. Through this relationship, we are able toactively asset manage our hotels and work closely with Interstate to develop strategies to generate newopportunities for Strong Balance Sheet: Sunstone has a strong financial foundation that provides us with bothliquidity and financial flexibility, allowing us to capitalize on opportunities as they are presented.

6 In theforthcoming year, we anticipate taking advantage of favorable capital markets and historically low interestrates to reduce our weighted average interest rate, lengthen our average debt maturity, and furtherstrengthen our financial foundation. As both the economy and lodging industry continue to strengthen, our portfolio is positionedto generate strong growth in RevPAR, cash flow and am excited about the prospects that lay before us at Sunstone in 2005 for continued growthand increased profitability. We extend our thanks to you, our shareholders, for your support as we workto achieve our A. AlterChief Executive 4/1/05 2:55 AM Page 342004 total Hotel revenue by chain scale segment%a Upper Upscale56b Upscale33c Midscale with F&B10d Midscale without F&B12004 total Hotel revenue by region%aCalifornia32bOther West20cMidwest20dSouthwest11eMiddle Atlantic9fSouth82004 total Hotel revenue by brand family%aMarriott47bHilton14cInterContine ntal12dHyatt8eIndependent8fWyndham6gCarl son3hStarwood2abcdfgheabcdabcefdHotel 4/1/05 2:56 AM Page 4marriott family hilton familyother: hyatt, radisson,of brandsof brandshawthorn, kahler,intercontinentalstarwood familyvalley river inn,family of brandsof brandswyndham5 Diversified 4/1/05 2:57 AM Page 4/1/05 2.

7 57 AM Page 6 UNITED STATESSECURITIES AND EXCHANGE COMMISSIONW ashington, 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 For the transition period fromtoCommission file number 333-117141 Sunstone Hotel Investors, Inc.(Exact Name of Registrant as Specified in Its Charter)Maryland20-1296886(State or Other Jurisdiction ofIncorporation or Organization)( EmployerIdentification Number)903 Calle Amanecer, Suite 100 San Clemente, California92673(Address of Principal Executive Offices)(Zip Code)Registrant s telephone number, including area code: (949) 369-4000 Securities registered pursuant to Section 12(b) of the Act: Common Stock, $ par value, New York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section13or15(d) of the SecuritiesExchange Act of1934during the preceding12months (or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past90days.

8 Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item405of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant s knowledge, in definitive proxy or information statements incorporated by reference inPart III of this Form10-K or any amendment to this Form10-K. Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule12b-2). Yes No As of December31, 2004, the aggregate market value of voting stock held by non-affiliates of the registrant, based upon the closingsales price for the registrant s Common Stock, as reported on the New York Stock Exchange, was$ Shares ofCommon Stock held by each officer and director and by each person who owns10% or more of the outstanding Common Stockhave been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily aconclusive determination for any other number of shares of the registrant s Common Stock outstanding as of February9, 2005was34,518, Incorporated by ReferencePart III of this Report incorporates by reference information from the definitive Proxy Statement for the registrant s2005 AnnualMeeting of Hotel INVESTORS, REPORT ONFORM10-KFor the Fiscal Year Ended December31,2004 TABLE OF CONTENTSPagePART IItem1 Business.

9 1 Item2 Hotel of Matters to a Vote of Security IIItem5 Market for Registrant s Common Equity and Related Stockholder Financial and Operating s Discussion and Analysis of Financial Condition and Results of Quantitative and Qualitative Disclosures About Market Statements and Supplementary in and Disagreements with Accountants on Accounting and Financial Controls and IIIItem10 Directors and Executive Officers of the Ownership of Certain Beneficial Owners and Management and Related Stockholder Relationships and Related Accountant Fees and IVItem15 Exhibits, Financial Statement Schedules, and Reports On Form8-K .. NOTE REGARDING FORWARD-LOOKING STATEMENTSThis report, together with other statements and information publicly disseminated by the Company, contains certainforward-looking statements within the meaning of Section27A of the Securities Act of1933, as amended, and Section21 EoftheSecurities Exchange Act of1934, as amended.

10 The Company intends such forward-looking statements to be covered by the safeharbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of1995and includesthis statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certainassumptions and describe the Company s future plans, strategies and expectations, are generally identifiable by use of the words believe, expect, intend, anticipate, estimate, project or similar expressions. You should not rely on forward-lookingstatements since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond theCompany s control and which could materially affect actual results, performances or achievements. Factors that may cause actualresults to differ materially from current expectations include, but are not limited to the risk factors discussed in this Annual Reporton Form10-K.


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